P&C Premiums on the Rise; But Where Does Trouble Lie

P&C Industry results find underwriting profits,
but what problems lurk below the surface? 

By Mark E. Ruquet

What do the early quarterly results this week tell us about the financial performance of the property and casualty insurance industry? Essentially, nothing new, except that companies can have a good quarter when there are no substantial catastrophe losses and premiums continue to rise.

W.R. Berkley reported third quarter net income up 39 percent to $137 million. Travelers’ third quarter results come in flat at $864 million, but earnings per share was up 9 cents based on “higher underwriting gain and share repurchase.” ACE beat earnings estimates by 26 cents a share as net income rose 43 percent to $916 million. Even BB&T Insurance Services, the insurance brokerage arm of BB&T bank, reported some increase in its net income in its insurance division, despite the fact the overall results were down.

On a quarter-to-quarter basis, BB&T said insurance services net income decreased $44 million to $22 million. The bank blamed the drop on seasonality in the P&C business and a refund of reinsurance premiums of $13 million. The firm underwrites a limited amount of P&C business. Comparing the performance to the same period a year ago, net income increased $6 million thanks to organic growth of $23 million in wholesale and retail P&C operations. BB&T also credited the performance with improved market conditions as an improving economy increases exposure units, and premium pricing continuing to firm.

The results correlate with the findings of a Towers Watson survey of Chief Financial Officers. In its fifth annual North American Property & Casualty CFO Survey, 23 P&C insurance company CFOs weighed in on the direction of premium pricing. Of those surveyed, 75 percent said the property market is hardening or at the top of the cycle and 65 percent said the casualty market is hardening or at the top of the cycle. Towers Watson said the CFO’s opinion that P&C insurance rates are on the risk is 30 percent higher than last year for property and 52 percent higher on for casualty. Those who see the casualty market hardening believe the duration of the increases will be longer than on the property side. Few believe lines are softening.

“The impact of the softer market the past several years, combined with low interest rates, has hurt insurers’ profitability,” said Bruce Fell, a managing director in Towers Watson’s Risk Consulting and Software business. “The state of today’s market should give insurers some breathing room and an opportunity to increase their bottom–line.”

In a report from Aon Benfield, the reinsurance broker examined rating agencies’ outlook and trends of the P&C industry and said the consensus view is more favorable, noting, “...the excellent level of capital adequacy and an improved aggregate combined ratio indicate the industry is moving in the right direction.”

In its report, United States Evolving Criteria, Aon Benfield observed that over the past 12 months the four global rating agencies have grown closer to consensus on the industry’s outlook as A.M. Best, S&P, Fitch and Moody’s rating personal lines and reinsurance companies stable. Turning to commercial lines, A.M. Best is alone rating commercial lines negative while the other three give the other three a stable rating, which is an upgrade from negative for S&P.

There are concerns with the sufficiency of rate increases, reserve redundancies and catastrophe losses, said Aon Benfield. However, the industry aggregate combined ratio of 98 through June of this year, a four-point improvement over last year, has the rating agencies coming to near consensus.

The bottom line is that the P&C industry still needs price increases to get back to an underwriting profit equal to almost a decade ago, said William R. Berkley, Chairman and CEO of W.R. Berkley Corp. Insurers that pursued volume during the soft market are now paying the price with bad results today, he said. Some are dealing with their mistakes and taking action by withdrawing from markets they should not have gotten into or re-capitalizing while “others are going in the wrong direction.”

He mentioned three—Tower Group, Medowbrook Insurance Group and Torrus—that are taking action to right their ship. Fitch downgraded Tower after the company said it would take $364 million in adverse reserve development. Medowbrook said it is working to strengthen its balance sheet and terminated a quota-share agreement with Swiss Re. Torrus received a shot of investment capital in July when Enstar Group purchased 60 percent ownership in the company. 

Berkley said the question for many insurers that thought they entered greener pastures and “will discover it was Astroturf,” is whether they will admit they made a mistake and find a solution “or be like the ostrich and keep their head in the ground and behave as if a problem does not exist until there is a crisis.”