SNL: Q2 P-C underwriting result is worst since 2001

The P/C industry is reporting a 117.7 combined ratio for Q2, SNL Financial reports (sub. req., I think). That’s the worst result since third and fourth quarters of 2001, when the industry booked 121 and 120, respectively.

How bad?

The second-quarter combined ratio easily topped that of other problematic periods for the industry in recent years. The same group of companies produced combined ratios of 112.7% in the third quarter of 2008 [ed. note: Hurricane Ike] and 113.6% in the third quarter of 2005 [Katrina], but the former was inflated by dismal results by bond insurers and the latter was suppressed to a lesser extent by strong bond insurer results.

The industry’s underwriting loss approached $19B. State Farm alone booked an underwriting loss of $2.5B. Clearly the awful tornado season took its toll.

SNL’s chart tells the story:

The industry booked $2.88B in favorable development on prior-year losses, a 37% dip from $4.58B in Q1.

• Personal lines writers suffered $10B in underwriting losses.
• Commercial property writers posted $3.7B in underwriting losses.
• Companies that focus more broadly on all commercial coverages posted underwriting losses of $2.8B.
• Financial writers, led by poor results at mortgage writers, booked $1.4B in underwriting losses.
• Medmal writers posted a modest $161M gain.

SNL’s analysis is based on statutory data and represents 98% of expected statutory filers.

Q2 earnings update

Link-o-rama updated for Zurich results.

Q2 earnings update

Q2 Link-o-rama page updated. New links include:

• Progressive 10-Q
• American Financial 10-Q
• Hanover webcast and 10-Q
• Everest Re 10-Q

Q2 results roundup

On Thursday night, after putting together The Week in a Minute, I realized that I didn’t have a way to recognize company earnings reports, many of which came out last week. None by itself was a top-shelf news item, but it seemed odd to leave off earnings reports when they were the main thing happening (at least until S&P downgraded U.S. debt).

So I’ve created a page summarizing Q2 earnings. Right now, it provides links to earnings announcements, 10-Q’s, etc., for major U.S. property-casualty companies and major reinsurers. If this is well-received, I will flesh it out.

You can also find the page by following the link in the “Pages” area, which will always be at the top left corner of the blog, just above the Twitter feed.

The Week in a Minute, Aug. 5, 2011

Update: Links to Q2 company earnings can be found here.

News

• Convictions of actuary Ron Ferguson and four others convicted in the 2000 AIG loss portfolio transfer deal got tossed out of court. The appeals court thought it was bad form for prosecutors to leak their investigation, then introduce as evidence the subsequent drop in AIG’s stock price.
• NOAA and the storm researchers at Colorado State updated their 2011 hurricane forecasts. Not much changed.
• Computer networks for the U.S. and Canadian governments, the Olympic committees of several countries and the United Nations have been hacked since 2006, two computer security firms announced. China suspected. China denies.

Viral

Whatcha got under the hood?

Early assessment of Japan insurance/tsunami losses

Insurance stocks sank in Europe on news of the Japanese earthquake/tsunami. Bloomberg has an article here, but updates will make it obsolete by 11:30 a.m. Friday.

Post Online quotes a Jefferies International analyst projecting a $10B insurance loss from the Japan earthquake.

WSJ has a rundown of insurance losses. Most companies (sensibly) say it’s too early to tell what their losses might be, but:

• Munich Re said Thursday that it would have trouble making 2011 profit targets if cats continued at the recent pace. That, of course, was before the earthquake.
• Swiss Re has “substantial” exposure to Japanese market, according to analysts. Japan was Swiss Re’s 9th largest market, with net premiums and fee income of $574 million – about 3% of total group premium.
• Scor Re reported in its annual report that it’s the No. 3 reinsurer in Japan. In December, the Journal notes, it placed a cat bond offering it €75 million protection against European wind and Japan quake.
• Axa is not exposed, according to the Journal.
• Lloyd’s writes £289 million in Japan, 90% of which is reinsurance. Japan is Lloyd’s ninth largest market. The article also details exposure from several syndicates.

FT Alphaville cites Espirito Santo insurance analyst Joy Ferneyhough. Money quote:

Ultimately we see 2 scenarios here;

1) this is a big industry loss (this would need to be >$30-50bn ) and stocks take significant 2011 earnings hits but prices rise globally and premiums rise, valuation multiples rise and growth/momentum funds come back in > +ve for reinsurance/Lloyds share prices (after initial weakness).

2) this isn’t a large industry loss and so we get worst of both worlds. More niggly losses in 2011 which drive earnings downgrades but no real impact on capacity so prices stay weak where they are (a bit like 2010).

We will know more once the cat modelling companies communicate their initial findings.

A premature call on the hard market

Business Insurance surprised me with this one:

U.S. commercial property/casualty premiums grew last year at their fastest rate since 2006 due to underwriting losses and “unfavorable reserve development,” SNL Financial said in its analysis of fourth-quarter statutory insurance data. The analysis includes data on reinsurance, investments, loss reserve schedules and other factors, the Charlottesville, Va.-based firm said in a statement.

Especially when it turned out I had read the SNL article (sub. req.) it quoted. SNL mentions “potential hardening in rates” in its lead but never directly comes back to support that fact.

To me the support for higher rates seems to lean on the fact that direct written premium was up 1.8% from Q4 2009 while net written premium was up 3%.

That could mean rates are rising, and there have been stories about rates ticking up among personal lines, though SNL doesn’t mention that. But most analysis shows commercial rates flat or decreasing.

Premium growth probably just meant customers bought more insurance last year. Industry premium had been falling because exposures decrease in recession. Fewer workers mean less workers comp premium, for example. As recovery creeps ahead, insurance premiums follow.

To me, SNL’s article is more interesting for the 104.75% combined ratio the industry posted in Q4 2010 (OK, the 95% of the industry that SNL has dumped into its databases). A year earlier, that number was 101.60%. If you exclude mortgage and financial guaranty and accident/health writers, those numbers are 103.72% and 99.58%.

For the year, the industry posted 102.29%, vs. 100.76% a year earlier – 101.11% and 99.60% excluding mor-fi and A&H. AIG’s huge reserve increases explain the fourth quarter change in results but not the change for the entire year – evidence that there might not be a lot of reserve releases coming in 2011.

That last may mean rates will be headed up soon. If managements can’t skinny down reserves anymore and won’t be bailed out by investment income, they will have to look to the market for revenue.

So SNL has a reasonable prediction. But I don’t think they’ve uncovered anything about the recent past.

For Liberty CEO, actions = words

Ted Kelly, CEO of Liberty Mutual, tells us what he really thinks:

I think insurance stocks stink . . .Until there is some common sense in commercial pricing, we don’t think insurance stocks will be fairly valued.

That was National Underwriter’s takeaway from the company’s earnings release Thursday.

So I’ve built a chart of combined ratios from the Q4 management discussion and analysis (pdf from this web location):

Commercial casualty - get it?

As the chart shows, the company is booking 101.3% for the year, a sliver above 2009. International and personal lines hold fairly steady from a year earlier (100% and 95% respectively). The outlier here is commercial business, up to 110.9%. (Liberty Mutual Agency Corp – independent agents, split about 50-50 between personal and commercial – also rose, but remained below 100% combined.)

Meanwhile, Kelly told Bloomberg News inflation could be between 8% and 9% in three or four years. Consistent with that, the company has been shortening the duration – the average time to maturity – of its bond portfolio. To keep investment income up, it’s letting the quality of its paper slip a tiny bit. Investment in investment grade securities fell to 89% of its portfolio at year end, from 92%, per this chart from p. 37 of the MD&A:

A little slip

So here’s a man who puts his money where his mouth is.

 

U.S. property/casualty combined ratio expected to hover at 102% | Business Insurance

U.S. property/casualty combined ratio expected to hover at 102% | Business Insurance.

S&P projects the industry to finish 2010 at 102.6% – I’ll take the over. For this year S&P projects 102.2%, which sounds about right.

Rates will stay flat or fall about 5%, S&P predicts, unless the economy recovers or there’s a big catastrophe to suck capital out of the industry.

Shorter Moody’s: What A.M. Best said

Outlook negative for commercial insurance.

Of course, Moody’s started saying this in 2009.