Property and casualty insurers' results improved sharply in2013's first half compared to the same time a year ago, and theindustry remains financially strong, but economic pressures meancarriers must achieve stronger underwriting results than in thepast to remain profitable, a new analysis shows.

The industry's 2013 first-half net income after taxes increasedby 42.4 percent, to $24.5 billion, compared to the year before,according to an ISO, Property Casualty Insurers Association ofAmerica, and Insurance Information Institute analysis. The combinedratio for the first half of the year was 97.9, down from 101.9 in2012's first half.

Insurers benefitted from a combination of premium growth andlower losses, resulting in net underwriting gains of $2.3billion—compared to an underwriting loss of $6.4 billion in 2012'sfirst half—and pretax operating income of $25.8 billion, up from$19.2 billion last year.

PCI's Senior Vice President for Policy Development and ResearchRobert Gordon says, “The drop in net losses and loss-adjustmentexpenses (LLAE) from catastrophes accounts for about one-third ofthe improvement in underwriting results in first-half 2013, withthe remainder primarily attributable to premium growth.”

Gordon also points out that underwriting profitability improvedfor all major sectors of the industry.

ISO Assistant Vice President for Financial Analysis Michael R.Murray says, “Insurers' overall results for first-half 2013 werecertainly better than their results for first-half 2012, withinsurers posting net gains on underwriting through six months forthe first time since 2007.”

But Murray adds that economic factors are forcing insurers toachieve better underwriting results to maintain profitability. Hesays “insurers' overall rate of return remained subpar comparedwith long-term historical norms, and insurers now need much betterunderwriting results just to be as profitable as they were in thepast.”

He notes that the 8.2 annualized rate of return on averagesurplus for 2013's first half was under insurers' 8.9 percentaverage rate of return for the 54 years from 1959 to 2012 despitethe combined ratio coming in 6.1 points lower than the 104 averagefor those 54 years.

“With investment yields, financial leverage and tax rates likethose in the first-half 2013, ISO estimates that the combined ratiowould have to improve another 1.2 percentage points to 96.7 forinsurers to earn their long-term average rate of return,” saysMurray.

Policyholders' surplus increased by $26.9 billion in the halfyear to $614 billion. PCI's Gordon says, “Insurers are strong, wellcapitalized and well prepared to pay future claims.”

While results across the industry were positive, mortgage andfinancial-guaranty insurers continued to struggle. Murray notesthat the combined ratio for these insurers did drop by 48.4 pointscompared to the same period last year, but it still came in at130.6, or 33.1 points higher than the 97.5 combined ratio for theindustry excluding mortgage and financial-guaranty insurers.

Net written premiums for the entire industry, at $237.2 billionin 2013's first half, grew by 4.5 percent year-over-year, but ISO'sMurray notes that growth did not accelerate for all P&Csectors. Insurers writing mostly commercial lines, he says, slowedto 3.8 percent growth in the period, while insurers writing mostlypersonal lines saw 5.3 percent growth.

Commenting on the industry's results, I.I.I. President RobertHartwig says, “Premium growth, while still modest, is nowexperiencing its longest sustained period of gains in a decade.Fundamentally, the P&C industry remains quite strongfinancially, with capital-adequacy ratios remaining high relativeto long-term historical averages.”