Financial Health of the Property & Casualty Industry. Managing Capital in a Challenging Economic Environment

Transcription

1 Financial Health of the Property & Casualty Industry Managing Capital in a Challenging Economic Environment Gordon McLean Senior Financial Analyst A.M. Best Company Puerto Rico Chamber of Commerce Insurance Summit Untapping Opportunities April 25, 2012

2 Discussion Topics 2011 Review Industry Outlook 2012 Commercial Lines Personal Lines Reinsurance

3 Commercial Lines Segment Analysis

4 State of Commercial Lines Bad News Extended Soft Market Premium Contraction Four Consecutive Years ( ) Premium Still Lower than 2006 Too Many Players Chasing Finite Market Limited New Growth Opportunities - Weak Economic Conditions Slow U.S. GDP Growth 8 9% Unemployment + High Underemployment Banks Limit Commercial Lending Activities; Low Levels of New Private Construction Corporate Spending Restricted

5 $ Billions Commercial Lines Commercial Lines Segment Net Premiums Written E 2012P

6 State of Commercial Lines More Bad News U.S. Catastrophes on the Rise Significant Catastrophe Frequency in 2011 Recent Higher Frequency of Hurricanes Just Haven t Hit Land Continued Investment Pressures Yields at Historic Lows Durations Shorten Reserve Releases May Be Nearing End

7 Commercial Lines Commercial Lines Segment Pre-tax Return on Net Premiums Earned (ROR) and After-Tax Return on Surplus 25.0% 21.1% 20.0% 15.0% 15.1% 17.0% 15.2% 13.7% 10.0% 11.5% 10.7% 9.6% 5.0% 5.4% 5.7% 6.5% 0.0% -5.0% -2.2% E 2012P Pretax Return on Net Premiums Earned (ROR) After-Tax Return on Surplus (ROE)

8 State of Commercial Lines Now the Good News Recent Price Increases No Significant Hurricane Events in U.S. Since Ike in 2008 Despite Headwinds, Respectable Combined Ratios

9 Commercial Lines Commerical Lines Segment Combined Ratio (Reported) E 2012P Loss & LAE Ratio Underwriting Expense Ratio Dividends to Policyholders Ratio

10 State of Commercial Lines More Good News Relatively Inexpensive Capital Lower Cost of Capital Increased Debt Refinancing Activity in 2011 High-Quality Investments Downgrade of U.S. Treasuries No material impact Municipal Bonds No material impact Low Risk Tolerance For Most Positive Cash Flow Strong Risk Adjusted Capital (BCAR)

11 ($ Billions) Commercial Lines Commercial Lines Segment Policyholder Surplus E 2012P

12 Segment Underwriting Details Commercial Lines E 2012P Net Writ t en Premium Growt h (%) Combined Rat io (Report ed) Less: Cat ast rophe Losses (%) Less: A&E Losses (%) CY Combined Rat io (Normalized) Less: Core Loss Reserve Dev. (%) AY Combined Rat io (Normalized)

13 Commercial Lines Outlook Negative Margins pressured Loss reserve redundancies fade Historically low investment yields Loss Reserve Adequacy Questioned Offsetting Factors: Price Firming Beginning of hard market? Capitalization still solid

14 Personal Lines Segment Analysis

15 Personal Lines Segment Divergent Trends Continue Automobile Stable Performance Homeowners Extreme Volatility Consolidation Divergent by Line

16 Segment Underwriting Details E 2012P Net Writ t en Premium Growt h (%) Combined Rat io (Report ed) Less: Cat ast rophe Losses (%) Less: A&E Losses (%) CY Combined Rat io (Normalized) Less: Core Loss Reserve Dev. (%) AY Combined Rat io (Normalized)

17 Personal Automobile Favorable Frequency Trends Severity Pressure Increased Fraud Activity in Several Key States Branding Initiatives Continue Distribution Expansion Telematics

18 Personal Automobile Private Passenger Automobile Combined Ratio E 2012P

19 Homeowners Homeowners Multi Peril Combined Ratio E 2012P

20 Homeowners Weather Volatility Reinsurance Pricing/Retentions Underwriting Basics Well Ingrained Pricing Sophistication Evolving

21 Catastrophe Models Significant Increases in Model Results Valuable Risk Management Tool But Not Only Tool Available No A.M Best Rating Actions Based Solely on Model Changes Increased Awareness of Model Parameters

22 Consolidation Trends DPW Market Share Top 10 Auto Top 10 Homeowner

23 Personal Lines Outlook Stable Capitalization Adequate Despite Property Volatility Automobile Performance Stable Homeowners Pricing/Underwriting Initiatives Relatively Benign Regulatory Environment However: Less Room for Additional Deterioration Rating Pressure on Concentrated Writers

24 Reinsurance Market Analysis

25 View of the Reinsurance Market 2011 events second only to 2005 in terms of loss impact: Capitalization remains strong Probable Maximum Losses factored into capital resources Each event within stated risk appetite For some companies cumulative losses approached/exceeded the single event PML Pricing trends improving especially for property classes

26 View of the Reinsurance Market Issues still persist: Total returns severely depressed Pricing remains below expectation especially for casualty classes Investment yields remain low Reserve redundancies drying up Thai flood estimates very preliminary Excess capacity diminished Global financial market issues Reduced financial flexibility

27 Global Reinsurance Aggregate BCAR Scores 300% 250% 200% 240% 219% 252% 234% 236% 201% 150% 100% 50% 0% (estimated) Standard Stressed

28 Positive Signs for a Firming Market Primary demand may improve: Prior year redundancies declining Insurers see need to reduce volatility Model changes impacted PMLs Primary retentions have remained high despite further margin compression More demand anticipated due to higher capital requirements from Solvency II in Europe Weak investment yields, greater focus on underwriting

29 Positive Signs for a Firming Market Rate increases substantial in affected areas Cold spots are more capital intensive than originally perceived Stricter terms and conditions and higher prices reported in Japan, New Zealand to date Reinsurers demanding better transparency around the data Reduced pressure for rate reductions in non-affected regions Casualty pricing has bottomed out

30 Ratio (%) Big Four European Reinsurers 120% 100% 29.0% 80% 29.1% 29.3% 28.8% 30.0% 60% 40% 66.4% 68.1% 65.5% 68.8% 80.5% 20% 0% Q 2011 Loss Ratio Expense Ratio

31 U.S. Reinsurance and Bermuda Market 2012P 2011E NPW (P&C only) $54.9 $53.8 $52.6 $50.3 Net Earned Premiums (P&C only) Net Investment Income Realized Investment Gains / (Losses) - (0.5) Tot al Revenue Net Income Shareholders' Equity (End of Period) Loss Ratio 67.1% 74.5% 61.8% 56.1% Expense Ratio 30.3% 30.1% 30.9% 29.7% Combined Ratio 97.4% 104.6% 92.7% 85.8% Favorable Loss Reserve Development -2.0% -6.2% -6.2% -6.1% Return on Equity 10.2% 2.6% 11.9% 16.0% Return on Revenue 15.5% 3.9% 17.1% 19.7% (USD Billions)

32 Reinsurers Response to Current Market Conditions

33 Maintain Balance Sheet Strength Capital preservation: Share buy backs and dividends temporarily scaled back Reallocation of capital amongst classes of business and regions Disposing of non core businesses Increasing use of Capital Market Solutions New capacity raised (e.g. Montpelier, Renaissance Re, SCOR, Partner Re)

34 Cycle Management Top line is flat to down for most reinsurers The shift from casualty classes has continued Capital management is the key focus New ways of accessing business: Very few pure reinsurers Purchase or alignment of MGAs Captives More co-insurance on large commercial risks

35 Global Reinsurance Rating Outlook Outlook remains stable Loss events, though large, equate to earnings events Balance sheets remain sound Asset risk conservatively managed Market remains disciplined from an underwriting perspective Pricing momentum has turned positive Enterprise risk management tested and functioning well Concerns: Possibility for short-lived pricing improvement Investment situation puts more emphasis on underwriting acumen Regulatory uncertainty Financial Flexibility

36 Puerto Rico Top Ten Carriers Direct Written Premium 300, , , , ,000 50,000 0 Univ. Ins. Co. (PR) MAPFRE CSM Triple S Propiedad Chartis Ins Co. of P.R. Real Legacy Integrand Ace United Surety Antilles (USD Millions)

37 Universal Ins. Co. (PR) MAPFRE CSM Triple S Propiedad Chartis Ins Co. of P.R. Real Legacy Integrand Ace Insurance Company P.R. United Surety Antilles Puerto Rico Top Ten Carriers Underwriting Income / Loss

38 Puerto Rico Top Ten Carriers 2011 Reported Combined Ratios % 108.3% 106.5% 103.6% % 97.3% 97.6% 99.3% % 90.4% 85.3% 80.00% 64.6% 70.2% 67.0% 54.3% 66.6% 54.2% 48.2% 47.4% 33.4% 18.1% 2.8% 60.00% 40.00% 34.0% 38.1% 39.5% 43.1% 49.3% 49.4% 51.9% 57.0% 61.8% 67.2% 20.00% 0.00% Universal. Ins. Co (PR) CSM Integrand MAPFRE Triple S Propiedad Ace Insurance Co. P.R. Real Legacy Chartis Ins Co. of P.R. United Surety Antilles Loss & LAE Expense Ratio

39 U.S. Life Market Overview Diversified business mix/competitive landscape Sound risk based capital positions Generally stable earnings stream Regulatory uncertainty

40 Economic Malaise Challenges Life Insurers Low interest rates Volatile equity markets High unemployment & low consumer confidence Global contagion impact

41 Global Contagion Sovereign downgrades Eurozone risks Slowing global economy Some impact on foreign owned life insurers

42 US Health

43 Health 2011 Review/2012 Preview Operating Results 2011 Remained strong Utilization remained low Minimum medical loss ratio requirement 2012 Margins expected to decline Utilization impact Impact of Minimum medical loss ratio & rate reasonableness requirements

44 Health 2011 Review/2012 Preview Capitalization 2011 Favorable earnings Lower premium growth 2012 Impact of margin compression

45 Health 2011 Review/2012 Preview Health Care Reform Minimum medical loss ratio requirement HHS waivers Companies exiting Rate reasonableness requirement

46 Health 2011 Review/2012 Preview Strategies For The Future Marketing/Products Medicaid expansion State exchanges Administrative costs Affiliations/alliances Fronting arrangements

47 Questions & Comments Welcome Gordon McLean x 5304 gordon.mclean@ambest.com

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