If you're not the lead dog, the view never changes, and the view from behind the property-casualty insurance industry's leading premium producer–State Farm–gave a fairly good picture of the overall industry's standing in 2005.
With minimal change in 2005 net written premiums, State Farm, along with most of the top 20 insurance groups, stayed exactly in the same positions they occupied on National Underwriter's annual ranking of top p-c groups in 2004.
State Farm's group combined ratio was also typical of the industry overall in 2005, with the group posting a 101.5 figure–nearly identical to the industry aggregate of 101.4. For State Farm, however, the 2005 combined ratio was nearly six points worse than its 2004 figure of 95.6, while the industry's aggregate deteriorated only 2.9 points from 98.5 in 2004.
The largest member of the State Farm family–State Farm Mutual Auto Insurance Company–was the only individual company-member of State Farm Group to report an underwriting loss, with a combined ratio of 107.2. This is a seemingly unusual result given that homeowners and commercial property lines–slammed with more than $6 billion in direct hurricane losses–are not written in State Farm Mutual Auto, but in the other companies that make up State Farm's group.
Equally bewildering, at first blush, are the personal and commercial lines details of State Farm's individual company results. For State Farm Mutual Auto, the 2005 personal lines net combined ratio was 98.6, while the commercial lines net combined ratio was 96.7. Yet the overall net combined ratio for the company for all lines was 107.2.
Personal and commercial lines, however, are not the whole story for State Farm Mutual–or for the industry. A separate line-item on the company's annual statement– "assumed nonproportional reinsurance"–displayed an underwriting loss of $2.8 billion, or a 2005 combined ratio of 540.3.
The result reflects the fact that State Farm Mutual–the parent company of the State Farm group–provides the bulk of the catastrophe reinsurance for non-auto property lines for State Farm Fire and Casualty, State Farm General, State Farm Lloyds and State Farm Florida Insurance Company, according to the management discussion set forth in the group's annual report. Incurred loss recoveries to these companies from State Farm Auto Mutual totaled $3.5 billion in 2005, and recoveries from external reinsurers were $599 million.
The $2.8 billion in underwriting losses from assumed reinsurance, coupled with more than $0.5 billion in profits for personal and commercial auto lines, produced a $2.3 billion net underwriting loss for State Farm Mutual–roughly 7.2 percent of $31.9 billion in premiums for 2005.
For other State Farm companies, personal and commercial combined ratios shown in this issue also do not reveal the impact of hurricane losses emanating from homeowners and business policies that these companies wrote. This is because a "net-of-ceded-reinsurance" basis of presentation was used to compile the published results.
For example, for State Farm's second largest company–State Farm Fire and Casualty–the net personal lines combined ratio was 94.8 in 2005, and the net commercial lines combined ratio was 90.3. On a direct basis, which doesn't reflect recoveries from reinsurance, the personal lines combined ratio for State Farm Fire was 117.4, and the commercial lines ratio was 106.1.
Elsewhere, personal and commercial lines insurers relied on external reinsurers to take the kinds of storm hits that State Farm Auto Mutual provided to affiliates.
For the industry overall, the net combined ratio for personal lines, while deteriorating roughly 3.5 points in 2005 to 97.2, still revealed a profit of nearly three points. For commercial lines, results improved, with the industry aggregate combined ratio coming in at 100.5–2.6 points better than 2004.
While NU doesn't publish combined ratios for the "assumed reinsurance" line by company, overall (all-lines) combined ratios for the reinsurers in our listings tell part of the story of where storm losses fell.
Scanning the top-100 group list on page 14, many of the highest combined ratios fall next to names of groups that include large reinsurers such as White Mountains, Everest Reinsurance Holdings, Swiss Reinsurance Group and PartnerRe Group.
The industry aggregate net combined ratio for the "assumed nonproportional reinsurance" line of business was 253.2–more than 130 points higher than the combined ratio of 120.5 reported in 2004.
Over all lines of business, the direct combined ratio for the industry (before reinsurance recoveries)–at 104.5–was more than three points higher than the net industry ratio of 101.4 in 2005.
(Excluding results for the federal flood program, however, the industry direct combined ratio was similar to the net, at 101.3.)
Like the industry, the p-c businesses of Bloomington, Ill.-based State Farm ended the year with a pretax operating profit–$3.5 billion, to be exact. Although the group had $778.9 million in underwriting losses, State Farm attributed its "remarkable" operating profit to increased investment income–rising to nearly $4 billion, compared with $3.5 billion in 2004. (Investment results also buoyed the industry's performance. See the Fitch Ratings analysis linked below.)
Net written premiums grew only 0.3 percent for State Farm overall, and while that wasn't much different from the industry–which registered a 0.9 percent increase–the industry figure was distorted by a $6 billion reinsurance cession from American Reinsurance to its European parent, Munich. (See NU, July 17.)
Behind the distortion, however, was a common theme–increasing competition. Indeed, State Farm, which met or exceeded its growth goals in all lines, "met this challenge in the face of stiff competition," State Farm Mutual's chief financial officer, Michael Tipsord, wrote in the company's annual report.
While it's been eight years since State Farm Chairman Edward Rust Jr. signaled the carrier's participation in an auto price war with his oft-quoted remark, "the big dog is off the porch," rate cuts were still evident in 2005. While State Farm's companies added 1.6 million auto policies last year, earned premiums fell 2.7 percent to $30.6 billion, with the decrease primarily attributable to $1.4 billion in rate cuts, the report said.
Breaking stride with other insurance groups, a handful of insurance groups saw their premiums grow at faster rates than the industry. Notable among the top 20 was The Hartford, which pushed ahead of Chubb to take 10th place in the premium rankings.
Although Hartford was the only group in the top 20 to post double-digit premium growth last year–reporting a net premium jump of exactly 10 percent–an accounting change may partially explain why the elk looked like a greyhound compared to other insurance groups in 2005.
An analysis of line-of-business details for the Connecticut-based insurer reveals that the workers' compensation line, representing more than one-quarter of Hartford's premiums, grew more than 40 percent last year.
According to Hartford's 10K report filed with the U.S. Securities and Exchange Commission, Hartford opted to start reporting workers' comp premiums in the period when policies incept, rather than when they are billed, as it had previously.
The change had no impact on earned premiums, Hartford said. According to data compiled by NU, Hartford's workers' comp earned premiums rose 18 percent in 2005, while for p-c business overall, Hartford's earned premiums grew 6.4 percent.
The highest growth figures generally went to specialty insurance groups, such as Greenwich, Conn.-based W.R. Berkley, which had the second-best growth rate among the top 20 at 8.6 percent.
W.R. Berkley also posted one of the best combined ratios among the top 20. With a 90.6 combined ratio in 2005, only three other top-20 groups edged out Berkley with slightly better ratios: Progressive of Mayfield Village, Ohio; Erie Insurance in Pennsylvania; and Auto Owners Group in Lansing, Mich.
At the other end of the spectrum, Chicago-based CNA posted the worst combined ratio among the top 20, chalking up the poor result to commutations of finite reinsurance and corporate covers, as well as lingering prior-year loss reserve issues.
Beyond the top 20, nonstandard auto insurer Bristol West in Davies, Fla., reported the highest growth of the top 100, expanding more than 65 percent to leap 36 spots and take 81st place in the 2005 rankings.
GE Global Insurance had the worst combined ratio of the top 100 groups. The result was likely attributable to $3.4 billion in pretax reserve additions provided to facilitate a deal in which Swiss Re agreed to acquire the Kansas City, Mo.-based firm.
A double-digit premium drop pushed GE Insurance out of the top 20 for the first time in over a decade, but the Swiss Re deal, completed in June this year, will likely vault the combined group back into the top 20 in next year's published rankings.
While NU's rankings for 2005 only include mergers and acquisitions completed through Dec. 31, 2005, combined 2005 net premiums of $5.2 billion for Swiss Re and GE would have landed Swiss Re in 16th place had the deal been finished last year.
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