Homeowners ROE Outlook

Transcription

1 Aon Benfield Homeowners ROE Outlook October 21 Risk. Reinsurance. Human Resources.

2 Homeowners: Positive Outlook, Expanding Growth Opportunities For a nationwide, personal lines insurer the overall outlook for the Homeowners line of business continues to be positive. Reinsurance capital, both traditional and non-traditional, is at a record high and is available in various new and innovative cost accretive forms to support profitable growth opportunities. Aon Benfield Analytics review of Homeowners rate changes continues to find that the country s largest Homeowners insurers are maintaining positive rate momentum. Furthermore, carriers are increasingly utilizing risk adjusted pricing methods and improving sophistication through by-peril rating plans. In a world of persistently low investment yields, our countrywide prospective after-tax ROE estimate is 8. percent, up from last year s. percent. Excluding Florida, the industry s prospective ROE is 12. percent with states projected to clear a 1 percent hurdle rate. The footprint of profitable growth opportunities continues to expand for the Homeowners line of business. As overall rate levels improve, the focus is shifting to increased sophistication in risk segmentation. Because catastrophe exposure significantly increases the volatility of the Homeowners line, filtering the price signal through the noise of loss experience is challenging. Reconciliation of loss experience with catastrophe model loss estimates, granular quantification of reinsurance and capital costs differentiation, as well as more refined utilization of exposure data in pricing algorithms are needed to determine the appropriate location level target rate. A failure to segment underlying cost differences among exposures jeopardizes the ability to identify areas that diversify risk and target them for growth. Aon Benfield Analytics provides clients with solutions to help them quantify their own unique cost of catastrophe risk, including expected losses, reinsurance, and cost of capital. These solutions are available to be integrated into rate filings, product management processes, and underwriting systems of our clients, providing risk quantification data at potentially all levels of detail including product line, state, territory, and individual risk. Homeowners is now a critical element of the growth strategy for many personal lines insurers, and we appreciate the opportunity to collaborate with our clients to help them implement sophisticated pricing and risk management processes that facilitate the execution of their strategies. Contacts Parr Schoolman parr.schoolman@aonbenfield.com Robert Fox robert.fox@aonbenfield.com Paul Eaton paul.eaton@aonbenfield.com Homeowners ROE Outlook 2

3 August 21 Prospective ROE at Current Rates Countrywide ROE estimate: 8.% Prospective ROE percent Less than to to to 1 and above ROE study methodology Change in prospective ROE from previous year The basis of the prospective ROE estimates are industry state and aggregate statutory filing data including reported direct losses, expenses, payout pattern, and investment yields. We replace actual historical catastrophe losses as measured by Property Claims Services with a multi-model view of expected catastrophe loss. On-leveling of direct premiums to current rates uses rate filings of the top 2 insurance company groups by state. Finally, estimated capital requirements and reinsurance costs consider a nationwide personal lines company writing both home and auto business at a capitalization level consistent with an A.M. Best A rating. The ROE estimates exclude earthquake shake losses, as the premium and losses for that coverage are recorded on a separate statutory line of business 1% 8% % % 2% %.% 2 prospective ROE.2% Improved prospective rate level.% Lower modeled catastrophe losses.% -.2% 8.% Lower reinsurance margin Decreased investment yields 21 prospective ROE The diversification available to a nationwide personal lines insurer impacts the ROE calculation. For instance, Homeowners business in California diversifies Gulf and East Coast hurricane exposure for a nationwide insurer. A California standalone would incur higher capital and reinsurance costs than the California portion of a nationwide insurer with similar premium volume in the state. Similar results are to be expected for any other regional or single state insurer. The 21 nationwide ROE estimate of 8. percent is an improvement over our 2 estimate of. percent. The three main drivers of the improvement are (1) continued rate activity in the primary rates, (2) a decline in the estimated catastrophe loss ratio resulting from updates to the vendor catastrophe models used in the study, and () declining costs of reinsurance to capitalize the volatility inherent in the Homeowners line. A small reduction in investment yields provided the only headwind to improved ROE outlook. Homeowners ROE Outlook 2

4 Ten year Property Claims Services loss experience vs. model average annual loss - Countrywide: -% Five year Property Claims Services loss experience vs. model average annual loss - 1 Loss ratio points Less than to - to to 1 and above The maps left and below show, in loss ratio points, the amount that catastrophe experience exceeds model average annual loss. Adjusting combined ratios for expected versus historical catastrophe loss is an important step to distinguish weather related randomness from inadequately priced business. Historical catastrophes can distort measures of results at a state level, causing the noise to overwhelm the signal. While the state level adjustments can be significant, the ten year nationwide experience catastrophe loss ratio of 1 percent is slightly less than the modeled expected catastrophe loss ratio of 1 percent. For both the five and ten year views, the lack of a major hurricane landfall in the US has resulted in favorable reported loss ratios in many coastal states, including Florida. For the coastal states in total, the ten year catastrophe loss experience was loss ratio points, well below the modeled expectation of 2 points Countrywide: -% Less than - to - to to 1 and above Loss ratio points The midwest and tornado alley states have experienced much more loss activity during the last five years than the catastrophe model estimates, causing a loss ratio drag of points. Texas presents an interesting juxtaposition as the favorable hurricane experience drives the state s favorable experience, even though the north and west portions of the state have experienced unfavorable thunderstorm losses. Combined ratio to achieve a 1 percent return on allocated capital Countrywide combined ratio: 1% Combined ratios Less than 8 8 to 8 8 to 1 to and above The percentages in the map on the left show the target combined ratios necessary to fund reinsurance costs and allocated capital for retained risk by state, including catastrophe and noncatastrophe risk. The targets are for a sample nationwide company only and will vary among individual companies because of state distribution of premiums, capital adequacy standards, target return on capital, allocation methodologies, reinsurance, and other considerations. For a diversified insurer with a footprint similar to the industry, the target combined ratios fall into three main categories: Florida, other coastal states, and non-coastal states.

5 Homeowners average approved rate change Countrywide: % * 1 Approved rate change Less than 2 2 to to to 8 and above *Rate filings not available The map on the left shows average approved rate changes filed between January 2 and August 21 for the top 2 Homeowners groups by state. Rate activity slowed nationwide consistent with findings that more states are nearing ROE target hurdle rates. The largest rate actions primarily came in states, including Texas, Montana, South Dakota, Colorado, Oklahoma, and Nebraska, with significantly adverse tornado and hail experience in the last three to five years. Florida primary rates fell preventing carriers from realizing ROE improvements despite reduced reinsurance costs. Direct written premium growth, 211 to Countrywide: % Percent achieved Less than to 1 1 to 1 2 to 2 2 and above Industry premium change from 211 to 2 shows growth for home continues to outpace auto. Strong performance in homeowners is strategically important for personal lines carriers looking to increase the top line. The regions with the largest premium changes in the period included midwest and tornado alley states in the belt from Texas to North Dakota. Strong overlap between premium growth and upward rate activity suggests an important piece of overall growth is the push towards rate adequacy. Industry Homeowners Direct written premium growth Amount (USD billions) Direct premiums written Loss, defense, and cost containment Direct written premium growth index Home Auto Aon Benfield

6 About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than, colleagues worldwide, Aon unites to empower results for clients in over 12 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: About Aon Benfield Aon Benfield, a division of Aon plc (NYSE: AON), is the world s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 8 offices in countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com. Aon plc 21. All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Risk. Reinsurance. Human Resources.