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Largest P/C insurers post profitable quarter

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Commercial property/casualty insurers continue to harvest the fruits of the past hard market, despite a softening market that eventually will affect results, observers say.

First-quarter 2007 insurer results were "excellent," said Diane Coogan-Pushner, a portfolio manager with Philo Smith & Co., a Stamford, Conn.-based investment banking firm. "Even after you strip out the investment gains, which many (insurers) experienced, the core results were very good."

But at the same time, "We're also hearing anecdotally that it's a very competitive market," Ms. Coogan-Pushner added.

The 14 major U.S. commercial property/casualty insurers surveyed by Business Insurance reported a 90.1% combined ratio for the first quarter, virtually even with the 90.3% combined ratio for the comparable period a year ago.

Among survey results:

  • P/C insurers reported an overall 4% increase in net premiums written, to $38.20 billion. However, half posted a decline in net premiums written.

  • Policyholder surplus increased 24.2%, to $92.45 billion.

  • Insurers' combined net income increased 24.1%, to $9.60 billion.

"Sort of boring, isn't it?" said John Gwynn, managing director at Memphis, Tenn.-based investment banking firm Morgan Keegan & Co. Inc., about the continued good results.

Insurers continue to benefit from relatively minor catastrophic activity last year despite pricing pressure in most commercial lines, said Mr. Gwynn. The "extraordinarily" high underwriting margins have started to decline on an accident-year basis, "but most companies continue to show very robust calendar-year results, largely as a result of reserve releases from prior accident years," he said.

Mark Lane, an analyst with William Blair & Co. in Chicago, said, "Overall, the first quarter was somewhat similar to the past few quarters. There continues to be increased pressure on pricing, which is pressuring premium growth," with price increases only on catastrophe-exposed property business.

"But competition is heating up as well," although "margins have continued to hold up extremely well," while the claims inflation environment "remains incredibly benign," Mr. Lane said.

"Top-line premium growth was somewhat slow, but not as bad as we would have thought, given the market is softening so much," said Adam Klauber, director of equity research for Cochran Caronia Waller Securities L.L.C., a Chicago-based insurance industry investment banking firm.

Observers also note that admitted insurers now are moving into the excess and surplus lines market.

"There's a lot of competition in the surplus lines coming from new entrants in the business," including many Bermuda companies that are seeking to diversify, said Ms. Coogan-Pushner.

The industry remains disciplined, though, said John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., an advisory firm specializing in the insurance industry. "The fear of catastrophes imposes discipline."

Furthermore, while investment returns have been relatively strong, they are still "well below historical levels," which has discouraged cash flow underwriting, Mr. Ward said.

The outlook in the short term is for continued good results, albeit with increasing competitiveness and assuming no major catastrophe activity this year, observers say.

Andrew Colannino, vp at Oldwick, N.J.-based A.M. Best Co. Inc.'s P/C division, said, "We're still expecting a pretty good year on a reporting basis for the full year of '07, although not as good as last year because of the softening of the market, and the wild card, as always," is hurricane activity later in the year.

However, "Rates are declining at an accelerated rate. That's a concern, and something we're watching closely," said James B. Auden, senior director at Chicago-based Fitch Ratings Ltd.

Margins will deteriorate gradually over the next 12 to 18 months, said William Blair & Co.'s Mr. Lane. "Even an active catastrophe season is not going to stop underwriting pressure on pricing, given the fact that margins are just so phenomenally high."

However, Cliff Gallant, an analyst with Keefe, Bruyette & Woods Inc. in New York, said, while rate cuts will continue, "I still think there's excess reserves out there. We could be in a period of extended profitability on the commercial side."

Future caution

But reserve development is a potential problem, Ms. Coogan-Pushner said. "We think that going forward, new business will start to weaken and prior business might have some development issues."

Meanwhile, many observers expect more merger and acquisition activity this year. They point to Boston-based Liberty Mutual Group Inc.'s planned $2.7 billion acquisition of Fairfield, Ohio- based Ohio Casualty Corp., which was announced last month (BI, May 14).

"As premium growth continues to slow, I think you're finally going to start to see more consolidation, as companies are starting to look for ways to grow through a slower period of the cycle," said Mr. Lane.

"The Liberty Mutual acquisition of Ohio Casualty, I thought, was telling," he said. "Activity's been relatively light, but we would expect that to pick up--potentially pretty meaningfully," said Mr. Lane.

"We've been anticipating increased M&A activity for the last year," said John Iten, director at Standard & Poor's Corp. in New York. The market softening makes it difficult to grow organically, he said.

Furthermore, both the acquirers

and the acquired have had the opportunity to strengthen their balance sheets and reserves, "so I think the potential acquirers are going to be less put off by the threat of legacy issues," Mr. Iten said.

The Liberty Mutual-Ohio Casualty combination could encourage others, Mr. Ward added. "It's true that transactions often breed other transactions."

However, synergies that are expected from an acquisition "don't often materialize, so we're kind of cautious in how we look at those," Mr. Auden said.