U.S. - Overview

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U.S. property and casualty insurers’ operating results rebounded in the second quarter to result in a modest profit in the first half of 2009, but challenges remain. While a number of negative events hit insurers hard over the past year, this has not yet resulted in the hardening market that many anticipated. We have observed some changes in rates begin to flatten, but a broad and dramatic shift has not occurred. When introducing competition, buyers can often still find reductions as insurers look to protect and grow their market share. We continue to see variation by line and industry, and some of the more difficult markets from the past six months may become less volatile. As a whole, we are in a period of relative calm in the insurance markets. Ample capacity will likely extend the favorable market in most lines for companies that have strong financials and loss histories.

This overview will provide an explanation of what has occurred as we reach the fall of 2009 and how it may impact insurance buyers now and in the future.

Insurance Surplus

Capacity remains below previous highs, but industry as a whole remains well capitalized.

It is estimated that policyholders’ surplus for U.S. P&C insurers was an estimated $463 billion by the end of the second quarter of 2009, which was lower than last year’s peak of approximately $518 billion but an increase since the early months of 2009. The industry remains well capitalized compared to historical precedent. This ample capacity has been critical to stemming off the hard market, and it appears there will continue to be injection of capital from new entrants.

Net written premiums continue to decline with soft market, which has resulted in an underwriting loss.

Net written premiums declined 4.2 percent since this time last year, the largest decline in 60-plus years. This is due to the continued soft-pricing market as well as the shrinking economic output from the recession.

Net Written Premium Growth

The combined ratio, a measure of underwriting performance, was 100.9 percent in the first half of 2009. These are improved results from 2008, when insurers saw a 105.1 percent combined ratio at the end of the year, and the $2 billion first-half underwriting loss is smaller than the same period last year. These negative underwriting results appear to primarily be due to the continuing soft written-premiums, as losses have not been as significant. While 2008 saw enormous losses from hurricanes and the collapse of Wall Street and the housing markets, 2009 has seen relatively lower levels of catastrophic losses and improvements in losses from mortgage and financial guaranty lines. Despite continued weak underwriting results, competitive pressures have, by and large, not allowed insurers much room to increase rates.

Underwriting Performance

Up from the bottom, but investment gains weaker than last year at this time.

In today’s economic climate, insurers will expect to see lower levels of investment gains causing them to be more reliant on underwriting results. Compared to the first half of 2008, insurers saw investment gains fall to $12.4 billion. However, since hitting a bottom in late 2008/early 2009, investment income and losses of capital seem to have at least temporarily stabilized in the second and third quarters, which has helped insurers alleviate some pressures. Insurers were still faced with over $12 billion in realized write-downs in the first half of 2009, but the majority came in the first quarter.

U.S. Catastrophe Losses

During the first half of 2009, U.S. P&C insurers saw a profit of $5.8 billion, which, while an improvement, is a low return on equity. All of the gains were made during the second quarter, which saw net income of about $7 billion. Lower levels of investment write-downs in the second quarter helped achieve this improvement. The first quarter of the year resulted in an operating loss for U.S. P&C insurers, which was a result of continued soft pricing and poor investment results.

U.S. P&C Profitability

AIG, after a record-breaking loss in 2008, saw a profit of $1.8 billion in the second quarter of 2009 (some of which are due to accounting-related gains). The ultimate outcome of the government acquisition will take years to unfold but, in the short run, seems to have kept the company’s core insurance operations independent and viable. Recently, AIG renamed the core insurance operations to Chartis, put proposed asset sales on hold, and appointed Robert Benmosche as CEO. The stabilization of AIG makes a substantial impact on the industry’s overall results.

Conclusion

There will continue to be increased pressure for underwriters to maintain pricing discipline than in previous years. However, pressure to maintain market share and clients who face their own economic concerns have, in many instances, supported continued lower rates, although as a whole we are seeing more modest declines. Certain risks that had seen dramatic increases—such as CAT—exposed property and financial institutions D&O—have regained some stability, but remain difficult. There will likely continue to be significant variation by line, industry, and according to loss history. The Council of Insurance Agents & Brokers reported across all lines, an average decline in rates of nearly 5 percent in the second quarter of 2009, which while a lesser decline than in previous quarters, is evidence that a favorable market continues.

Commercial Insurance Pricing

In the following Market Update, top Lockton experts discuss the state of the insurance market. Lockton analysis includes:

Casualty Lines

The global insurance market is calmer and less volatile than it had been. The established markets are fighting to retain market share and the new markets are struggling to make budget. This has had the effect of preventing the much-heralded hard market.
Carriers have continued to employ a bifurcated pricing model for existing and new business. Many carriers have attempted to raise rates for existing business after realizing that their core insurance product was priced low. At the same time, ample capacity still exists in the marketplace and carriers have been aggressively pricing new business.
Despite the good news for many buyers, not every company has benefited from the current market. Distressed companies have more limited options in terms of carrier choice, and those carriers providing options have been pricing these risks opportunistically.
Our view in the near term is that we are at—or very near—the bottom of the pricing cycle for companies with good loss histories.

Property Lines

Premium increases were not as bad as we first feared. Rates were up for large property clients with catastrophe exposure for both wind and earthquake and for clients with excessive losses. Clients that were not exposed to catastrophes and had minimal losses generally saw only flat to moderate increases in their rates.
The global property insurance markets have emerged from the last six months in generally stable condition. But the heavy catastrophe losses and economic turmoil of 2008 have not been forgotten.
Premium increases in the energy sector were sharp because the insurers that provided the market for this sector saw a significant increase in their reinsurance costs, resulting in a sharp drop in capacity.

Reinsurance

The calm seas of a stable and mostly flat renewal look set to provide clients and cedants with safe passage despite low investment returns and a far from certain global economic outlook.
The reinsurance market appears to be in good health, sufficiently capitalized, well-resourced, and well placed to manage clients’ exposures in a cost-effective way.

Financial and Executive Risk

The current D&O market environment is characterized by an ever-growing landscape of new capacity for commercial organizations. An oversupply of capacity for both public and private organizations has prevented a hardening of the market in 2009 in the commercial sector.
The D&O and Professional Liability/E&O environment for financial institutions has deteriorated over the past several years, as underwriters have reacted to a material increase in filing frequency and expectations that losses will be severe. Lack of additional capacity is causing the “supply/demand” equation to work against financial institution buyers, though we do expect to experience more of a leveling off in 2010.