In 10-Year Review of Performance Metrics, Regionals Lag Behind Other Insurers

The last decade has been a rough one for regional insurers, judging by a Fitch Ratings performance review that shows regionals lagging behind other types of insurers in two key metrics.

Fitch's “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.

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.

That deterioration was worse in some sectors than in others: For example, average net income ROE for personal-lines insurers was 14.5 percent in 2002-2006—the highest among the five P&C sectors for that period. But that same net ROE fell by 5.6 points to 8.9 percent between 2007 and 2011, dropping the sector to third among the five sectors in the decade's second half. 

Reinsurers, on the other hand, recorded net income ROE of 11.8 percent from 2002-2006—placing third among the five sectors—but that figure deteriorated by just 1.2 points from 2007-2011. At 10.6 percent, reinsurers' average net ROE ranked first among the five sectors for the latter time period.

Regional insurers placed last 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 2007-2011, regionals' average net ROE fell by 3.6 points, to 4.9 percent—five points below the five-sector average.

When measuring CAGR in book value per share, regional insurers again were the lowest performers for both five-year periods.

Even regional insurers' combined ratios, while arguably respectable, still ranked behind those of other sectors.

In Fitch's measure of 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 among 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).

“For regionals and personal-lines writers,” Fitch says, “the key driver of deteriorating combined ratios was higher catastrophe losses in the period ending 2011. This was in addition to the soft underwriting environment and recessionary pressures.”

Outlining further challenges facing regional insurers, Fitch adds, “While most personal-lines writers in the analysis have adequate scale, regional insurers also have scale disadvantages that promote higher expense ratios.”