Texas Joins Rest of the U.S. in Profitability Upswing of Last Few Years

I.I.I.’s Hartwig says the state is still one of the riskiest in which to operate

The last few years have been good ones for the property casualty insurance industry in terms of profitability. But it’s been a long time coming, according to Robert Hartwig, president of the Insurance Information Institute.

The industry turned in record profits in 2006 and the numbers for 2007 are showing another profitable year, although not as stellar as 2006. All the figures for 2007 are not in, Hartwig said, but profits are likely to be in the $63 billion to $64 billion range for the year. He expects 2008, barring any major catastrophes, to be profitable as well, although perhaps not as robustly so as the two previous years.

During this decade the industry rebounded from its worst year ever in 2001 to its best year ever in terms of pure dollars in 2006. To Hartwig, the insurance industry’s ability to swing back from record lows to record highs in less than 10 years shows “how resilient the industry is.”

The Texas market has been riding the profitability trend, as well, in some cases outperforming other areas of the country, despite the fact that it is more volatile.

Still, recent profits don’t tell the whole story, said Hartwig, speaking in late January at the Independent Insurance Agents of Texas’ 45th Annual Joe Vincent Management Seminar. The volatility and cyclicality of the property casualty industry means that while the industry may experience several years in a row of profitability, it can just as well suffer through many low performing years. In fact, Hartwig said, over the past 19 years the P/C industry has consistently underperformed the Fortune 500, even in the last two years.

So, he said, “criticisms that you hear, that the industry is greedy and earning grievous levels of profitability on the backs of poor people across the country is simply ludicrous. It doesn’t stand up to the facts.”

He said “the industry hits its peaks in profitability every nine to 10 years. Then it takes us about four, five, six years to descend down into the trough. The peaks are usually in the teens, the troughs are usually in the low single digits. Our last trough was in 2001 with a negative 1 percent rate of return.”

While the Texas market has improved along with the rest of the P/C industry throughout the decade, Hartwig reminded his audience of independent agents that it was not so long ago that the property market was “much, much worse. And that’s due to everyone’s scariest four-letter word: mold.”

He added that even without mold, the Texas homeowners market traditionally has been “incredibly volatile.” From 1992 through 2006, the return on equity for the market was an average 0.14 percent. “The good years are offset by the bad years on average over a long period of time,” Hartwig said. “2007 is going to be a good year. … Anything could happen in ’08 with cat losses and drive it back down.

And, Hartwig explained, “in the United States two types of cat losses account for 75 percent of all losses. Texas has both of them — hurricanes and tornadoes.”

Coasts Skew the Numbers

Hartwig said the homeowners market nationally represents about 11 to 12 percent of the premium base for the property casualty industry as a whole. Increases in homeowners premiums in U.S. coastal regions have skewed the numbers so that it appears the market has experienced fairly steep premium hikes. However, without coastal rates factored in, prices have remained somewhat flatter.

In Texas, between 1985 and 2006, premium growth on an average annual basis was roughly what it was in the U.S. “It was above average in the early part of this decade, but that was because there were problems that were above average in the early part of this decade,” Hartwig said. “Over a long period of time things even out. So if you hear that rates are rising more in Texas than they are other places, it’s simply not true on average over the long run.” And, he said, Texas no longer has the highest homeowners insurance prices in the nation. That honor goes to Florida. He estimated Texas ranks about third in pricing.

Still, Hartwig sees the cost of homeowners insurance as one of the best deals going. “Your average homeowners insurance premium as a percent of the cost of the median home is equal to 0.4 percent of the value of that home. … What that says to me is that homeowners insurance, in spite of everything that’s happened, is that, yes, prices have gone up in coastal areas but it remains an incredible bargain. Where else can you get a new house for about $900 a year?” Risky business

Despite a couple of relatively calm years, in terms of catastrophe losses Texas remains “among the riskiest places to operate in the United States. Florida is the riskiest, but [Texas has] the hurricane risk, the tornado risk.”

Every three or four years Texas gets hit with a billion- or multi-billion dollar event. The state “has experienced billion dollar event cat years in nine of the past 28 years, so about one out of every three years on average,” Hartwig said. “The average annual cat loss in Texas is almost a billion dollars when you account for inflation. … Texas accounts for 10 percent of all the cat losses in the United States over nearly a 30 year period.”

He acknowledged that in actuality, “every square inch of America can be part of a billion dollar disaster today,” and the industry needs to plan accordingly. The P/C industry needs to be able to sustain a $100 billion year in terms of cat losses, he said, and it would not take much to get there — two Hurricane Katrinas and a couple of other disasters would add up to $100 billion fairly easily.

He said last year about 1.2 million claims were filed associated with catastrophes in 41 states. There were 23 catastrophic events and losses came in at around $6.5 billion. California, with its wildfires, led the nation last year in terms of cat losses, but Texas fell into third place. The state had $667 million in insured cat losses in 2007, Hartwig said.

Topics Catastrophe USA Texas Profit Loss Homeowners Market Property Casualty