NEW YORK ( TheStreet) -- Property and casualty insurers are improving their core businesses, as industry damage payouts decline and premium prices move higher. As part of TheStreet's 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 Verisk Analystics ( VRSK). 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 just before Sandy hit one year ago:
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 Thomson Reuters.
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 Federal Reserve 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.