NEW YORK (
) -- Property and casualty insurers are improving their core businesses, as industry damage payouts decline and premium prices move higher.
As part of
series on the one year anniversary of the disastrous arrival of Hurricane Sandy in the Northeast, we have reviewed the earnings and core insurance underwriting performance of the five publicly traded U.S. property and casualty (P&C) insurers with the largest Northeast market shares, and found vast improvement.
According to the Insurance Information Institute, total insurance losses from catastrophes in the United States during 2012 came to $35 billion, with $18.75 billion in losses from Hurricane Sandy. The 2012 loss total increased from $33.6 billion in 2011.
During the first half of 2013, U.S. insured catastrophe losses totaled $9.7 billion, declining sharply from $14.4 billion a year earlier. To offer some perspective on what that figure means, the 10-year average for U.S. insured catastrophe losses over the past 10 years is $9.2 billion, according to ISO, a subsidiary of
So the first half of 2013 can be considered somewhat "normal," while "the third quarter of 2013 did not bring any major catastrophes," according to Insurance Information Institute president and economist Robert Hartwig. In his organization's assessment of first-half results for the P&C insurance industry, Hartwig wrote that "historically, the third quarter is the most costly in terms of catastrophe losses. Hurricane activity remained subdued and far below expectations for an active season."
2013 is shaping up to be a very good year for the industry, as long as we don't see any fourth-quarter hurricane surprises. But these events are beyond the industry's control. The real story for investors is the development of underwriting profits, with "continued and steady premium growth," according to Hartwig.
When asked how the insurers are creating a better underwriting pricing environment (at least for them), Hartwig says "we are in the midst of a trend with rates continuing to move up modestly across most types of P&C coverage. That includes homeowners and commercial property insurance which, of course, has been affected by catastrophe losses, but also auto insurance and workers compensation.'
"There is a sustained trend toward moderate rate increases, that has actually been in place for two to three years," Hartwig says, adding that the main factor in the rise of insurance premium rates is the pressure on earnings from the Federal Reserve's "extraordinary efforts to keep interest rates low."
A P&C insurer's second largest source of revenue is usually its investment portfolio. With the Fed keeping the short-term federal funds rate in a range of zero to 0.25% since late 2008 and continuing making large bond purchases in an effort to hold down long-term interest rates, "an insurer will need to improve its underwriting performance to achieve the same
return on equity," according to Hartwig.
One area of commercial P&C insurance that has seen a major underwriting profitability improvement is workers compensation coverage, which has seen "fairly substantial rate increases in the range of 8% to 10% typically," according to Hartwig.
"We have a moderation of underling claim cost trends," he says, as "the moderation we have seen across the economy for inflation associated with medical services, has pushed down the pace at risk claims costs are increasing, relative to five or 10 years ago."
At the same time, there has been a decline in workplace accident claims in the United States, despite the addition of "half a million manufacturing jobs over the past three years," according to Hartwig.
Here's a quick review of earnings and underwriting results for the first half or first three quarters of 2013, depending on the insurers' reporting schedules, as well as stock-price multiples for the same group of five P&C insurers, we looked at
one year ago:
For its P&C insurance subsidiaries,
reported first-half 2013 underwriting profits of $1.421 billion, improving from $673 million during the first half of 2012.
With so many non-insurance subsidiaries, Berkshire Hathaway's overall earnings performance can't be compared to the other companies listed here. But the company's net earnings attributable to common shareholders increased to $9.433 Billion, or $5,740 per Class A share, during the first half of 3013, from $6.353 billion, or $3,847 a share, a year earlier. Class B earnings-per-share increased to $3.83 during the first half from $2.56 a year earlier.
Berkshire Hathaway's Class B shares closed at $117.03 Friday, rising 31% this year. The shares trade for 18.0 times the consensus 2014 EPS estimate of $6.51, among analysts polled by
reported first-half underwriting income of $727 million, increasing from $657 million in the first half of 2012. The company's combined ratio for its property and liability insurance units declined to 94.7% in the first half of 2013 from 95.1% a year earlier.
The combined ratio is an insurer's claims and expenses divided by its earned premiums. A ratio below 100% indicates an underwriting profit.
Allstate's net income available to common shareholders during the first half of 2013 was $1.143 billion, or $2.39 a share, compared to $1.189 billion, or $2.39 a share, during the first half of 2012. The year-over-year profit decline reflected an increase in first-quarter losses.
Allstate's shares closed at $53.35 Friday, returning 35% this year. The shares trade for 10.3 times the consensus 2014 EPS estimate of $5.18.
The Travelers Companies
The Travelers Companies
for the first three quarters of 2013 reported an underwriting gain of $1.478 billion, increasing from $845 million during the first three quarters of 2012. The combined ratio improved to 90.6% during the first three quarters of 2013 from 94.3% a year earlier.
The company's net income increased to $2.685 billion, or $2.35 a share, during the first three quarters, from $2.169 billion, or $2.22 a share, during the first three quarters of 2012.
Shares of Travelers closed at $86.63 Friday, returning 23% this year. The shares trade for 10.8 times the consensus 2014 EPS estimate of $8.07.
American International Group
When we looked at the major P&C carriers right before Hurricane Sandy hit last year,
American International Group
was lagging the group by continuing to post underwriting losses in its property and casualty insurance business. The company for the first half of 2013 reported a small P&C underwriting profit of $6 million, compared to an underwriting loss of $397 million during the first half of 2012. The combined ratio for the first half of 2012 was 100.0%, improving from 102.3% a year earlier.
AIG reported after-tax net operating income of $3.637 billion, $2.46 a share, for for the first half of 2013, declining from $4.724 billion, or $2.60 a share, during the first half of 2012. The earnings decline reflected gains in the fair value of AIA Aurora LLC and Maiden Lane III, which was set up in 2008 by the U.S. Treasury and the
to purchase heavily discounted AIG credit default swaps as part of AIG's bailout by the federal government. The Fed sold the last of Maiden Lane III's portfolio in August 2012. AIG's bailout came to an end in December 2012, when the Treasury sold its last holdings of AIG shares and said "the overall positive return on the Federal Reserve and Treasury's combined $182 billion commitment to stabilize AIG during the financial crisis is now $22.7 billion."
AIG's shares closed at $51.85 Friday, returning 47% this year. The shares trade for 12.0 times the consensus 2014 EPS estimate of $4.33.
reported underwriting income of $1.245 billion for the first three quarters of 2013, increasing from $880 million in the first three quarters of 2012. The combined ratio improved to 86.4% for the first three quarters from 90.1% a year earlier. That's the best P&C combined ratio among the companies listed here, and it's reflected in the stock's market valuation to earnings estimates.
The company's net income for the first three quarters was $1.776 billion, or $6.80 a share, increasing from $1.443 billion, or $5.25 a share, during the first three quarters of 2012.
Chubb's shares closed at $92.20 Friday, returning 24% this year. The shares trade for 12.4 times the consensus 2014 EPS estimate of $7.46.
-- Written by Philip van Doorn in Jupiter, Fla.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.