Personal lines looking fine, thanks to fewer accidents and price changes

I.I.I. JOINT P/C FORUM: Outside Looking In – Left to right: V.J. Dowling, Dowling & Partners Securities; Mark Puccia, Standard & Poor’s; David Schiff, Schiff’s Insurance Observer; Brian P. Sullivan, Auto and Property Insurance Reports and Franklin Nutter, Reinsurance Association of America.

Photo: Ben Asen, Copyright 2006.

News Currents

The year 2005 is looking like it was a relatively good one with solid financial news for property casualty insurers overall, despite record catastrophe losses, and 2006 could bring even better news, according to analysts at a recent New York meeting of analysts and executives.

For the year just ended, property casualty insurers are likely to show a slight underwriting profit, with a combined ratio around 99. Insurer stocks outperformed the Standard & Poor’s 500 by 10 percent, with only utilities and energy coming in better.

The good news is most apparent in personal lines, where insurers have refrained from typical cyclical behavior of cutting prices to build market share. The commercial lines picture is a bit less rosy.

‘Remarkable’ year

According to Franklin Nutter, president, Reinsurance Association of America, the results made 2005 a “remarkable” year and 2006 looks to be just as remarkable. A poll of analysts predicted another underwriting profit in 2006. Credit Suisse Boston is projecting a return for the property casualty industry in 2006 of 15 percent.

Nutter was among the experts at the annual Property Casualty Joint Industry Forum sponsored by the Insurance Information Institute who wondered how long the good news in personal lines would continue.

“We’re in a spot now for whatever reason, and I think people are smarter about their business and have more data, people are saying, ‘We can’t grow by cutting prices,'” noted Brian Sullivan, publisher of Auto Insurance Report and Property Insurance Report.

So instead insurers are saying, “let’s not do anything,” continued Sullivan, who termed 2005 as a “let’s not do anything year” when insurers decided to just keep making money.

“It’s a very unusual marketplace in personal lines,” the noted personal lines authority added.

Friend in frequency

While he thinks it may not be as profitable as surface numbers suggest, personal lines, particularly auto, is still a good place for insurers right now, according to stock analyst V.J. Dowling.

Auto is seeing returns of 15 percent, he said, not because rates are going up or because settlement costs are going down but because accident frequency is down.

“As long as that keeps happening, results will be stronger than anticipated but at some point you can’t keep having fewer and fewer accidents and things will turn,” predicted Dowling, whose firm, Dowling & Partners Securities LLC, in Hartford, Conn., specializes in property casualty stocks.

Cycles not dead

Companies may have stopped cutting personal lines prices but that does not mean that the cyclical tendency has been put to rest forever, warned another observer. David Schiff, editor of Schiff’s Insurance Observer, stressed that while cycles may be longer and less predictable, they still exist. “The key is not to get too intoxicated by the good times,” Schiff advised.

Standard & Poor’s chief quality officer, Mark Puccia, was among those noting that stagnant investment income and the hurricanes kept the pressure on insurers to maintain rather than reduce personal lines prices in 2005.

The analysts also credited insurers’ use of better underwriting tools and risk information for the underwriting results in personal lines. “Progressive has more underwriting cells in some states than there are people,” commented Sullivan.

Consolidation outlook

Dowling questioned whether there would be much consolidation activity among carriers in the coming year. “Nobody’s getting out with 15 percent return on equity,” according to the stock expert.

S&P’s Puccia agreed, maintaining that there are not many “white elephants” in personal lines today that are looking to be bought out and that insurers in personal lines now want to stay in.

Sullivan suggested that mergers don’t make as much sense as they did years ago. Today, insurers can grow by simply winning over business from weaker competitors that lack the skills and market presence to compete. “One of the key factors in personal lines is a lot of companies have recognized that it’s more profitable and possible to grow by just taking customers from those ‘weak sisters,'” Sullivan said. “Who wants to sell? There’s too little upside to buying.”

Sullivan and S&P’s Puccia described a personal lines market so good that combined ratios in some states are in the 40s and 50s right now. Yet even within the overall bright picture there are some dark spots, including Florida where insurers face problems, and an uncertainty over what is in store for catastrophe losses in 2006.

As tough as Florida is, it could be worse if calls for federal government involvement in a solution are heeded, analysts said. “A federal solution is the biggest disaster waiting to happen,” commented Puccia.

Commercial lines

The commercial lines picture is not quite as bright. Commercial liability prices are still deteriorating, according to Puccia, and it could take years before property insurance prices get to where they should be.

According to Sullivan, compared to personal lines, there is less specific rating and loss information in commercial lines “so insurers can still delude themselves.”

The reinsurance market also came in for some criticism. Puccia described it as a “very volatile” segment, adding that S&P remains “underwhelmed” by reinsurers’ risk management abilities.

Schiff said he thought capital markets responded efficiently after the hurricanes by pouring new funds into reinsurance, although Dowling contended there is not a lot of new net capital.

Topics Carriers Reinsurance Property Casualty Personal Lines