In 2013, private U.S. property-casualty insurers posted a $15.5 billion underwriting profit, according to the full-year p-c insurance industry results from ISO and the Property Casualty Insurers Association. How should agents interpret the tea leaves of the industry’s financial performance—and what will happen to pricing for the rest of 2014?
After taxes, net income for U.S. p-c insurers grew to $63.8 billion in 2013 from $35.1 billion in 2012. Increases in pretax operating income, net income after taxes and overall return rates are largely attributable to the improvement in underwriting results, which mark not only a $30.9 billion swing from $15.4 billion in net losses in 2012, but also the first underwriting profit since the recession.
“There are many factors that affect industry profitability—some are controllable, some are not,” says Darren Gill, senior financial analyst at ALIRT Insurance Research. “The most notable in 2013—and the least controllable—was low catastrophe losses.”
Still, “an industry underwriting profit is fairly rare, having happened only five times since 1999, and never more than two years in a row,” Gill says. So even if 2013 was a catastrophe anomaly for the p-c industry, an underwriting profit is significant—and it has direct implications for the independent agency system.
According to economist Bob Hartwig, president of the Insurance Information Institute (I.I.I.), agents who work in both personal and commercial lines can expect “modest growth” through the rest of the year. “I think there’s enough momentum both in rates and in the economy to continue that growth into 2015 at modest levels,” Hartwig says. “In terms of rates, in both personal and commercial lines, expect to renew in positive territory—albeit somewhat more modestly in commercial lines in 2014 than in 2013.”
But that won’t necessarily apply across the board. “The wild card for many agents is going to be the strength of their economy locally,” Hartwig explains. “To the extent that agents operate in parts of the country where the economy is improving more rapidly than others—that puts more income in the hands of clients. We see the basic drivers of demand for insurance products very enormously right now, but it depends on where you are in the country.”
And Gill warns against reading too much into the successes of just one calendar year. “Agents sell insurance in good times and bad,” he says. “One profitable year for the industry is not a trend. The industry enjoyed price increases over the last couple of years, but those increases appear to already be waning.”
But Hartwig says carriers remain disciplined and the market competitive. “I don’t see the sort of destructive competition that many people envision when they talk about markets softening,” he says. “If there’s some moderation in rates, particularly in commercial lines, it’s associated with the fact that combined ratios have come down as a result of the rate increases of the past three years or so.”
While combined ratios have been generating underwriting profits or close to it for many lines of coverage, others still have some work to do. “I would say agencies that write a lot of workers comp business would tend to see above-trend growth,” Hartwig says. “And I would say agencies that write a lot of homeowners business would tend to see above-trend growth, particularly in the eastern two-thirds of the country.”
Perhaps most important, the p-c industry is steeled to handle a return to normal cat levels in 2014. Although the third quarter tends to be largest for cat losses due to hurricane and wildfire seasons and “a lot can happen between now and then,” Hartwig expects numbers to remain strong throughout the year.
“The industry is better capitalized than it’s actually ever been in its history—it’s absolutely ready for really anything that Mother Nature or mankind could send its way,” Hartwig says, noting that carrier stability applies not only to natural disasters but also business risks like cyber liability. “Even if we move back to a more typical level of catastrophe activity in 2014, I think the industry still stands the chance of running an underwriting profit.”
Jacquelyn Connelly is IA assistant editor. Infographic by Paul Buse, president of Big I Advantage