A.M. Best has maintained its stable outlooks on the P&C, life and reinsurance industries, despite many significant and persistent economic challenges.
The majority of rating actions in 2013 for personal P&C lines insurers are likely to be affirmations, according to A.M. Best. However, that optimism is counter balanced by the company’s continuing negative outlook for the commercial P&C lines, based on an expectation of “competitive market conditions, less-favorable loss reserve development, depressed investment yields and sluggish economic growth.” The global reinsurance segment continues to be stable, the company said, supported by strong risk-adjusted capitalization, judicious enterprise risk management practices and stable pricing across business classes.
Commercial insurers are expected to confront the difficult operating environment through price increases, but increases will likely by limited by insurers’ desire to retain business, which remains challenging, as well as costly to attract. “The current loss-reserve position and the potential for continued underfunding remains a critical issue,” the company said. “The continuation of our negative outlook largely reflects this challenge as well as the struggle for the segment to generate sustainable, favorable earnings.”
Many commercial lines insurers still are attempting to recoup billions of dollars in insurable risks that have disappeared since the economic downturn began in 2008. “Other commercial insurers remain determined to put their capital to use,” A.M Best said.
“In the aggregate, A.M. Best believes that core accident-year margins in commercial lines will continue to improve due to price firming. However, the spread on margins today, versus pre-2008, has widened and will take some time to narrow based on prevailing interest rates and future inflationary concerns,” the company said. “This is particularly true for workers’ compensation, professional liability and general liability lines – three lines that have been most impacted by competitive pricing. Absent a major catastrophic event, A.M. Best believes the commercial sector will remain well-capitalized. This continues to be true despite a broad attempt by many to manage and deploy capital via stock dividends and share-repurchase activity. This view of capitalization also takes into consideration A.M. Best’s view of deficient loss reserves in the sector.”
Auto lines represent more than 60 percent of net premium written for personal lines and the outlook for personal lines remains stable. However, two divergent trends are at work. While auto insurance continues to perform consistently, the property line remains volatile and subject to weather-driven performance. Some geographically concentrated property writers will continue to confront rating pressure depending on their ability to address weather-related volatility.
For example, insurers have effectively absorbed losses related to Superstorm Sandy, but prior to the storm, the segment was headed for a significant decline in catastrophe losses compared to 2011, which brought heavy losses.
“Despite this trend of frequent and severe events, the personal lines segment remains adequately capitalized. This has been driven primarily by the continued stable results in the auto line reflecting pricing segmentation and sophistication,” A.M. Best said. “Pricing sophistication continues to evolve, particularly regarding the development of telematics and the ability to understand each individual’s unique driving characteristics.”
Other trends in personal lines include multi-channel distribution using a variety of customer-touch points, and brand awareness and corresponding marketing budgets should continue at the current pace.
Reinsurance
Reinsurers rebounded from enormous catastrophe losses in 2011 and produced an average-return-on-equity in the low double-digits through the first three quarters of 2012, and A.M. Best said that despite fourth-quarter losses, reinsurers are positioned to put forward acceptable levels of underwriting and profit for the entire year.
“Reinsurers are well capitalized and capable of absorbing significant losses from a combination of events. The ongoing weakness in the global economy presents unprecedented levels of uncertainty and challenges,” A.M. Best said. “Risks associated with underwriting and investment activities are manageable from a capital perspective, and A.M. Best continues to monitor (re)insurance companies through various capital stress scenarios as issues emerge to gain an additional level of comfort.”
The company expects reasonable levels of organic growth in reinsurers’ capital for 2013, tempered by active capital management strategies, assuming continuing stabilization in the global economy and normal levels of global catastrophe losses. But the company said it is concerned that stable reinsurance pricing may be short-lived as a result of volatile underwriting earnings.
“While Superstorm Sandy had little effect on pricing going into the January renewal, some regional accounts that were impacted did experience price increases. Furthermore, while reserve releases have helped to bolster profits and will likely continue to do so, this crutch will provide less and less support over time,” A.M. Best said.
“With operating returns pressured by low investment yields, overall earnings must be driven by underwriting profits for the foreseeable future,” A.M. Best said, and underwriting discipline should translate into a positive for the segment.
Life and Annuities
The life and annuity sector also remains stable, despite low interest rates, reflecting strong risk-adjusted capital positions, favorable GAAP and statutory operating earnings and continued efforts at improving balance sheets through risk management and de-risking initiatives, the company said. Investment portfolios have generally held up well, and most insurers reported only modest investment impairments in 2012 and relatively large unrealized gain positions in fixed income portfolios.
On a financial strength rating (FSR) basis, 93 percent of life/health insurers had a stable rating outlook (split almost evenly between positive and negative outlooks), compared to three-fourths of life/health insurers that had stable rating outlooks at year-end 2010. However, without a gradual increase in interest rates, the likelihood of a negative rating outlook on the life and annuity sector increases.
Low interest rates are expected to remain at or near historically low levels beyond 2015 and depress life insurers’ earnings. Life and annuity companies with diversified sources of earnings, should fare better, as should indexed annuity writers, and life writers that can more frequently reprice their liabilities.
