Regional P/C Insurers Shine in Underwriting, Pricing Performance: Fitch

March 6, 2016

Pricing improvements over several years have propelled returns for U.S. regional property/casualty insurers, according to Fitch Ratings. While the majority of North American publicly-traded insurers experienced flat to slight declines in underwriting performance in 2015, regional insurers reported a steady improvement in results with a corresponding uptick in return on equity.

Fitch said it will release a special report that assesses year-end 2015 GAAP performance for a group of 45 property/casualty insurers. The analysis will reveal that regional insurers as a group experienced the largest year-over-year combined-ratio improvement of any segment in the insurer universe, leading the way to a 14 percent improvement in net income, and a strong aggregate net return on equity of 10.2 percent for the year.

The group consists of five publicly-traded regional insurers, including Cincinnati Financial Corp. (CINF), Hanover Insurance Group Inc. (HIG), Selective Insurance Group Inc. (SIGI), State Auto Financial Corp. (SAFC) and United Fire Group Inc. (UFCS). Each of the companies in this group reported an improved calendar-year combined ratio in 2015, although SAFC stands out as the company continues to report underwriting losses with a 101.5 combined ratio.

This group of five regional carriers reported a 3.1 percentage point, combined-ratio improvement to 94.1, as well as an improved underlying combined ratio (excluding prior-year reserve development and catastrophe losses), that dropped to 93.3, from 94.7 in 2014.

Fitch said that while the companies benefited from lower catastrophe-related losses in 2015, the results reveal the effects of underwriting and pricing actions taken in the last several years. These entities tend to emphasize smaller commercial accounts and personal lines business in targeted states. Smaller commercial business has been less competitive than business that generates higher average premiums per policy. The broader U.S. commercial lines market has shifted toward flat-to-declining price changes in most markets. However, SIGI, CINF and HIG reported low to mid-single digit price increases on renewals in their respective commercial segments in 2015, which Fitch said largely surpassed claim inflation and led to a further improvement in underwriting results.

The regional group studied by Fitch generated increased revenues in 2015, reporting 4.0 percent growth in net written premiums. For several of the companies, the largest increase in premiums was reported in specialty lines such as excess and surplus (CINF, SIGI and STFC) as companies diversify and seek profitable segments outside of their core business lines.

The ability to implement further pricing actions in a more competitive market environment will have a significant influence on future underwriting experience within the segment, according to Fitch.

Fitch said differences in scale create a competitive and expense disadvantage with larger national companies pose continuing challenges for regional carriers. National underwriters continue to invest in systems to automate the underwriting and risk selection process for smaller commercial accounts. Regional insurers with more limited resources may have difficulty keeping pace with these technological change, according to the analysts.

However, Fitch added, local underwriting knowledge and distribution relationships are likely to give regional underwriters an edge on larger competitors.

Property/casualty underwriters are facing a more competitive pricing environment and a declining contribution to earnings from investments, Fitch said. For regional underwriters, performance changes will hinge on a continued resolve to maintain underwriting and pricing discipline, and the unpredictable direction of catastrophe related losses.

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Latest Comments

  • March 8, 2016 at 1:38 pm
    Insurance 102 says:
    @ Yogi Polar Berra Yes. I see regional carriers in some parts of the country removing subsidence and residential exclusions off excavators and demolition contractors. Moreover... read more
  • March 8, 2016 at 8:35 am
    Yogi Polar Berra says:
    Often?! How often? I'm not doubting what you said happens, but I am unsure if you are serious or exaggerating about 'often'. If regional risks experience frequent cancellation... read more
  • March 7, 2016 at 7:28 pm
    Insurance 102 says:
    @ Mikey Rooker You do not know what you are talking about. Regional carriers often put forth price and coverage terms that are irresponsible and not in line with the insured's... read more
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