Personal Lines Doing Fine, Even Without Price Changes, Suggest P&C Analysts

By | January 11, 2006

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 executives.

The analysts said that the good news is most apparent in personal lines, where it appears insurers have refrained from typical cyclical behavior of cutting prices to build market share.

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.

According to Franklin Nutter, president, Reinsurance Association of America, results like this made 2005 a “remarkable” year and 2006 looks to be just as remarkable. According to a poll of analysts, there should be 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 will continue.

“We’re in a spot now and 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 they 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.

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, specializes in property casualty stocks.

Companies may have stopped cutting personal lines prices but that does not mean that the cycle is dead, warned another analyst. “The key is not to get too intoxicated by the good times,” said David Schiff, editor of Schiff’s Insurance Observer. Schiff stressed that while cycles may be longer and less predictable, they still exist.

Standard & Poor’s chief quality officer, Mark Puccia, along with Sullivan and others note 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 credit 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.

History suggests that in a soft market there may be mergers in the agency ranks but 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,” the stock expert said.

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.

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