Underwriting Improves After Rocky 2012, Concerns Remain

A.M. Best foresees the first yearly underwriting profit since 2009 if the fourth quarter results from 2013 hold the momentum set forth by the remainder of the year.

The year’s results (thus far) have already reached a milestone not seen since 2007 — profitable quarters across the board.

The company attributes the uptick to three primary factors that broke in favor of the industry:

  • Lower catastrophe statistics
  • A reduction in non-catastrophic weather losses
  • Higher premium volumes

Overall, the Property and Casualty outlook was stable.

In a report from January 2, the company said that although there were a number of severe tornado events in 2013, “overall weather-related losses were relatively modest and provided a welcome reprieve from the frequent and severe events of recent years.”

“Like the auto line,” the report continued, “trends over the past several years in homeowners line continue to evolve. In particular, successful carriers continue to enhance the granularity of their homeowners pricing models, with increased sophistication and enhanced products becoming the norm.”

The company added that “In addition, risk management has evolved from risk avoidance to gaining a better understanding of the various risk characteristics, and then pricing accordingly.”

 

By The Numbers

The industry surged out to a 4.4 percent increase in return rate through the first half of 2013 compared to the previous year. Over the next three months, that inched up another 0.1 percent to a 4.5 percent increase.

While this might indicate a slowdown in performance heading into the final three months of 2013, Insurance Information Institute President Robert Hartwig sees potential, issuing a positive outlook for the trajectory of the industry that will “assuredly be its best year in the post-crisis era.”

In actual dollars and cents, the underwriting profit through September 2013 of $7.5 billion represented a $12.2 billion upswing from 2012’s $4.7 billion underwriting loss through the same period. Profits also exceeded the 2.8 percent decline in investment income and were a large contributing factor to the industry’s $43.5 billion pre-tax operating income (an increase of 35.3 percent).

Capital gains for Property and Casualty were also considerably higher than the first nine months of the previous year with $12.8 billion in realized funds compared to $5.1 billion for 2012. This assisted in the 54.9 percent increase for net income to $47.7 billion.

Last but not least, the industry’s combined ratio finished at 96.5, a reduction of 3.7 points from the same period of 2012 (100.2).

 

Concerns Remain

While no one can deny that the industry is showing spring in its step, the A.M. Best report still held out a few areas of concern.

Third quarter results for commercial lines underwriting showed positive at $2.6 billion, a quarter-to-quarter increase from 2012. However, the standing diminished significantly from the gains shown early in 2013. The combined ratio of 99.9 also elevated the average of the first and second quarters.

A.M. Best also continued to be concerned about the industry’s loss-reserve position. The numbers themselves were positive with $13.1 billion in “favorable development” from January through September of 2013, along with $3 billion in favorable reserve release for commercial. This was a $1.1 billion increase from $1.9 billion for the same period in 2012.

Still, A.M. Best “remains concerned with the industry’s loss-reserve position given the extended soft-market cycle, which eroded pricing adequacy during those years while reducing the available loss-reserve cushion, particularly the reserves of the commercial-lines segment,” the report stated.

The company also noted that several insurance groups announced they would be taking reserve charges to strengthen prior accident years’ loss reserves in the fourth quarter.

“In light of the level of favorable development recognized on recent accident years and the concern with adequacy of those rates due to challenging market conditions that predominated in those years, the cushion of available reserve redundancies has declined and may not provide the same support to future calendar-year results,” A.M. Best noted.

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