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S&P conference addresses property/casualty concerns Panel discusses the future of the industry's earnings posture By Phil Zinkewicz The theme of Standard & Poor’s 23rd annual insurance conference, held in June at the Grand Hyatt Hotel in New York, was “In Pursuit of Sustainable Earnings,” and conference panelists addressed all of the nuts and bolts issues that might affect the property and casualty insurance industry’s earnings posture in the coming years. Issues such as a softening market and new capital that came into the marketplace in the wake of Hurricane Katrina were discussed and debated, and speakers stressed the importance of the industry’s embracing enterprise risk management. Setting the stage for the overall two-day conference and for the first panel of insurance company chief executive officers in particular was Standard & Poor’s managing director, Grace Osborne. She said that Standard & Poor’s Ratings Services is concerned that market conditions in the property/casualty insurance and reinsurance sectors indicate that the hard market, however short, is now over, and “we are witnessing the beginning of the pricing cycle’s downside.” Osborne continued: “However, unlike other pricing cycles, which have been deep and long on the downside, we may experience something different this time around. Our reason for this cautious optimism is our overall view that as enterprise risk management is playing an increasingly significant role at insurance and reinsurance companies, financial discipline will have a positive impact this time.” She added that “we are already seeing signs of an orderly exit of capacity from the market, in deference to traditional players that have a longer-term threshold for risk/return rewards.” Commenting on capital markets that have entered the business, Osborne said: “The capital markets swooped into the insurance industry in a meaningful way after Hurricane Katrina and offered sorely needed capacity. It is hard to deny that profits from hardening rates seeped out of the traditional insurance/reinsurance sectors and didn’t fully replenish the losses of the industry as a whole.” Eye on earnings Following Osborne’s opening remarks, a panel of insurance company CEOs discussed the industry’s future earnings situation. Moderated by Thomas Upton, a managing director of S&P, the panel consisted of Ramani Ayer, chairman and CEO of The Hartford; Charles Kavitsky, president of Allianz of America; and Stephen W. Lilienthal, chairman and CEO of CNA Financial Corp. Upton started off the panel by asking whether the new soft market in the property and casualty industry is accelerating. Ayer said yes to that question but added that, thus far, the soft market has not overshadowed good pricing. Both Kavitsky and Lilienthal agreed with Ayer but added that continued profitability depends upon how much an insurance company is exposed to the catastrophe market. All three panelists predicted that the oncoming soft market will not severely affect the industry because insurers are smarter than they were in the past and will not abandon appropriate pricing of their products. Similarly, the panelists said that investors will not abandon the insurance industry during the soft market because they have become more sophisticated. “They are no longer focused on the bottom line, but rather on the big picture,” said Lilienthal. Nevertheless, the panelists agreed that some insurers will not do well in the coming soft market and will likely become targets for acquisition. Those companies that do not practice sound enterprise risk management concepts will be more vulnerable, the panelists said. During the conference, S&P released its midyear outlook for the property and casualty insurance industry as well as life and health. The outlook said that strong earnings and capitalization are supporting current ratings of commercial lines insurers. However, the outlook went on to say, price deterioration may erode healthy profit margins. S&P’s outlook said also that opportunities and challenges exist for both U.S. and Bermuda reinsurers. “Poor operating profitability has traditionally been troublesome for this sector, but 2006’s unusually quiet storm season kept profits high and strengthened balance sheets, and reinsurers have been substantially enhancing their ERM,” said the outlook. “However, gradual softening of primary property/casualty rates and continued uncertainty about frequency and severity of future storms could threaten reinsurers’ newly acquired strength.” In the personal lines sector, indicators continue to be positive, according to the S&P outlook. Risk-adjusted capitalization, underwriting discipline and profitability are all good. “Nevertheless, price softening and increasing competition in the auto sector might make margins more difficult to sustain.” Reinsurance panel A CEO panel on reinsurance was moderated by an S&P managing director, Rob Jones. Panelists were Joseph P. Brandon, chairman and CEO of General Re Corp.; Patrick A. Thiele, chairman and CEO of Partner Reinsurance Co. Ltd.; and Dr. Nikolaus von Bomhard, chairman of the board of management of Munich Re. Addressing the possibility of a “soft landing” to the current cycle, Brandon said he is not optimistic. “I think this cycle will end badly, as the fundamental economics of the reinsurance business have not changed,” he said. “Exposures have been growing faster than premiums for a few years now, which is one definition of a soft market.” Thiele agreed, saying that although loss trends at this point are well constrained, another loss cycle could lead to several years of poor results. Both he and Brandon expressed concern over the two to three years it currently takes to identify loss cost trends. “If all the new tools could enable a soft landing in a market where capacity has been withdrawn and performance is poor, that’s fine,” Brandon said. “However, the back-end tools currently available will not do the job until it’s too late.” Dr. von Bomhard said he sees capital management as part of good cycle management, but acknowledged that, for right now, it’s an “uphill struggle” to convince the capital markets that a reinsurance business is well run. None of the panelists saw real value in acquiring a reinsurer in the current market. During each S&P annual conference, attendees are asked to fill out a survey questionnaire, and the results are distributed at the meeting. At this meeting, more than three-quarters (77%) of respondents favored an optional charter for insurance regulation. “It’s not surprising that the conference participants selected an optional federal charter, with the emphasis on ‘optional,’” said Grace Osborne, who opened the conference. “The insurance market is becoming increasingly global in scope, and the U.S. insurance industry does not have a single voice to advocate U.S. interests with the foreign regulators and various accounting regimes.” In reply to “What Single Industry Risk Is of Most Concern to You?” 36% said “irresponsible competition” while 29% said “natural catastrophes.” Other concerns were: regulatory risks, 16%; terrorism, 9%; rapidly rising interest rates, 8%; and pandemics, 2%. * |
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