Underwriting drives U.S. regional P&C insurer returns: Fitch

Pricing improvements over several years in underwriting portfolios have propelled returns for regional property and casualty insurers in the United States, credit ratings and research company Fitch Ratings said on Friday.

The ability to implement further pricing actions in a more competitive market environment will have a significant influence on future underwriting experience within the segment, the firm said in a press release. While the majority of North American publicly traded insurers experienced flat to slight declines in underwriting performance in 2015, regional insurers reported a steady improvement in results with a corresponding uptick in return on equity.

Fitch Ratings said that it will release a special report that assesses year-end 2015 GAAP (generally accepted accounting principles) performance for a group of 45 property/casualty insurers. The analysis will reveal that regional insurers as a group experienced the largest year-over-year combined-ratio improvement of any segment in the insurer universe, leading the way to a 14% improvement in net income, and a strong aggregate net return on equity of 10.2% for the year.

The group consists of five publicly traded regional insurers, with each company reporting an improved calendar-year combined ratio in 2015, Fitch said in the release. The group reported a 3.1 percentage point, combined-ratio improvement to 94.1%, as well as an improved underlying combined ratio (excluding prior-year reserve development and catastrophe losses), that dropped to 93.3% in 2015, from 94.7% in 2014.

While the companies benefited from lower catastrophe-related losses in 2015, which typically have a meaningful effect on results for these companies, the results reveal the effects of underwriting and pricing actions taken in the last several years. These entities tend to emphasize smaller commercial accounts and personal lines business in targeted states. Smaller commercial business has been less competitive than business that generates higher average premiums per policy, Fitch noted, while the broader U.S. commercial lines market has shifted toward flat-to-declining price changes in most markets. However, three of the publicly traded regional insurers reported low to mid-single digit price increases on renewals in their respective commercial segments in 2015, which largely surpassed claim inflation and led to a further improvement in underwriting results.

The regional group generated increased revenues in 2015, reporting 4% growth in net written premiums. For several of the companies, the largest increase in premiums was reported in specialty lines such as excess and surplus as companies diversify and seek profitable segments outside of their core business lines.

A continuing challenge for regional insurers is that differences in scale create a competitive and expense disadvantage with larger national companies, Fitch noted in the release. “National underwriters that are attracted to small commercial accounts continue to invest in systems to automate and simplify the underwriting and risk selection process for smaller accounts. Regional insurers with more limited resources may have difficulty keeping pace with technological change versus larger peers.” However, regional underwriters are likely to have an edge on larger competitors through local underwriting knowledge and distribution relationships, Fitch pointed out.

P&C underwriters face several impediments to maintaining profitability at current levels in 2016, including a more competitive pricing environment and a declining contribution to earnings from investments as portfolio yields continue to decline. For regional underwriters, performance changes will hinge on a continued resolve to maintain underwriting and pricing discipline, and the unpredictable direction of catastrophe related losses.