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Competition Steady Despite Disasters, Fitch Says

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In its newest annual outlook report for property and casualty insurers, Fitch Ratings noted that while the 2018 rating outlook for insurers is stable, the fundamental forecast remains negative. Underwriting results deteriorated in the second half of 2017 following events including Hurricanes Harvey, Irma and Maria, along with fourth quarter California wildfires. As a result, Fitch projected that industry-estimated statutory net profits would fall by about 50% in 2017, projecting a market combined ratio of 104.4% for the year compared to 100.7% in 2016.

Fitch said that even with the substantial catastrophe-related losses, U.S. property and casualty insurers’ operating performance appears to be on the rebound. The agency estimates that the industry combined ratio will approach break-even levels in 2018 if natural catastrophe-related losses revert towards long-term averages.

How does all this affect the market for insurance buyers? James Auden, managing director at Fitch Ratings, Inc. told the Risk Management Monitor that from a pricing standpoint, while there is some deterioration in results, especially in property, there is plenty of capacity for coverage in just about every segment.

“We haven’t seen a reduction in capital in the broader market, so how much these losses will carry over and make changes in another segment is a question,” he said. “And there are some segments that have been suffering in their own right, such as commercial and personal auto rates, which have been going up tremendously. We’ve seen a lot of turnaround, but there is still a need for rate hikes there. You’ll probably see that continue.”

Property
Markets affected by catastrophe losses should see some large rate increases in property, which could carry over geographically, he said. Commercial property lines, which have been very soft for a while, should see broader increases. Other factors include companies’ loss history and the types of perils they face.

“I think we’ll see more rate increases geographically throughout the market next year,” Auden explained. “They will be higher in areas hit by hurricanes, but we will see them elsewhere as well. In Houston, the losses were much more commercial than residential in nature. In Florida the losses were more skewed to residential, but there were plenty of commercial losses there, too.” How far rates will rise may be dampened by the amount of capacity that still exists. “If you go back historically, when we’ve had true hard markets, it’s been tied to capacity shortages,” he said.

Auden added, “We are not seeing companies withdrawing from the market right now. We did see that in areas like commercial auto over the last couple of years, especially in long-haul trucking. In commercial property, however, I don’t think there is a big withdrawal of capacity. Companies are seeing an opportunity to improve the economics of their business and relieve pressure around pricing.”

M&A
In the area of mergers and acquisitions, there have not been many with the magnitude of last year’s Chubb-Ace deal. “We have had a few things, like Liberty Mutual’s purchase of Ironshore,” he said, adding that “There is always potential for M&As, but one thing that could restrict them is that with the stock market up so much, insurance markets have benefitted, so evaluations are a bit richer and that may limit interest from a value standpoint.”

Lloyd’s
The Lloyd’s market, which has been affected by competitive pricing over several years now, is on negative outlook. “There have been more exposures in the catastrophe piece and a weaker performance, so that has been driving our opinion there,” he said. “And there definitely are a lot of losses at Lloyd’s from the catastrophes this year.”

Competition
Despite the huge losses being seen, however, competition is still going on. “It’s relentless. There are plenty of underwriters out there trying to write the same business and to differentiate themselves on things like service,” Auden said, adding that he believes turnover will remain steady because insurance buyers typically shop their coverage frequently. “I don’t think there will be more turnover than usual.”

He concluded that in the area of property, while that there will be positive rate actions, making response to the losses more substantial, this may not be sustainable. “Do we see multiple carriers with rate increases? We think it’s likely that is not sustainable, unless we have a really bad year next year in terms of catastrophes,” Auden said.

Hurricane Matthew Could Impact Renewals, Reinsurers

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Downgraded to a post-tropical cyclone on Sunday, Hurricane Matthew proceeded to work its way north, pummeling coastal regions of Georgia, South Carolina and North Carolina, where rivers are overflowing and flooding continues. So far, Matthew has killed nearly 900 people in Haiti and 17 in the United States. More than 2 million U.S. homes and businesses lost power over the weekend, according to Reuters.

CoreLogic said today that it anticipates hurricane-related insured property losses for both residential and commercial properties to be between billion and billion from wind and storm surge damage.

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The amount does not include insured losses related to additional flooding, business interruption or contents.

CoreLogic: Hurricane Matthew Loss Contribution by County in Florida, Georgia and South Carolina
lorelogic-losses

Willis Towers Watson said on Friday that the storm’s losses are not expected to adversely affect the insurance industry, due to abundant capacity. Organizations with upcoming renewals, however, may be impacted, the company warned.

“There will still be upset for the next couple of weeks, and underwriters will be skittish about renewing business until they calculate their losses,” Gary Marchitello, head of property broking at Willis Towers Watson, said in a statement. “Anyone with the misfortune of renewing programs with East or Gulf coast exposures over the next 4 to 6 weeks will be challenged to secure property coverage at favorable terms.”

Despite the excess capacity, the market is “ripe for an opportunity to turn,” and an event or aggregated events “will drive pricing adjustments,” he said.

Fitch Ratings said Hurricane Matthew will put pressure on earnings of some insurance underwriters in Florida and other southeast states but is “not expected to present a major capital challenge.” If storm insured losses exceed $10 billion, Fitch said a greater proportion of the losses will be borne by reinsurers as opposed to primary companies.

According to Fitch, the homeowner’s market share has shifted away from large national writers and the state-sponsored Citizens Property Insurance Corp. to a number of smaller Florida homeowners specialists. “A lack of storm activity over the last decade has substantially increased the claims paying resources to meet catastrophe losses, such as those arising from Matthew, of both Citizens and state-sponsored reinsurer, the Florida Hurricane Catastrophe Fund (FHCF),” Fitch said.

Primary insurers with the largest exposure in Florida are: Universal Insurance Holding Group, Tower Hill Group, State Farm Mutual Group, Citizens Property Insurance Corporation and Federated National Insurance Company.

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Property insurers writing business in Florida rely heavily on reinsurance protection and other methods to mitigate their risk of extreme loss.

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“As a result, the FHCF, the traditional and collateralized reinsurance markets and the catastrophe bond market could have meaningful exposure to losses from Matthew,” Fitch said. Fitch estimates that FHCF has assumed the largest level of premiums by a wide margin. Among private entities, Lloyd’s of London appears to be the next largest reinsurer followed by Allianz SE; Tokio Marine Holdings, Inc.; Everest Re Group, Ltd.; and XL Group Plc., Fitch said.

Small Villages Hit Hardest by Italian Earthquake

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A strong 6.2 magnitude earthquake that stuck Central Italy in the early morning hours of Aug. 24 has caused about 250 deaths and hundreds of injuries. The temblor stuck 10km (6.2 miles) southeast of Norcia and 100km (62.13 miles) northeast of Rome. Areas with the most damage are smaller, older towns consisting of unreinforced masonry buildings. One such town was Amatrice, which the town’s mayor has said “no longer exists.”

Dozens of aftershocks have since occurred in the area—the strongest a magnitude 5.5. Because it was a shallow quake, occurring about six miles below the surface, it was more destructive, the New York Times reported.
Italy map

Map: USGS.gov

The vicinity of Wednesday’s temblor has also experienced significant earthquakes in the past, including one with a magnitude of 6.3 near the town of L’Aquila in 2009. According to the Times. That quake killed at least 295 people, injured more than 1,000 and left 55,000 homeless. Bloomberg reported that only about 2% of the economic loss from the 2009 quake was insured.

Catastrophe modeling firm AIR Worldwide said that Italy’s nonlife insurance market is the eighth-largest in the world and the fifth largest in Europe, and its property insurance market is the second-largest nonlife market in the country after automobile.

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Earthquake coverage, however, is often not included in standard homeowners’ policies and is typically issued as an extension of fire policies. Earthquake coverage for industrial and commercial structures may be offered for an additional premium, which varies by region.

Fitch Ratings said on Aug. 26 that it expects to see limited impact on Italian insurers. According to Fitch:

We estimate insured losses of EUR100 million-EUR200 million, arising mainly from property lines. Our estimate reflects the low density of population and businesses and limited insurance coverage in the region. Claims of this magnitude would not have a material impact on Italian insurers’ underwriting results or credit profiles.

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Italian non-life insurers wrote EUR2.

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3 billion of gross written premiums of property insurance in 2015.

Italy has declared a state of emergency in the region hit by the earthquake and the government has pledged EUR50 million for first aid. The declaration of a state of emergency means that certain losses will be covered by a state fund for emergencies, limiting losses for insurers.

We expect the insured losses to be EUR40 million-EUR80 million for primary insurers and EUR60 million-EUR120 million for reinsurers. A similar event that struck a nearby area in 2009, where the insurance exposure was higher, caused insured losses of around EUR250 million.

Justice Department Investigation of S&P

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The Justice Department is investigating Standard & Poor’s for improperly rating the garbage mortgage-backed securities that tanked the economy once the world caught on that they were toxic assets.

The anonymous folks who leaked this info to the press claim that the inquiry began prior to S&P’s downgrade of U.S. debt, but many have speculated that the fervor and depth of the probe has ratcheted up since the nation lost its AAA-status.

Either way, the law dogs are — finally — poking around in the ratings world.

he Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.

Any inquiry should of course involve looking at all three. Each overrated the used diaper mortgage-backed securities to a baffling degree. Whether or not it was incompetence or something more insidious is really the only question, I have. I presume they are capable of both.

But if this investigation focuses solely on S&P then it falls even more into how one talking head on MSNBC’s The Daily Rundown described it: more of a Washington story than a Wall Street one.

Honestly, the only weird thing about hearing today about an investigation going on right now is that it was something I expected to hear in 2008.

In related news, and not just to toot our own horn, but I would feel remiss not to mention that our Risk Management magazine cover story this month was titled “The Future of Ratings” and examines “how rating agencies gained so much power, helped tank the economy and figure into the future of risk assessment.”

I’m not going to pretend that I knew just how much play rating agencies would be getting in August when I commissioned the piece a few months ago. I’m many things, but clairvoyant is not one of them. But the piece speaks to many of the questionable issues surrounding the ratings world that have been curiously dormant in the mainstream media for years until recently.

A wonderful writer, Lori Widmer, did a fine job so please do give it a read.