Fitch: Competitive Underwriting Drives U.S. Regional P/C Insurer Returns

Pricing improvements over several years in underwriting portfolios have propelled returns for U.S. regional property and casualty insurers, according to Fitch Ratings. 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 majority of North American publicly traded insurers experienced flat to slight declines in underwriting performance in 2015, but regional insurers reported a steady improvement in results with a corresponding uptick in return on equity.

Fitch will release a special report that assesses year-end 2015 GAAP performance for a group of 45 property/casualty insurers. Our 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 percent improvement in net income, and a strong aggregate net return on equity of 10.2 percent for the year.

The group consists of five publicly traded regional insurers, including Cincinnati Financial Corporation (CINF), Hanover Insurance Group, Inc. (HIG), Selective Insurance Group, Inc. (SIGI), State Auto Financial Corporation (SAFC) and United Fire Group, Inc. (UFCS). Each of the companies in this group reported an improved calendar-year combined ratio in 2015, although SAFC stands out as the company continues to report underwriting losses with a 101.5 percent combined ratio. This group reported a 3.1 percentage point, combined-ratio improvement to 94.1 percent, as well as an improved underlying combined ratio (excluding prior-year reserve development and catastrophe losses), that dropped to 93.3 percent, from 94.7 percent 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. The broader US commercial lines market has shifted toward flat-to-declining price changes in most markets. However, SIGI, CINF and HIG reported low to midsingle 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 4.0 percent 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 (CINF, SIGI and STFC) 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. 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.

Property/casualty 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.

Source: Fitch Ratings