2013 - Year End Results

Profitability in the property/casualty insurance industry surged to its highest level in the post-crisis era in 2013 as sharply lower catastrophe losses, modestly higher premium growth, improved realized investment gains and favorable prior-year reserve loss development coalesced to push the industry’s return on average surplus to 10.3 percent, up from 6.1 percent in 2012 and just 3.5 percent in 2011. The effect: the industry combined ratio in 2013 fell to 96.1, down from 102.9 in 2012, leading to an underwriting profit of $15.5 billion—a necessity in an era of persistent, ultra-low interest rates (despite some increases in longer-term yields late in the year). The industry’s bottom line benefited commensurately as overall net income after taxes (profits) for the year surged by 81.9 percent to $63.8 billion from $35.1 billion a year earlier. Top line growth was also a consistent and meaningful contributor to improved profitability. Net written premiums were up 4.6 percent in 2013, up from a 4.3 percent gain recorded in 2012. Persistently low interest rates, of course, remain a challenge for the industry, with net investment income for the year the slipping by $0.6 billion or 1.4 percent. Overall industry capacity rose to a record $653.3 billion as of December 31, 2013—up $66.3 billion, or 11.3 percent, from $587.1 billion as of year-end 2012.

 

The industry results were released by ISO, a Verisk Analytics company, and the Property Casualty Insurers Association of America (PCI).

 

Profitability Improves: Catastrophes Much Less of a Drag on Earnings

The industry’s performance in 2013 is a welcome departure from the heavily catastrophe impacted results of 2011 and 2012. As noted earlier, the P/C insurance industry reported an annualized statutory rate of return on average surplus of 10.3 percent last year (9.8 percent after excluding mortgage and financial guaranty insurers), up from 6.1 percent in the year earlier period (6.3 percent after excluding mortgage and financial guaranty insurers).

 

A discussion of 2013’s key performance drivers follows:

 

Much of the improvement in performance in 2013 can be attributed to materially lower catastrophe losses. While the prior two years (2011 and 2012) ranked among the costliest on record for catastrophe losses, direct insured losses from catastrophes in 2013 fell by $22.1 billion to $12.9 billion from $35.0 billion in 2012 (with superstorm Sandy accounting for $18.8 billion of those losses), providing a meaningful lift to the industry’s bottom line. Last year’s catastrophe losses were far below the 10-year average annual catastrophe losses of $23.9 billion, according to ISO’s PCS unit. The largest catastrophe event of 2013 was an EF-5 tornado that struck Moore, Oklahoma, on May 20, causing nearly $2 billion in insured damages. Wildfires in Colorado and several other states resulted in hundreds of millions of dollars in claims as did an outbreak of unusual late season (fourth quarter) tornadoes in the Midwest. According to PCS, Oklahoma led the country with $2.0 billion in insured catastrophe losses, followed by $1.5 billion in Texas, $1.2 billion in Illinois and $0.9 billion in both Colorado and Minnesota.

 

In addition to accelerating premium growth and lower catastrophe losses, favorable development of prior-year claims reserves in 2013 totaled $16.0, a material increase from $10.2 billion in 2012, according to ISO/PCI. Reserve releases are generally associated with lower-than-expected costs for claims occurring in past accident years. While early in 2013 some of the reserve releases were associated with Hurricane Sandy claims, much of the growth in reserve releases is attributable to favorable development within the mortgage and financial guaranty (MF&G) lines ($3.5 billion), which had been hit hard during the financial crisis but have now largely recovered. Excluding these insurers, favorable reserve development totaled $12.4 billion in 2013 compared with $12.1 billion in the year earlier period. Removing the effects of favorablereserve development altogether results in a combined ratio of 99.5 for 2013 (versus 96.1 when the effects are included).

 

The overall improvement in underwriting during 2013 was material and notable, with the industry’s combined ratio falling to 96.1 compared with 102.9 in 2012 (excluding mortgage and financial guaranty insurers the combined ratios for the same periods were 96.7 and 102.3, respectively).

 

Also contributing to improved underwriting performance was continued and steady premium growth, which accelerated slightly to 4.6 percent in 2013 from 4.3 percent in 2012.

 

There are two principal drivers of growth in the property/casualty insurance industry: exposure growth and rate. Exposure growth—basically an increase in the number and/or value of insurable interests (such as property and liability risks)—is being fueled primarily by the rebounding economy. Real (inflation adjusted) GDP in 2013 actually decelerated to 1.9 percent from 2.8 percent in 2012. That said, continued expansion in key areas of the economy such as new vehicle sales, residential construction and consistent employment and payroll growth clearly benefitted the P/C insurance industry. With the pace of GDP growth expected to quicken in 2014 to 2.7 percent, personal and commercial lines exposures should continue to expand modestly.

 

Not all economic growth, however, leads directly to the formation of insurable exposures. Indeed, historically, the most important determinant in industry growth is rate activity. With auto, home and major commercial lines all trending positively, overall industry growth could outpace overall economic growth in 2014, as was the case in the prior two years.

 

Improving labor market conditions in 2013 are also critical to top line growth in the P/C insurance industry. Job growth benefits the entire economy, of course, but the associated expansion of payrolls benefits workers compensation insurers in particular. The United States economy added 2.368 million private sector jobs in 2013. Combined with modest increases in the hourly earnings of employees, payrolls expanded by $142.8 billion last year, which contributed to billions of dollars in new premiums written being earned by workers compensation insurers in 2013. Indeed, workers compensation, hit hard during the recession by a soft market and a precipitous drop in payrolls, has within the span of just a few years transformed itself from the fastest contracting major property/casualty line to the fastest growing, with direct premium growth in 2013 up by nearly 10 percent. Workers compensation is likely to remain the fastest growing major P/C line of insurance in 2014 if economic growth and hiring accelerate as projected.

 

Summary