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Property/casualty insurer results benefitted from calm 2014

Benign domestic catastrophe losses offset continued low interest rates


Stable is the best way to describe commercial property/casualty insurers' performance during 2014.

It was a year without huge domestic catastrophe losses, which meant many underwriters continued to post underwriting profits. Insurers did well with their equity portfolios as well, but the continuing paucity of interest income did affect insurers' balance sheets.

In addition, insurers were able to get rate increases last year. However, the size of the increases decelerated as the year went on, a trend that appears to be continuing this year.

Net income for the 10 largest commercial property/casualty insurers that report quarterly results dropped 12.3% in 2014 vs. 2013. In their financial statements, most reported disappointing investment income even though the relatively small portion of their portfolios consisting of equities performed well.

Net written premiums grew only 2.6%, but the group's collective combined ratio continued to improve, declining to 93.5% from 94.5% the previous year.

Only American International Group Inc. posted a combined ratio above 100%.

Of course, results varied greatly by company. At one extreme, Hartford Financial Services Group Inc.'s 2014 net income grew more than 380% to $798 million, reflecting better underwriting results as well as lowered losses associated with discontinued business, notably its Japanese annuity business. At the other extreme, XL Group P.L.C.'s net income dropped more than 80% year-over-year, reflecting a large loss stemming from the sale of its life reinsurance business.

Industry analysts generally liked what they saw.

“It was a pretty stable year compared to 2013,” said James Auden, managing director of insurance at Fitch Ratings Inc. in Chicago. “Underwriting results for most companies were pretty much on par with 2013.”

“2013 and 2014 were very similar,” said Joshua Shanker, New York-based analyst at Deutsche Bank Securities Inc. There were no major domestic catastrophes, and there was “a generally benign loss-cost trend in both years.”

In fact, 2014 turned out better than some observers expected, said Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Dominion Securities Inc. in Richmond, Virginia.

“Pricing held up better, margins held up better and reserves held up better,” he said.

But “interest rates continued to be a drag,” Mr. Dwelle said. Some insurers also sustained slightly higher-than-normal noncatastrophe-related weather losses.

Interest rates could be one key factor affecting insurers this year.

“The prevailing view last year was interest rates were going up, and they didn't,” said Mr. Dwelle.

As a result, Fitch's Mr. Auden said insurers are contending with maturing bonds with higher interest rates than those borne by the new bonds that are replacing them in the underwriters' investment portfolios, leading to lower investment income.

But Mr. Shanker had a different perspective. He said higher interest rates could cause problems for insurers that have benefited from strong equity markets.

“In a rising interest rate environment, the amazing bull market we had in equities comes to a halt,” he said. Investment income takes would take a step down “almost immediately,” he said.

Another challenge insurers faced last year that's likely to become more of an issue this year is premium rate increases that are getting smaller.

“Pricing for the U.S. companies tended to peak at about October 2013 at about 5% (increases), and you've been in a creeping deceleration since that time,” Mr. Shanker said. “Right now, pricing is about flat compared to where it was a year ago.”

Fitch's Mr. Auden said that overall “it's more of a flat-pricing market. We don't see sharp declines in primary rates.”

“Our expectation for this year is that rate increases will continue to taper off and likely turn into rare decreases as 2015 unfolds,” Mr. Dwelle said.

Richard Kerr, CEO of Dallas-based electronic insurance exchange MarketScout, said insurers enjoyed rate increases most of the year, and “it took until the very end of the year when it all went flat.”

Mr. Kerr noted that rate movement, which MarketScout tracks, has differed state by state and line by line.

“Depending where you are, what line of coverage you're doing, it may be different from the composite,” Mr. Kerr said. “We started out up three or four points and bounced down to one (point); and coming into 2015, it actually went negative, but in February, it actually went up a point.”