2013 was one of the best years in recent memory for U.S. property/casualty insurers. Unlike 2012, when Superstorm Sandy losses battered earnings, insurers enjoyed relatively light catastrophe losses last year.
In addition to improved combined ratios, insurers continued to benefit from higher insurance rates, which analysts said helped offset disappointing investment results.
Net income for a group of 10 large commercial property/casualty insurers that report quarterly results soared 83.8% in 2013 vs. 2012 despite a relatively low 3.3% average rate of growth in net written premiums. The group's 2013 combined ratio improved significantly to 94.3% from 100.5% a year earlier.
Whether that favorable run can continue this year remains unknown.
Bad winter weather throughout much of the United States already has caused at least $1.5 billion in insured damage this year, according to the industry-supported Insurance Information Institute (see related story). While property/casualty prices increased, the rate of increase appears to be slowing even as interest income remains bogged down with little sign of significant improvement anytime soon.
Nevertheless, 2013 was one of the best years commercial property/casualty insurers have experienced in some time. In 2012, insurers had to deal with the late-year impact of Superstorm Sandy. In 2011, record global catastrophe losses battered insurer results already hurt by disappointing investment returns.
“Unquestionably 2013 was a very good year,” said Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Dominion Securities Inc. in Richmond, Va. “We saw good margin improvement across virtually all product lines, low catastrophe losses and continued favorable prior accident year reserve development.”
Last year “was an outstanding year for the industry, with a combined ratio for the industry of 97% to 98%,” said John Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio. That indicates that the “industry overall had an underwriting profit, which is highly unusual and evidence of what an outstanding year it was.”
Insurers did “reasonably well, probably better than they should have,” said Meyer Shields, managing director and analyst with Keefe, Bruyette & Woods Inc. in Baltimore.
“The "should have' part is right now insurance companies are much more reliant on underwriting income as a percentage of total income, and when you're relying on underwriting income, it's a much riskier stream of earnings,” Mr. Shields said. “Having said that, we didn't see a lot of really bad weather, and we didn't see a recurrence of inflation, at least not on an industrywide basis.
Gloria Vogel, a senior vice president at Drexel Hamilton L.L.C. in New York, called 2013 “an above-average” year for commercial property/casualty insurers. Underwriters enjoyed rate increases last year, though the gains started to slow later in the year, she and Mr. Ward said.
“But they were still up in certain lines like workers compensation. You were still getting some rate increases,” Ms. Vogel said.
“The industry has always been cyclical, and we're probably closer to the end than the beginning (of higher pricing), but at least now most signs point to at least a moderately favorable environment,” said Mr. Dwelle. “To some extent, last year's light catastrophe activity makes for a difficult comparison. We're not to assume every year will be as light as last year, so I think that is a hurdle that the group will need to clear.”
“The problem with the insurance industry is that either companies are not very profitable or rates are coming down,” said Mr. Shields. “Given the fact the insurance industry was reasonably profitable in 2013 puts pressure on rates.”
One issue insurers contended with in 2013 was depressed investment income.
“Investment income is a challenge for everybody,” said Ms. Vogel.
“The current yields are still below the maturing book yields,” she said. “That's creating a challenge for the bottom line of the commercial property/casualty companies.” Still, some companies have announced dividend hikes and share buyback programs, which is a positive for the insurers, she said.
“While the interest rates remained low, the equities markets had an outstanding year, and that helped the investment results,” said Mr. Ward.
“We're somewhat optimistic that at least by the end of the year, we could see a stabilization of investment income — that's not to say higher, but at least not lower,” said Mr. Dwelle.
Hope for 2014
Mr. Shields said one blemish on some insurers' performance was reserve problems, which affected an increasing number of insurers.
“The way it typically works is it's a few isolated incidents, and then a few more isolated incidents and then boom, you've got a trend,” he said.
Looking ahead, Mr. Ward remained somewhat optimistic.
“I think 2014 won't be quite as good as 2013 was, but the outlook is reasonably positive,” he said. “I see the rate increases continuing to decelerate. I see investment yields remaining low. And the trend for favorable reserve development, I think will moderate in 2014.”