Financial Health of the Property & Casualty Industry Managing Capital … · 2012-04-24 ·...
Transcript of Financial Health of the Property & Casualty Industry Managing Capital … · 2012-04-24 ·...
Financial Health of the Property & Casualty Industry
Managing Capital in a Challenging
Economic Environment
Gordon McLean Senior Financial Analyst A.M. Best Company Puerto Rico Chamber of Commerce Insurance Summit – “Untapping Opportunities” April 25, 2012
Discussion Topics
• 2011 Review
• Industry Outlook 2012
– Commercial Lines
– Personal Lines
– Reinsurance
Commercial Lines Segment
Analysis
State of Commercial Lines
“Bad News”
• Extended Soft Market
– Premium Contraction Four Consecutive Years (2007 – 2010)
– Premium Still Lower than 2006
– Too Many Players Chasing Finite Market
• Limited New Growth Opportunities - Weak Economic
Conditions
– Slow U.S. GDP Growth
– 8–9% Unemployment + High Underemployment
– Banks Limit Commercial Lending Activities; Low Levels of New
Private Construction
– Corporate Spending Restricted
Commercial Lines
150.0
160.0
170.0
180.0
190.0
200.0
210.0
2007 2008 2009 2010 2011E 2012P
$ B
illio
ns
Commercial Lines Segment
Net Premiums Written
State of Commercial Lines
More “Bad News”
• U.S. Catastrophes on the Rise
– Significant Catastrophe “Frequency” in 2011
– Recent Higher Frequency of Hurricanes – Just
Haven’t Hit Land
• Continued Investment Pressures
– Yields at Historic Lows
– Durations Shorten
• Reserve Releases May Be Nearing End
Commercial Lines Commercial Lines Segment
Pre-tax Return on Net Premiums Earned (ROR) and After-Tax Return on Surplus
21.1%
17.0%
15.2%
11.5%
5.4%
9.6%
15.1%
-2.2%
13.7%
10.7%
5.7%6.5%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2007 2008 2009 2010 2011E 2012P
Pretax Return on Net Premiums Earned (ROR) After-Tax Return on Surplus (ROE)
State of Commercial Lines
Now the “Good News”
• Recent Price Increases
• No Significant Hurricane Events in U.S. Since
“Ike” in 2008
• Despite Headwinds, Respectable Combined
Ratios
Commercial Lines
64.669.0 68.5 71.4
77.874.2
28.1
28.5 30.030.5
29.6
29.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
2007 2008 2009 2010 2011E 2012P
Commerical Lines Segment
Combined Ratio (Reported)
Loss & LAE Ratio Underwriting Expense Ratio Dividends to Policyholders Ratio
93.6 98.4 99.1102.7
108.2103.9
State of Commercial Lines
More “Good News”
• Relatively Inexpensive Capital
– Lower Cost of Capital
– Increased Debt Refinancing Activity in 2011
• High-Quality Investments
– Downgrade of U.S. Treasuries – No material impact
– Municipal Bonds – No material impact
– Low Risk Tolerance For Most
• Positive Cash Flow
• “Strong” Risk Adjusted Capital (BCAR)
Commercial Lines
221.4
197.3
222.3
226.3
218.9
223.3
180.0
185.0
190.0
195.0
200.0
205.0
210.0
215.0
220.0
225.0
230.0
2007 2008 2009 2010 2011E 2012P
($ B
illio
ns)
Commercial Lines Segment
Policyholder Surplus
Segment Underwriting Details
Commercial Lines
2010 2011E 2012P
Net Writ ten Premium Growth (%) -1.6 4.1 4.2
Combined Rat io (Reported) 102.7 108.2 103.9
Less: Catastrophe Losses (%) 3.5 8.5 4.0
Less: A&E Losses (%) 1.6 1.2 1.1
CY Combined Rat io (Normalized) 97.6 98.5 98.8
Less: Core Loss Reserve Dev. (%) -2.7 -2.3 -1.7
AY Combined Rat io (Normalized) 100.3 100.8 100.5
Commercial Lines Outlook
Negative
• Margins pressured – Loss reserve redundancies fade
– Historically low investment yields
• Loss Reserve Adequacy Questioned
Offsetting Factors:
• Price Firming – Beginning of hard market?
• Capitalization still solid
Personal Lines Segment
Analysis
Personal Lines Segment
Divergent Trends Continue
• Automobile – Stable Performance
• Homeowners – Extreme Volatility
• Consolidation – Divergent by Line
Segment Underwriting Details
2010 2011E 2012P
Net Writ ten Premium Growth (%) 3.3 2.5 3.0
Combined Rat io (Reported) 100.4 107.4 101.7
Less: Catastrophe Losses (%) 5.3 10.5 5.0
Less: A&E Losses (%) 0.1 0.1 0.1
CY Combined Rat io (Normalized) 95.1 96.8 96.6
Less: Core Loss Reserve Dev. (%) -4.1 -4.2 -3.4
AY Combined Rat io (Normalized) 99.2 101.0 100.0
Personal Automobile
• Favorable Frequency Trends
• Severity Pressure
• Increased Fraud Activity in Several Key States
• Branding Initiatives Continue
• Distribution Expansion
• Telematics
Personal Automobile
98.3
100.3
101.3
101100.8
100.3
95
98
100
103
2007 2008 2009 2010 2011E 2012P
Private Passenger Automobile Combined Ratio
Homeowners
95.7
116.9
105.8106.7
123.7
105.0
90
95
100
105
110
115
120
125
130
2007 2008 2009 2010 2011E 2012P
Homeowners Multi Peril Combined Ratio
Homeowners
• Weather Volatility
• Reinsurance Pricing/Retentions
• Underwriting Basics Well Ingrained
• Pricing Sophistication Evolving
Catastrophe Models
• Significant Increases in Model Results
• Valuable Risk Management Tool – But Not Only
Tool Available
• No A.M Best Rating Actions Based Solely on
Model Changes
• Increased Awareness of Model Parameters
Consolidation Trends
58.9
65.6
68.4
62.4
50
55
60
65
70
Top 10 Auto Top 10 Homeowner
DPW Market Share
2000 2010
Personal Lines Outlook
Stable
• Capitalization Adequate – Despite Property
Volatility
• Automobile Performance Stable
• Homeowners Pricing/Underwriting Initiatives
• Relatively Benign Regulatory Environment
However:
• Less Room for Additional Deterioration
• Rating Pressure on Concentrated Writers
Reinsurance Market Analysis
View of the Reinsurance Market
• 2011 events second only to 2005 in terms of
loss impact:
– Capitalization remains strong
– Probable Maximum Losses factored into capital
resources
– Each event within stated risk appetite
– For some companies cumulative losses
approached/exceeded the single event PML
– Pricing trends improving especially for property
classes
View of the Reinsurance Market
• Issues still persist:
– Total returns severely depressed
– Pricing remains below expectation especially for
casualty classes
– Investment yields remain low
– Reserve redundancies drying up
– Thai flood estimates very preliminary
– Excess capacity diminished
– Global financial market issues
– Reduced financial flexibility
Global Reinsurance –
Aggregate BCAR Scores
240%
252%
236%
219%
234%
201%
0%
50%
100%
150%
200%
250%
300%
2009 2010 2011 (estimated)
Standard Stressed
Positive Signs for a Firming Market
• Primary demand may improve:
– Prior year redundancies declining
– Insurers see need to reduce volatility
– Model changes impacted PMLs
– Primary retentions have remained high despite
further margin compression
– More demand anticipated due to higher capital
requirements from Solvency II in Europe
– Weak investment yields, greater focus on
underwriting
Positive Signs for a Firming Market
• Rate increases substantial in affected areas
• Cold spots are more capital intensive than originally perceived
• Stricter terms and conditions and higher prices reported in Japan, New Zealand to date
• Reinsurers demanding better transparency around the data
• Reduced pressure for rate reductions in non-affected regions
• Casualty pricing has bottomed out
“Big Four” European Reinsurers
66.4% 68.1%65.5%
68.8%
80.5%
29.1%29.3%
28.8%
30.0%
29.0%
0%
20%
40%
60%
80%
100%
120%
2007 2008 2009 2010 3Q 2011
Ratio
(%
)
Loss Ratio Expense Ratio
U.S. Reinsurance and Bermuda Market
2012P 2011E 2010 2009
NPW (P&C only) $54.9 $53.8 $52.6 $50.3
Net Earned Premiums (P&C only) 55.0 53.9 52.4 51.1
Net Investment Income 7.7 7.6 8.1 8.2
Realized Investment Gains / (Losses) - (0.5) 2.2 0.7
Total Revenue 64.1 63.0 65.7 63.1
Net Income 9.9 2.5 11.2 12.4
Shareholders' Equity (End of Period) 99.8 94.9 96.1 88.4
Loss Ratio 67.1% 74.5% 61.8% 56.1%
Expense Ratio 30.3% 30.1% 30.9% 29.7%
Combined Ratio 97.4% 104.6% 92.7% 85.8%
Favorable Loss Reserve Development -2.0% -6.2% -6.2% -6.1%
Return on Equity 10.2% 2.6% 11.9% 16.0%
Return on Revenue 15.5% 3.9% 17.1% 19.7%
(USD Billions)
Reinsurers’ Response to
Current Market Conditions
Maintain Balance Sheet Strength
• Capital preservation:
– Share buy backs and dividends temporarily scaled
back
– Reallocation of capital amongst classes of
business and regions
– Disposing of non core businesses
• Increasing use of Capital Market Solutions
• New capacity raised (e.g. Montpelier,
Renaissance Re, SCOR, Partner Re)
Cycle Management
• Top line is flat to down for most reinsurers
• The shift from casualty classes has continued
• Capital management is the key focus
• New ways of accessing business:
– Very few pure reinsurers
– Purchase or alignment of MGAs
– Captives
– More co-insurance on large commercial risks
Global Reinsurance Rating Outlook
• Outlook remains stable
• Loss events, though large, equate to earnings events
• Balance sheets remain sound
• Asset risk conservatively managed
• Market remains disciplined from an underwriting perspective
• Pricing momentum has turned positive
• Enterprise risk management tested and functioning well
• Concerns: – Possibility for short-lived pricing improvement
– Investment situation puts more emphasis on underwriting acumen
– Regulatory uncertainty
– Financial Flexibility
Puerto Rico – Top Ten Carriers
Direct Written Premium
0
50,000
100,000
150,000
200,000
250,000
300,000
Univ.
Ins.
Co.
(PR)
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2009
2010
2011
(USD Millions)
Puerto Rico – Top Ten Carriers
Underwriting Income / Loss
-50000
-40000
-30000
-20000
-10000
0
10000
20000
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2009
2010
2011
Puerto Rico – Top Ten Carriers 2011 Reported Combined Ratios
34.0% 38.1% 39.5% 43.1% 49.3% 49.4% 51.9% 57.0% 61.8% 67.2%
66.6%70.2% 67.0% 54.2%
54.3% 48.2% 47.4% 33.4% 18.1%2.8%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
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Loss & LAE
Expense Ratio
100.6 %108.3% 106.5%
97.3%103.6%
97.6% 99.3%90.4%
64.6%
85.3%
U.S. Life Market Overview
• Diversified business mix/competitive landscape
• Sound risk based capital positions
• Generally stable earnings stream
• Regulatory uncertainty
Economic Malaise Challenges Life
Insurers
• Low interest rates
• Volatile equity markets
• High unemployment & low consumer confidence
• Global contagion impact
Global Contagion
• Sovereign downgrades
• Eurozone risks
• Slowing global economy
• Some impact on foreign owned life insurers
US Health
Health 2011 Review/2012 Preview
Operating Results
– 2011
• Remained strong
• Utilization remained low
• Minimum medical loss ratio requirement
– 2012
• Margins expected to decline
• Utilization impact
• Impact of Minimum medical loss ratio & rate reasonableness
requirements
Health 2011 Review/2012 Preview
Capitalization
– 2011
• Favorable earnings
• Lower premium growth
– 2012
• Impact of margin compression
Health 2011 Review/2012 Preview
Health Care Reform
• Minimum medical loss ratio requirement
– HHS waivers
– Companies exiting
• Rate reasonableness requirement
Health 2011 Review/2012 Preview
Strategies For The Future
• Marketing/Products
• Medicaid expansion
• State exchanges
• Administrative costs
• Affiliations/alliances
• Fronting arrangements
Questions & Comments Welcome
Gordon McLean
+1 908-439-2200 x 5304
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