It has been a rough decade for regional insurers, as a Fitch Ratings performance review of the last decade shows regionals lagging behind other types of insurers in two key metrics.
The analysis, "Property/Casualty Insurers' Long-Term GAAP Performance Review," breaks the past decade down into two five-year periods — 2002-2006, and 2007-2011 — and measures average net income return on equity (ROE), and compound annual growth rate (CAGR) in book value per share (BVPS).
Fitch notes that, overall, industry profitability deteriorated in the second half of the decade compared to the first, with average net income ROE falling to 8.9 percent in the latter five years compared to 11.6 percent in the 2002-2006 period for the five P&C sectors analyzed: diversified, regional, specialty, personal and reinsurance.
But the deterioration hit some sectors more than others. For example, average net income ROE for personal-lines insurers was 14.5 percent in 2002-2006 — highest among the five P&C sectors for that period. But personal-lines insurers' net ROE fell by 5.6 points, to 8.9 percent, in 2007-2011, dropping the sector to third among the five sectors for the second half of the decade.
Reinsurers, on the other hand, recorded net income ROE of 11.8 percent in 2002-2006 — third among the five sectors — and that figure deteriorated by just 1.2 points in the 2007-2011 period. At 10.6 percent, reinsurers' average net ROE placed first among the five sectors for the second half of the decade.
Regional insurers placed last among the analyzed sectors for both five-year periods. From 2002-2006, average net ROE was 8.5 percent, 3.1 points lower than the average for that time period among all five sectors. For the 2007-2011 period, average net ROE fell by 3.6 points, to 4.9 percent, which was five points below the five-sector average.
When measuring CAGR in BVPS, regional insurers again were the worst performers for both five-year periods.
Fitch also measured premium weighted average combined ratios for the five sectors. Regional insurers posted a combined ratio of 97.2 for the 2002-2006 period, slightly above the average for the five sectors, but below the 98.4 average for the three commercial sectors (diversified, regional and specialty). However, while the combined ratios for diversified insurers, specialty insurers and reinsurers improved in the second half of the decade, regional insurers saw their combined ratio climb by 4.2 points, to 101.4, well above the commercial-lines average of 94.7 and overall average of 94.9 for the 2007-2011 period.
Personal lines represented the only other sector that saw combined-ratio deterioration in the second half of the decade, posting a 96.2 combined ratio in the 2007-2011 period compared to 93 in 2002-2006.
Fitch says, "For regionals and personal-lines writers, the key driver of deteriorating combined ratios was higher catastrophe losses in the period ending 2011. this was in addition to the sot-underwriting environment and recessionary pressures."
Outlining further challenges facing regional companies, Fitch adds, "While most personal-lines writers in the analysis have adequate scale, regional insurers also have scale disadvantages that promote higher expense ratios and a more-limited underwriting opportunity set."
Reinsurers benefited by seeing the least amount of erosion in pricing in the 2007-2011 period, as large cat events affected this sector and "helped reinforce underwriting discipline."
Specialty writers enjoyed low combined ratios in both five-year periods due to "significant favorable loss reserve development and because pricing in many specialty lines held up better than more commodity-like business lines," says Fitch.
Consequently, specialty companies posted above-average percentages for both average net ROE and CAGR in BVPS for the 2002-2006 and 2007-2011 time periods.
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