Property casualty insurance insiders predicted 2008 will be a year of marginal growth as continued pricing competition will keep premiums low and profits lower — although that could quickly worsen if a natural catastrophe strikes.
Those predictions — which follow two years of double-digit profits for the industry as a whole — were the general consensus of CEOs during an industry panel held in January by the Insurance Information Institute in New York, an event that featured many of the top execs of several major companies from across the property casualty spectrum.
Evan G. Greenberg, chairman and CEO of commercial insurer and reinsurer ACE Limited, predicted a “marginal year” for the industry as a whole, although Greenberg did say he expected underwriting to turn a profit for ACE.
Echoing those comments was Ramani Ayer, chairman and CEO of The Hartford Financial Services Co., who added that commercial lines in particular “will be challenging for the industry as a whole,” and that at the Hartford, he did not “anticipate commercial lines generating a lot of top line revenue.”
Putting 2007 in perspective, Ayer pointed out that — although the industry enjoyed profit margins north of 13 percent — the S&P 500 for instance had average profits over 14 percent. “It was a terrific year, but if you go back to 1990 or 1950, you really are looking at two good years over a period of anemic years. It’s not a large return over longer period of time. Shareholders would share that sentiment.”
An informal poll of the audience, comprised of several hundred industry executives, mirrored Ayer’s and Greenberg’s comments, as where more than three quarters said they expected commercial and personal lines profits to flatten or fall this year.
Elephant in the Room
The declining premiums and profits will come as balance sheets remain significantly higher and reserves go untouched by any major natural catastrophe over the last two years.
Natural catastrophes are the major “what if?” for any company’s margins and balance sheet, and Ayer, of The Hartford, said “barring any natural catastrophe, I believe 2008 will continue to be — from an underwriting standpoint — a profitable year.”
A major storm could change that, however, he said.
Thomas J. Wilson, president and CEO of The Allstate Corp, echoed Ayer’s comments, adding that a natural catastrophe “has always been a wild card for the industry,” and though none reared its head in 2007, “it hasn’t been so long that we’ve forgotten.”
Those comments came as Insurance Services Office released a report saying that U.S. property casualty insurers would pay homeowners and businesses $6.5 billion for 2007 property losses from 23 catastrophes — making 2007 one of the lowest-cost years in a decade.
In all, nearly 1.18 million claims in 41 states are expected to be paid for catastrophe-caused damage, about $1.23 billion of which stemmed from wildfire claims in Southern California.
Indeed, the prospect of a natural catastrophe continues to be the elephant in the room, said Steven N. Weisbart, chief economist for the III.
“We’ve gone two years in a row without anything like (hurricanes) Katrina or Rita,” he said. “To go three years in a row would be the first time in a long time.”
Falling premiums will continue in 2008, predicted Allstate’s Wilson, adding that his own company planned to build growth around new products, such as higher-priced “green” auto policies in which the company buys carbon offsets for a car’s emissions.
“Price is important but it’s not the only thing,” Wilson said. “Auto’s a little different than commercial; it’s a different type of competition. Investing in new products and services is a good thing, it raises value for consumers.”
Gerald P. Schmidt, president and CEO of Mutual of Enumclaw, pointed out that recent surveys of insurance customers show that service from an agent outweighs price as a major factor for customers in picking an agent. He predicted that companies would focus on client service as a key growth driver in 2008.
“Those (carriers) who win (more market share) will have outstanding front line intervention,” he said.
In terms of profits, Allstate’s Wilson said “margins will come down a little bit in 2008, but I don’t think you’ll see the types of cycles that you see in other places where competition is only based on price.”
Competitive pressure is also driving reinsurance prices down, said Greenberg of ACE Ltd., which both buys and sells reinsurance.
“We had already contemplated a competitive environment, and it was much more of a buyer’s market this year,” he said.
Added Ayer, of The Hartford: “(Reinsurance) prices have come down and more capacity is available. If you want to buy reinsurance you can buy reinsurance.”
Wilson, however, said that much of the capacity is low-level, and that reinsurance for more severe risks “is not available.”
Acquisitions could also continue to be a major dynamic in the property casualty industry in 2008, some execs said.
Greenberg, whose ACE Limited in December bought Combined Insurance Co. of America and several other subsidiaries of Aon Corp., said “there will be activity” in mergers and acquisitions next year.
Much of that could come from overseas, as a relatively weak U.S. dollar makes acquisitions more attractive for European companies, said Anthony J. Kuczinski, CEO of Munich Re America. “In terms of U.S. versus foreign, if someone is looking to acquire and wants to be in the largest market in world, it’s a good time.”
Tempering that acquisitions-frenzy would be lower earnings in 2008, said Allstate’s Wilson.
Another factor would be board room jitters, said Schmidt of Mutual of Enumclaw.
“Governance is different than even a year ago,” he said. “It’s not as easy to get permission to buy or merge as it was a year ago. Boards are savvier to the fact that only 20 percent of acquisitions work.”