Aug
17

Property and casualty industry is looking good, for now

The property-casualty industry looks to be heading for a profitable year, but (no pun intended) storm clouds are on the horizon. The latest prediction comes from Conning and Co, the Hartford, Conn. based insurance research firm.
According to Conning’s analysis, 2006 looks very strong, with past price hikes fattening bottom lines. The bad news is the industry can’t ever seem to maintain pricing discipline, which is (inevitably) leading to price competition in some lines, which in turn will result in rising loss costs and a decline in return on equity (which isn’t all that strong to start with at 9.2% in 2005).
So far, prices have remained flat to slightly down, with mild variations among the various insurance lines (work comp prices are slightly lower, property (outside of hurricane areas) flat, D&O down somewhat…)
The big worry continues to be the storm season, which has been quite mild to date. One knowledgeable source, a reinsurance broker, told me the reinsurers are holding their collective breath while watching the Weather Channel. if the weather continues its’ current quiescent state, reinsurers may well recover a big chunk of the losses they incurred over the last couple of years. If not, expect to see reinsurance premiums zoom up for all property and casualty lines, as reinsurers seek to maintain solvency.
What does this mean for you?
Primary insurer profitability follows reinsurer profitability, hope for calm winds.


Jun
19

Reinsurance getting harder to find

While primary P&C insurance markets appear to be flat to softening, the opposite seems to be occuring in the reinsurance business. According to leaders of several of the top reinsurers, capacity is down while demand is up, the indication of a hardening reinsurance market.
Underlying these macro trends are less obvious factors contributing to this apparent dichotomy. First, the secondary insurers are paying more attention to bottom lines than top lines; looking for profitable business and not just any business. Second, reinsurers are seeking good long-tail line business such as workers comp; these lines also tend to be the least affected by natural catastrophes and provide the longest access to capital as claims are paid out over years instead of months. Third, with interest rates ticking up, reinsurers can find attractive places to invest premiums over the long haul.
And finally, there are a lot of very anxious reinsurance underwriters who break out in a cold sweat when the barometer drops…witness all the press about the season’s first tropical depression, a weather non-event that normally would merit nothing more than a slightly extended local weather update in coastal Florida cities.


Jun
16

The smart money is buying TPAs

Sedgwick CMS, one of the nation’s larger property and casualty TPAs, is getting even bigger. The company will be acquiring Comp Management Inc. (CMI) for just under $200 million.
This marks the first expansion of Sedgwick since its sale to Fidelity National earlier in the year. Sedgwick acquired California-based disability management and administration firm VPA in May. Prior to that deal, Sedgwick had primarily grown organically; the new owners look to be very interested in gaining size and competencies as quickly as possible.
CMI had been on an expansion trajectory of its own, branching out into medical malpractice administration with the acquisition of Octagon in 2003, a deal that also significantly expanded CMI’s west coast presence. CMI was owned by investment firm Security Capital Corp. of Greenwich Ct.
Broadspire is another TPA acquired by an investment firm. This deal, which transferred the somewhat-damaged Kemper National Services TPA to Platinum Equity, was the first of a series of acquisitions that have propelled the combined entity into the top tier of TPAs in terms of market size. RSKCO and Cunningham Lindsey were added to the portfolio in 2004. Since that deal, Broadspire has been selling off assets that appear to be tangential to its core claims adjudication business; the disability management operation went to Aetna and Bureau Veritas picked up the loss control/safety division earlier this year.
These deals are not the only sign of interest on the part of the investment community in the P&C world. The level and amount of interest in TPAs has grown exponentially over the past year; my sense is the industry is perceived to be ripe for consolidation; backward in terms of technology, business process streamlining, and operational excellence; and significantly less profitable than it could be.
I agree.


May
24

P&C Predictions for 2006

2006 will be a good year for insurer profitability, according to Robert Hartwig of the Insurance Information Institute. If the storm season is not unduly harsh and if insurers can maintain some pricing discipline. Those are mighty big “ifs”, and while the weather may be unpredictable, the propensity for underwritering discipline to waver is well documented.
There are two components to profits – premiums and claims. And while the claims picture is cloudy, the revenue picture is pretty clear. Premium increases have leveled off to half of one percent, the lowest rate since the nineties. And in spots there has been evidence of rate decreases as insurers try to hold onto profitable business. If the discipline holds, insurers may be OK. If not, we’ll have problems.
While insurer profits look good (up 12% over 2004), that is misleading as the industry’s return on equity remains below that enjoyed by other, less risky businesses. An RoE of 10.5% is not adequate for an industry that is subject to huge unpredictable losses; investors will find better returns from less-risky investments in many sectors.
As unattractive as 10.5% may be, it is much better than the industry’s average results for the last ten years of 7.7%.
What does this mean for you?
Hold on to your hat. Predictions are for the hurricane season to be a bad one, and if a big storm makes landfall in a populated and/or industrialized area, losses will be big and so will rate increases.


May
4

What P&C insurance industry exexs are thinking

The national conference of insurance agents’ annual legislative get together featured a panel comprised of CEOs and top execs at some of the nation’s leading property and casualty insurers.
The gentlemen discussed terrorism reinsurance and the need for a federal backstop, contingent commissions, state reinsuramce pools, and state v federal regulation. All interesting topics, but I’m most worried about something that doesn’t seem to have hit their radar.
Health care costs.
Yes, these guys are P&C insurers – they insure buildings, liability, the environment, cars, houses, businesses, boats and many other things. No, none of them are health plans per se. But they all are facing double-digit increases in the medical expense portion of their claims dollar, have been for years, and don’t seem to be paying attention.
In workers comp, over half of the claims dollar goes to medical care; for the largest insurers that’s about $1.5 billion annually. Auto insurers also pay a lot of medical expenses, as do medical malpractice carriers and liability insurers.
Yet the top execs don’t appear to give medical inflation and health care costs the same attention they give to TRIA, reinsurance pools, or state v. federal regulation.
Maybe that’s why their health care costs are going up so fast.


Apr
26

Workers comp rates: hard? soft? just right?

Well, are workers comp rates softening, hardening, or just right?
According to a study released at this year’s annual RIMS conference (held in Honolulu…), the market is softening. I’m not sure I buy that, and here’s why.
There are lots of moving pieces here that all have an impact on insurance rates: prior year losses; medical cost trend rates; expectations of losses for the coming policy year; claims volume projections; claim cost projections; equity market investment returns; interest rates; the amount of free capital in the market; etc.
So, one would need a supercomputer or really good ouija board to consider all these factors. Lacking either, I’ll use the trusty educated guess to prognosticate on the future of rates…
Workers comp rates are down about 3% over prior year renewals. This is due to more favorable investment returns (equity markets are up as are interest rates); a significant improvement in loss ratios in California (home to about 17% of the nation’s WC exposure); an expectation that reforms in Texas will significantly reduce costs in that key state; concern about potential claims for property and liability from past and future hurricanes (soaking up capital that could be used to write WC) and perhaps most significant, the continuing decline in claims frequency.
All these factors make for a relatively rosy outlook for comp. In fact, coupling the legislative and regulatory changes with the decline in claims frequency, one could argue that rates should be substantially lower than they are today.


Apr
21

P&C insurance rates

Following on the heels of the “revelation” that the Property and Casualty insurance industry experienced a significant drop in profitablility last year comes news that insurance rates appear to be leveling off from last falls’ declines. According to an analysis done by Lehman Brothers, the average commercial account saw a drop of 2.7% over their prior rates.
Yes, rates are still dropping – a little. The exception is property insurance, where rates are bumping up significantly, with the greatest increases in catastrophic coverage hitting the 25% range.


Apr
19

Property and Casualty 2005 results are down

Weiss Ratings has released its analysis of the P&C industry’s 2005 results; it will come as no surprise that results are down due to hurricanes and related disasters.
For those unfamiliar with the industry’s risk structure, here’s a quick snapshot. Primary insurers, such as Allstate and USAA, sell the policies and usually reinsure some portion of the potential losses with another insurance company. Thus, when big claims, or lots of claims, hit, the reinsurers get hammered.
Such was the case in 2005. Although the number and size of claims were high, reinsurers picked up a big chunk of the losses.
And, insurance companies did a pretty good job of investing premiums and therefore gained substantial returns on those assets. As a result, despite underwriting losses of $4.2 billion, on the whole the industry earned $46.7 billion, up 13% from the prior year.
The entire industry has just over half a trillion dollars in surplus available to pay claims. So, even if a major disaster hits, we should be OK.
What does this mean for you?
With reinsurance rates going up and coverage harder to obtain, expect to see the market continue to waver between hard and soft as underwriters wait for the hurricane season.


Mar
21

St. Paul Travelers won’t be merging with Zurich

The rumors of a potential St. Paul/Travelers merger with Zurich are likely groundless. Sources indicate that reports of a pending deal in the Wall Street Journal between the two insurers are incorrect.
According to a high-level exec at one of the companies, “there are no discussions at any level for either a merger with ZFS or an acquisition of the North American P&C operation.”
That said, St. Paul/Travelers is in the acquisition mode, and will likely buy something this year.


Mar
16

More problems for Marsh

Marsh Mclennan, the nation’s largest broker, has once again been hit by a civil suit charging bid rigging, hidden commissions, and RICO violations. This time the suit has been filed in Florida’s Lee County.
According to the St. Petersburg Times, one of the issues deals with hidden commission payments from insurers:
“The suit does allege Marsh contracted with Miami-Dade County to provide coverage for services for a flat fee, but received from insurers an additional $140,000 in hidden commissions.”
Marsh has condemned the suit, noting it simply repeats the charges filed by (and not coincidentally settled for $850 million by) NY Attorney General Eliot Spitzer.
Thanks to Helen Knight for the tip.