An RLI executive reported yesterday that as his insurance company’s profits have soared he has seen competitors’ market discipline eroding in the property-catastrophe insurance sector.
Michael Stone, president and chief operating officer of RLI Insurance Company made his comments during a fourth-quarter earnings conference call that announced a 26 percent jump in net income for 2006.
And he suggested that some carriers may be fudging on what they reveal about their underwriting.
“Any reinsurers out there, your cedents aren’t being as disciplined as they have represented to you,” he warned
His Peoria, Ill.-based specialty insurer reported net earnings of $134.6 million, or $4.35 per share, for 2006 and also recorded its 11th consecutive underwriting profit with a combined ratio of 84.1 for the year.
But while gross premiums rose 5.6 percent to $799 million overall for the year, in the fourth quarter, they slipped 7.7 percent.
For the property segment, Mr. Stone reported gross premiums jumped 28 percent for the year, while shrinking 19 percent in the fourth quarter. He said that property rates returned to 2004 pre-hurricane levels in the fourth quarter.
Contrasting conditions earlier in the year, he said that the “very hard” catastrophe market of the second quarter saw the company binding seven or eight out of 10 quotes, compared to two or three out of 10 in more typical years.
In an effort to slow the flow of wind business, Mr. Stone said that RLI underwriters continued to raise rates, tighten terms and increase deductibles, but that the rest of the market went in the opposite direction.
“The hurricane season ended benignly, and the market began to weaken. What a short memory we have,” he exclaimed.
“Companies chased premium to meet year-end premium goals,” he said, noting later that this is not an unusual situation in the fourth quarter of any year.
Competitors, he noted, typically lose some discipline in the final quarter as they push to meet top-line goals for the year, he said, noting that there has been some “return to normalcy” in the beginning of 2007.
As for fourth-quarter 2006, he said: “Remember those disciplined [property] underwriters [and] talk of the death of the underwriting cycle, better data, better management. I’m not sure you should believe all those assertions.”
“RLI underwriters stayed disciplined, and as a result, we lost a little share,” he said.
Within the property segment, while market discipline on wind business waned, Mr. Stone said earthquake pricing remained strong, reporting that RLI’s rates were up 50 percent on that business.
In addition to the weakening market for property-catastrophe insurance in fourth quarter 2006, Mr. Stone said the casualty market continued to weaken also, “but not precipitously.”
Throughout the year, rates for non-catastrophe property business remained fairly flat, he said.