Property/casualty insurer profits slipPosted On: Mar. 27, 2016 12:00 AM CST
Commercial property/casualty insurers enjoyed a good if not outstanding year in 2015, but the prospects for 2016 are mixed.
For most insurers, underwriting remained profitable as catastrophe losses remained low and they eked out rate increases in some lines. As a result, combined ratios were favorable for most insurers.
But the rate of increases continued to slow, and many lines and accounts saw decreases. In addition, underwriters continue to contend with low interest rates, which cut into investment earnings, and the prospect of loss cost inflation looms.
Net income for the 10 largest U.S.-based or listed commercial property/casualty insurers that report quarterly results dropped 28.7% compared with 2014 to $13.19 billion. But the drop was not spread evenly.
At one extreme, the two largest insurers in the group, Liberty Mutual Insurance Co. and American International Group Inc., both posted declines of more than 70%.
In Liberty Mutual's case, the drop reflected one-time expenses associated with divesting its Venezuelan operations.
At AIG, a $3 billion charge for adverse prior-year loss reserve development in property/casualty operations put a damper on results. The insurer, which is under pressure from activist investor Carl Icahn to break into three separate companies — life, mortgage insurance and property/casualty — also had to contend with costs associated with an ongoing reorganization, including the elimination of more than 20% of its top management positions.
At the other extreme, XL Group P.L.C.'s net income for the year jumped more than 500%, reflecting benefits from its merger with Catlin Group Ltd., which closed earlier in the year. Hartford Financial Services Group Inc. also saw a profit surge with net income up 110.8% from the previous year, which had been hit by a loss from discontinued operations associated primarily with its Japanese annuity business.
Net written premiums for the group rose 0.7% from 2014's total to $157.32 billion. The group's cumulative combined ratio deteriorated to 94.5% from 93.1% a year earlier. But the number was skewed somewhat by AIG's 115.0% combined ratio. No other insurer reported a combined ratio of 100.0% or above.
On the whole, analysts liked what they saw.
“The industry had a good year on balance,” said Josh Stirling, a senior analyst with Sanford C. Bernstein & Co. in New York. “The industry had the benefit of a number of years of price increases, and ultimately most of the companies have done a decent job in managing underwriting.”
Mark Dwelle, an analyst with RBC Capital Markets L.L.C. in Richmond, Virginia, said last year was a year of record earnings for many insurers, while for others like AIG it was a year of “significant strategic change.”
But he said that three straight years of below-normal catastrophe losses may skew the outlook for insurers. “That alone would be a headwind if it returns to normal,” he said.
“It's inevitable that fortunes turn there,” said James Auden, managing director of insurance at Fitch Ratings Inc. in Chicago.
Insurers results were acceptable, considering the commercial environment, said Paul Newsome, managing director at Sandler O'Neill & Partners L.P. in Chicago.
“On a relative basis, these companies have done very well as compared to other financial companies.
That's because much of what they do is little affected by a lot of the macroeconomic changes that have hurt the overall financial market lately,” such as turmoil in the financial markets overseas, he said.
Meyer Shields, managing director with Keefe, Bruyette & Woods Inc. in Baltimore, was a bit more skeptical.
“If I look at the sector as whole, it was OK, but not as good as 2014,” he said. “Mostly it was compounding of rate decreases and unprofitable commercial auto lines.” In addition, he said, some insurers had unfavorable loss reserve developments in the fourth quarter and faster-than-expected loss cost inflation.
Insurers may have a hard time maintaining their profitability levels as prices continue to fall meaningfully in key areas such as specialty lines and coastal property, said Mr. Stirling. However, insurers focused on small and middle-market business as well as some casualty lines are still raising prices, he said.