Commercial-lines insurers were lucky in 2013 as they enjoyed mild weather and more-favorable equity markets, but ultimately results were unimpressive, and improvement in combined ratios may already be slowing, according to analyst firm Nomura.
Analyst Clifford Gallant's P&C Q4 earnings review states, "While 2013 was a good year, a harder look causes concern."
Nomura, using ACE, AIG, Chubb and Travelers as proxies for the primary commercial-insurance industry, notes that 2013 was a better underwriting year than 2012. "The improvement was driven by a better average combined ratio of 91.3 versus 98.7 in 2012," the analysis says, adding that while lighter catastrophes and favorable reserve development played roles, "we also saw the underlying combined ratio improve to 92 versus 93.8 in 2012. On conference calls, management teams repeatedly have stressed that regardless of slowdowns in pricing, pricing still exceeds loss-cost trend."
But Nomura says the degree of improvement declined as 2013 progressed. the analysis points out that the fourth quarter saw deterioration in the underlying combined ratios for three of the four companies studied, with Chubb being the lone exception. The "randomness of loss events" could be a reason for this, but Nomura says it remains skeptical of industry claims that underlying results are improving.
Nomura states, "After several years of pricing improvements, 2013's 11.1% return on equity doesn't look that strong, particularly when one considers that this may be the peak ROE for the cycle or worse, what the industry is capable of producing in a 'lucky' year."
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