Highlights from the Q3 earnings release for property-casualty insurers:
- Business is growing again, with net written premiums 0.8% higher than they were at the same time last year. Second quarter premiums were 1.3% higher than a year earlier and third quarter’s were 2.3% higher, the first back-to-back increase in premium writings sinxe Q1 2007. This year will mark the first increase in premiums since 2006.
- Surplus is growing, up $33.4 billion (6.4%) from year-end. That means the industry has more capital to survive whatever megacatastrophes lurk.
- Stock prices are recovering, sending industry capital gains higher, with $4.4 billion in gains through September, compared with $9.6 billion in capital losses a year ago.
- Though return on surplus was 7.7%, cost of capital is about 10.4%. That means earnings aren’t hefty enough, adjusted for risk, to please investors. That means capital could be heading for the exits. It also could mean raising capital after the next catastrophe could be difficult.
- Rates continue falling in commercial insurance, with the most optimistic estimates saying rates are flat, while the most pessimistic say rates fell about 5% in the quarter.
- Low bond yields and dividends will make it harder to generate healthy earnings.
History provides an example: In 2009, the industry booked a 101% combined ratio and generated a 5.8% return on surplus. In 1979, the industry booked 101% and generated a 15.9% return. The difference? Interest rates in the late ’70s were above 10%. Last year, they were below 5%. Earning more interest on the float tripled earnings.
- Financial/mortgage insurers, the guys who guaranteed that mortgages would be paid back. For the nine months they booked a combined ratio of 192%, up from 175% last year. This year’s mark was good for a negative 36% return on average surplus.