P&C Carrier Due Diligence: Taking Control

Transcription

1 P&C Carrier Due Diligence: Taking Control May 26, 2016

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4 Provides private credit analytics on the life, property & casualty, and health industries Located in Windsor, CT Years in Business: 17 Principals have worked together providing credit oversight on insurers for 25 years Produces quarterly financial analyses on approximately 600 Life, 1,700 P&C, and 450 managed care insurers Analysis generated by running statutory and GAAP financials through a proprietary model that screens for relative financial strength Clients: distributors of insurance products, end users of insurance products, asset managers, boards of directors, insurers Purpose: to get below the public ratings in order to more accurately determine the relative financial strength and weakness of insurers

5 Goals Tools Get Proper Coverage at Adequate Price Assess a Carrier s: Willingness To Pay (philosophy) Ability to Pay (financial standing) Understanding a Carrier s Appetite (Where do they want to play) Ratings A.M. Best Principally Moody s & S&P on Property Risks Other Broker Experience and Analytics Long-Term Industry Contacts: Gut Feel, We See A lot, We Know People Quasi-Regular Meetings with Company Management

6 Concerns Mergers & Acquisitions Aggregation of Risk Management/Personnel Changes Strategic Changes Reinsurance How Much Risk is Being Assumed Deeper Dive on Reinsurer Financials

7 Enstar/Stonepoint Validus (4/2014) Bermuda/Lloyds Nipponkoa Canopius (5/2014) - Lloyds RenaissanceRe Platinum Underwriters (3/2015) - Bermuda XL Catlin (5/2015) Bermuda/Lloyds Fairfax Financial Brit (7/2015) - Lloyds Endurance Montpelier Re (8/2015) Bermuda/Lloyds Tokio Marine HCC (10/2015) U.S./Lloyds Fosun Ironshore (11/2015) Bermuda/Lloyds Ace Ltd. Chubb Cos. (1/2016) U.S. Mitsui Sumitomo - Amlin plc (2/2016) - Lloyds Exor PartnerRe (3/2016) - Bermuda

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9 Legal Entity Focus Contractual Obligation Ratings Issues Regular and On-Going Analysis Quantifiable and Measurable Analytics

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12 Frequency P&C ALIRT Score Distribution ( ) + / - 1 Standard Deviation + / - 2 Standard Deviations Standard Deviation = Mean Score = Distribution Frequency

13 National Commercial Lines Writers - YE2015 Total ALIRT Scores Year Average Total ALIRT Score = Federal Ins. Co. (Chubb) (A++) Travelers Indemnity Co. (A++) Hartford Fire Ins. Co. (A+) ACE American Insurance Co. (A++) Commercial Lines Composite Liberty Mutual Ins. Co. (A) Continental Casualty Co. (A) Zurich American Ins. Co. (A+) National Union Fire (AIG) (A) Fireman's Fund Ins. Co. (A+)

14 85 80 Several National Insurers vs. ALIRT CL Composite YE2007 YE2008 YE2009 YE2010 YE2011 YE2012 YE2013 3/14 6/14 9/14 YE2014 3/15 6/15 9/15 YE2015 ALIRT Score Federal Ins. Co. (Chubb) Travelers Ind. Co. ALIRT Commercial Lines Composite National Union Fire (AIG) Zurich American Ins. Co.

15 90 80 Specialty Insurers - YE 2015 Total ALIRT Scores 15 Year Average Total ALIRT Score = Berkley Ins. Co. (A+) Starr Ind. & Liability (A) Westport Ins. Corp. (A+) Commercial Lines Composite Aspen American (A) Allied World Assur. (US) (A) Arch Ins. Co. (A+) Markel Ins. Co. (A) AXIS Ins. Company (A+) United States Fire (A) XL Reins. America (A) QBE Ins. Corp. (A) Argonaut Ins. Co. (A) Ironshore Ind. Co. (A) Lexington Ins. Co. (A)

16 YE2015 9/15 Several Specialty Insurers vs. ALIRT CL Composite 6/15 3/15 YE2014 9/14 6/14 3/14 YE2013 YE2012 YE2011 YE2010 YE2009 Berkley Ins. Co. Lexington Ins. Co. (AIG) QBE Ins. Corp. Starr Ind. & Liability ALIRT Commercial Lines Composite YE2008 YE ALIRT Score

17 RELIANCE INSURANCE COMPANY 12/31/1998 3/31/1999 6/30/1999 9/30/ /31/1999 Company Total ALIRT Score 39 H 30 H 22 H 18 H 20 H Industry Composite Total ALIRT Score 49 M N/A N/A N/A 46 M Total ALIRT Flags Raised* A.M. Best Ratings A- A- A- A- A- Fitch Ratings N/R N/R N/R N/R N/R S&P Ratings A A A A- A- M oody's Ratings Baa2 Baa2 Baa2 Baa2 Baa2 NOTE: Reliance Ins Co ceased writing business in 2000 and was placed into rehabilitation in January The major rating agencies took note of the issues at Reliance and began a rapid series of ratings downgrades starting in mid As you can clearly see, our ALIRT analysis detected Reliance's higher risk status as of year-end 1998 financials. The Score indicated rapid deterioration in the first quarter and second quarter of 1999, at least a year before the major rating agencies took any meaningful action.

18 LUMBERMENS MUTUAL CASUALTY INSURANCE COMPANY YE 2000 YE Q Q Q 2002 Company Total ALIRT Score 35 H 34 H 27 H 28 H 27 H Industry Composite Total ALIRT Score 46 M 37 H 40 H 35 H 37 H Total ALIRT Flags Raised* A.M. Best Ratings A A A- A- B+ Fitch Ratings A A- BBB BBB B+ S&P Ratings A A A A BBB- M oody's Ratings A2 A2 A2 Baa1 Ba2 NOTE: Lumbermens Mutual Casualty (LMC) has been in runoff since Our ALIRT Report and flagging screens would have warned clients of the higher risk nature of LMC's financial condition based on year-end 2000 results, and again with year-end 2001 results, both well before the major public rating agencies began downgrading LMC "en masse".

19 Steps to Take When a Company Shows Signs of Financial Stress Want to be Ahead of Everyone Else = Proactive Preferably Switch Insurers When Availability, Terms and Price are Still Attractive Be Careful What You Pay For Inexpensive Rate is Great Until It Isn t A Price May Indeed be Too Good to Be True Slow and Steady Wins the Race Be a Good Partner to Your Carrier

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21 I. A Hard or Soft Market Can Mean 2 Different Things: An Aggregate % Price Increase/Decrease over the Prior Year Period (Traditional Brokers/Consumers) The Degree to Which Premiums Exceed Loss Costs = Degree of Rate Adequacy (Insurers) II. Pricing Cycles Have Gradations; the Industry is Not Monolithic Market Pricing moves over a continuum, fluctuating from hard to soft There are sub-pricing cycles within an overall pricing cycle, given fragmentation in the industry III. Advent of New Technology and Data Analytics Capacity Insurers are Better Able to Price Initial Risk and also to React to Underwriting Mistakes; This Should Shorten Market Swings IV. Every Carrier Has Different ROE Hurdles What a Publicly Traded Company Needs for Rate Can Differ from a Mutual or Privately-Held Company Aggressiveness of Investment Portfolio Also Influences The Rate Needed to Meet Hurdles V. Who are Today s Market Leaders? In Broad Commercial Lines Segment: Chubb & Travelers Are They Holding The Line on Rates?

22 P&C Industry Line of Business Breakdown ( ) 100% 90% 18.7% 19.1% 18.9% 17.9% 16.1% 17.9% 18.6% 19.6% 18.9% 18.4% 18.8% 18.7% 17.9% 16.9% 16.6% All Other % of Industry Net Premiums Written 80% 70% 60% 50% 40% 30% 20% 1.9% 2.0% 2.2% 2.2% 2.3% 2.3% 2.2% 6.8% 6.3% 2.2% 2.2% 2.1% 2.0% 1.9% 1.8% 1.6% 1.6% 6.7% 6.3% 6.3% 6.0% 5.7% 5.4% 5.2% 5.0% 4.8% 4.8% 5.0% 5.1% 5.3% 6.9% 6.9% 6.8% 6.8% 6.9% 7.1% 7.0% 6.9% 6.8% 6.8% 6.8% 6.9% 6.9% 6.9% 6.7% 9.1% 8.3% 7.6% 7.4% 8.1% 8.3% 8.5% 8.7% 8.6% 8.4% 8.4% 8.2% 8.6% 9.3% 9.3% 6.6% 7.9% 8.9% 9.3% 9.2% 9.4% 9.2% 8.7% 8.5% 8.4% 8.2% 8.3% 8.7% 8.7% 8.8% 10.9% 10.9% 11.3% 11.7% 12.3% 12.3% 12.4% 12.8% 13.6% 14.4% 14.4% 14.5% 14.9% 15.3% 15.3% 39.8% 38.1% 37.5% 37.2% 37.5% 35.8% 35.7% 36.1% 37.2% 37.6% 37.0% 36.6% 36.3% 36.7% 37.1% Med Mal Commercial Auto CMP Workers' Comp. Other Liability Homeowners Personal Auto 10% 0% Per SNL Financial, U.S. P&C industry net written premiums were $519.0 billion for 2015, up 3.3% from Year Avg. Mix is 50.2% PL / 49.8% CL Commercial Lines Share of Industry Premium has ranged from 47.6% - 52% over the past 18 years; currently at 47.6% - can it go lower?

23 85% U.S. P/C Industry Direct Loss & Allocated Loss Adj. Expense Ratio (WC, Comm'l Auto, CMP ) 80% Direct Loss & ALAE Ratio 75% 70% 65% 60% 55% 50% 45% Workers' Comp. Comm'l Auto Comm'l Multi Peril 125% U.S. P/C Industry Direct Loss & Allocated Loss Adj. Expense Ratio (Other Liability & Medical Professional Liability ) 115% Direct Loss & ALAE Ratio 105% 95% 85% 75% 65% 55% 45% Other Liab. (Total) Medical Prof. Liab.

24 600 PC Industry Net Written Premiums ( ) Net Premiums Written ($, Billions) Net written premium growth = 61.3%

25 Surplus ($ in billions) P&C Industry Surplus and Net Premium Leverage Net Premium Leverage Surplus (Left Axis) Net Premium/Surplus (Right Axis) 0.70 Surplus growth = 132.7%; 15 year average net premium leverage 90.6%

26 Percent Change in P&C Industry Surplus and Premium Rates 30% 25% 22% 26% % Change in Surplus % Change in Rates 20% 22% 15% 10% 5% 0% -5% -10% -9% -1% 11% 12% 1% 9% -5% 15% -4% 6% -7% 12% 8% -8% -3% -3% -12% 1% 0% 6% 12% 5% 5% 2% 3% 0% -1% -15% NOTE: 2008 and 2009 surplus change percentages exclude the results of Syncora Guarantee (XL Capital Assurance). Rate change is a weighted average of figures reported by CIAB, CLIPS and MarketScout. 1Q2011 (1.73)% 2Q % 3Q % 4Q % 1Q % 2Q % 3Q % 4Q % 1Q % 2Q % 3Q % 4Q % 1Q % 2Q % 3Q % 4Q % 1Q % 2Q2015 (0.50)% 3Q2015 (0.87)% 4Q2015 (1.70)%

27 P&C Industry - Prior Year Reserve Development by Calendar Year 30,000 Reserve Development ($ in Millions) 25,000 20,000 15,000 10,000 5, ,000-10,000-15,000-20,000-25,000 11,393 22,301 14,132 10, (7,036) (8,320) (11,437) (10,537) (14,581) (12,674) (12,166) (14,481) (9,447) (7,291) D e f i c i e n t R e d u n d a n t A d e q u a t e Calendar Year $108 billion of reserve releases in the decade ; 19% of average surplus over that period of $577 billion.

28 P&C Industry Reported Combined Ratio vs. Operating Ratio 120% 115.9% 110% 100% 90% 80% 103.7% 107.3% 96.0% 100.2% 100.8% 98.5% 90.0% 88.8% 88.8% 92.5% 95.8% 80.3% 83.1% 104.4% 101.0% 102.7% 92.4% 89.6% 91.4% 108.0% 96.4% 103.1% 92.0% 96.4% 97.3% 97.8% 86.0% 86.2% 88.3% 70% 60% 50% Reported CR Operating Ratio NOTE: 2008 and 2009 figures exclude the results of Syncora Guarantee (XL Capital Assurance). 15 Year Average Combined Ratio = 101.0%; 15 Year Average Operating Ratio = 90.2% 15 Year Average Benefit of Net Investment Income = 11.2 points; range = points.

29 P&C Industry Components of Income Net Investment Income & Other Underwriting Income/Loss P-Tax Operating Income/Loss $ in Billions

30 6.00% P&C Industry Historical Net Investment Yield vs. 10 Year Treasury Yield 5.00% 4.00% 5.03% 4.89% 4.87% 3.82% 4.45% 4.26% 4.22% 4.08% 4.65% 4.71% 4.56% 4.39% 4.55% 4.32% 3.97% 4.03% 3.84% 3.77% 3.87% 3.72% 3.47% 3.69% 3.21% 3.00% 3.31% 3.04% 2.00% 2.24% 2.17% 2.27% 1.89% 1.78% 1.00% Net Investment Yield 10 Year Treasury Rate Treasury Rates are as of the last trading day in December. Adjusting Investment Income Earned to a 3.88% 10-Year Avg. Yield (Dollar Amounts in Billions) Total P&C Industry Original Adjusted Impact Year Inv. Inc. Inv. Inc. Difference On CR 2011 $50.9 $51.0 $ % 2012 $50.3 $52.4 $ % 2013 $49.3 $55.1 $ % 2014 $55.0 $57.8 $ % 2015 $48.7 $58.6 $ %

31 3/01 6/01 9/01 YE01 3/02 6/02 9/02 YE02 3/03 6/03 9/03 YE03 3/04 6/04 9/04 YE04 3/05 6/05 9/05 YE05 3/06 6/06 9/06 YE06 3/07 6/07 9/07 YE07 3/08 6/08 9/08 YE08 3/09 6/09 9/09 YE09 3/10 6/10 9/10 YE10 3/11 6/11 9/11 YE11 3/12 6/12 9/12 YE12 3/13 6/13 9/13 YE13 3/14 6/14 9/14 YE14 3/15 6/15 9/15 YE ALIRT Personal & Commercial Line Composite Scores Personal Lines Comp. Comm'l Lines Comp. Volatility Gauge of ALIRT Scores: 1 Standard Deviation From Median Score 1 Standard Deviation 6/02 9/02 YE02 3/03 6/03 9/03 YE03 3/04 6/04 9/04 YE04 3/05 6/05 9/05 YE05 3/06 6/06 9/06 YE06 3/07 6/07 9/07 YE07 3/08 6/08 9/08 YE08 3/09 6/09 9/09 YE09 3/10 6/10 9/10 YE10 3/11 6/11 9/11 YE11 3/12 6/12 9/12 YE12 3/13 6/13 9/13 YE13 3/14 6/14 9/14 YE14 3/15 6/15 9/15 YE15

32 Property & Casualty Company Impairments* % 20% 15% 10% 5% 0% % of ALIRT Scores <35 ( ) YE02 3/03 6/03 9/03 YE03 3/04 6/04 9/04 YE04 3/05 6/05 9/05 YE05 3/06 6/06 9/06 YE06 3/07 6/07 9/07 YE07 3/08 6/08 9/08 YE08 3/09 6/09 9/09 YE09 3/10 6/10 9/10 YE10 3/11 6/11 9/11 YE11 3/12 6/12 9/12 YE12 3/13 6/13 9/13 YE13 3/14 6/14 9/14 YE14 3/15 6/15 9/15 YE15 % of ALIRT Scores <35 14 Year Avg. ALIRT Score <35 Property & Casualty Company Impairments

33 Risk Managers are Well Served to be Proactively Involved with Carrier Oversight Non-performance of insurer counterparties can be extremely detrimental to company financials Proactivity requires some level of oversight/experience in-house + accountability of brokers Risk of non-performance rises with weakening rate environment and/or poor economic conditions Strong carrier due diligence involves both a macro (industry) and micro (individual carrier) approach Carriers more at risk in weakening rate cycle High M&A activity often introduces disruptive element into carrier performance Insurer due diligence is best done at the statutory entity level and not by exclusive dependence on ratings Parents not legally obligated to make good on claims of dec page carrier Ratings based on implicit support of parent; can change overnight with sale, spin-off, run-off, etc. Growing M&A environment makes such transactions more likely. Good due diligence is on-going and depends on credible inputs and comparative benchmarks

34 The U.S. mini hard market starting in late 2011 ran out of steam, with broad rates now softening; global rates generally even more competitive. Supply of Redundant Capital in the Industry continues to grow Continued strong underwriting results for large national and regional carriers Rate Adequacy seems to be in place Continued prior year reserve releases/reported overall PY reserve adequacy Anemic economic conditions = lower demand, though improving Overall ALIRT pain gauges not anywhere near 2000 levels But, mix of commercial lines business at multi-year lows; will there be reversion to the mean? Insurer managements admitting to broader rate adequacy, but companies are growing more sophisticated now so the cycle may evolve within a less pronounced band. Companies likely putting up conservative loss picks in anticipation of inflation growth - but also to smooth earnings? Lower investment yields, on their own, not enough for hard turn, but have contributed to firmer pricing how long can that story play out?

35 The real story is excess surplus and publicly-traded holding companies attempting to maintain adequate returns on their capital positions. Three consecutive years of relatively light cat losses, but changes in weather patterns a concern for insurers another stated reason for pricing and reserve discipline. Monetary and fiscal challenges do matter and could directly impact the health of the U.S. P&C market. Keep an eye on the capital markets and the economy.

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37 THANK YOU!