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Lower rate increases and frequent losses cause slide in insurer profits

Posted On: Aug. 31, 2014 12:00 AM CST

A slowdown in rate increases, an uptick in weather-related and other property losses, and ongoing low investment returns weighed on the largest commercial property/casualty insurers' first-half results.

That isn't to say insurers weren't profitable; by and large they were. But most did report declines in net income for the first six months of 2014 compared with the same period in 2013.

For the sample of large commercial insurers as a whole, net written premiums actually grew 3% to a cumulative $79.99 billion for the first six months of the year. But consolidated revenue for the group dropped 2.6% to $105.35 billion, and net income dropped 11.0% to $103.14 billion, with only two of the 10 insurers reporting an increase in net income year over year.

W.R. Berkley Corp. posted the largest percentage gains in net premiums written, consolidated revenue and net income of the group during the first half. XL Group P.L.C. had the largest percentage declines in net premiums written and net income. Meanwhile, The Hartford Financial Services Group Inc. had the largest percentage drop in consolidated revenue.

The end of significant rate increases played a role in their collective performance.

“Clearly, we're seeing a slowing in pricing increases,” said Gloria Vogel, senior vice president at Drexel Hamilton L.L.C. in New York. She noted that Dallas-based electronic insurance exchange MarketScout's July report showed that commercial property/casualty insurance rates increased on average only 1.5% over a year earlier. As a result, insurers are looking for new ways to turn a profit, she said.

“The trend is that because the larger, particularly property, lines are so competitive, there seems to be more focus on using data analytics to price individual risks or focusing more on smaller to midsize accounts where maybe relationships matter more and pricing is less competitive — smaller, midsize specialty type accounts,” she said. “But if everybody goes after that market, that market won't stay very attractive for long.”

“We've seen a distinct slowing in the level of rate increases being achieved, and that has gradually led to a lower level of margin improvement,” said Mark Dwelle, director of insurance equity re-search at RBC Capital Markets, a unit of RBC Dominion Securities Inc. in Richmond, Virginia. “The second quarter was really kind of a transition quarter. It was the last quarter where you could say things are getting better and better. We're going to be using words like "slowly' in the future.”

The rate trajectory “was negative and getting worse on property and positive and getting worse on the casualty” side of underwriting, said Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore.

“I would characterize the first half as a relatively strong half and profitable, although below the comparable results from the first half of 2013,” said John L. Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio. “While it was a relatively strong first half, it is apparent there are headwinds that the industry will have to deal with going forward.”

“The favorable reserve development that occurred in the first half is about on par with the first half of 2013,” Mr. Ward said. “Overall, inflation continues to be very low, and that has helped with the favorable reserve development in the first of "14. It was higher than I expected and cannot continue.”

Although catastrophe losses tend to draw attention as insurers announce quarterly results, the first half of this year was marked by property losses that didn't reach the catastrophe level as defined by Verisk Analytics Inc.'s Property Claim Services operation, which defines a catastrophe as an event that causes “$25 million or more in direct insured losses to property and affects a significant number of policyholders and insurers.”

“There have not been a lot of declared catastrophes,” said Mr. Dwelle. But when the weather turns severely cold and there are a lot of burst pipes, it doesn't necessarily get a catastrophe number from PCS, he said.

“It's something that does happen from time to time, and I think it's something that's more evident in commentary where results are generally otherwise good,” he said.

“We saw in the first and second quarters unusual and unexpected levels of noncatastrophe losses,” said Mr. Shields.

In addition, insurers still had to contend with the issue of continued low interest rate income in the first half of this year, he said, adding that interest rates are actually getting worse.

“If interest rates continue to stay low, investors will still look for alternative sources of income. The demand will still be there unless the Fed decides to change direction,” said Ms. Vogel.

“The biggest problem the industry faces is growth,” she said. “How do you grow in an economy that's in recovery but is still pretty sluggish?”

Looking ahead, “we're in a better underwriting position,” said Mr. Shields, noting workers compensation rates have gotten better and commercial auto has “got some ways to go but its gotten better.”

Mr. Ward's outlook was optimistic: “The surplus for the industry is at record highs, so the financial strength and resiliency of the industry is quite positive,” he said.