As first-quarter earnings reports started trickling in from property/casualty insurers and reinsurers carriers last week, two executives confirmed that property-catastrophe pricing is coming under pressure, with one pointing to an upcoming catastrophe model change as a factor.
Michael Stone, president and chief operating officer of the insurance subsidiaries of RLI Corp., who recounted healthy premium growth in most areas of the business—and a 10 percent jump in gross premiums for RLI overall in the first quarter—said the company’s excess-and-surplus lines property book was “basically flat” for the specialty insurer during a first-quarter earnings conference call.
“The catastrophe business is under considerable pressure as capital markets come in on top-layer cat programs,” Stone said.
In addition, he said, the E&S property market is “already seeing the impact” of a new catastrophe model change that is supposed to become effective late in the second quarter or early in the third quarter, referring to a revision coming from Newark, Calif.-based cat modeler RMS.
Stone said the model is going to drive expected losses down in the hurricane-prone areas, as the cat modeler incorporates data from recent storms.
“The truth changes, if you will, and it’s going to drive costs down, just like it drove loss costs up in the prior model,” Stone said, referring to RMS’s Version 11. (In February 2011, when RMS released Version 11, the revised model indicated double-digit jumps for U.S. wind loss exposures for some insurance and reinsurance portfolios.)
Putting the two versions together, RLI’s modeled loss costs are still up some 10-plus percent, even though the upcoming model change produces a decline, Stone said. RLI’s early discussion and analysis of the new model suggests that lower frequency is the factor driving down the lower loss costs in the 2013 revision.
“You’re going to see companies starting to write business at lower rates. That’s what you’re going to see.”
“It’s not fully implemented yet. In fact, it’s not implemented at all. But everybody knows what the result is already. So you’re starting to see brokers push new rates.”
“Brokers know what the results are going to be, roughly. So we’re seeing pressure on cat-exposed business, wind business, as a result of that.”
Separately, giving a reinsurer’s perspective, Michael Price, chief executive officer of Platinum Underwriters Holdings Ltd., focused on the pricing impact of new capacity—particularly in Florida, where he said double-digit declines on property-catastrophe reinsurance programs are possible during the midyear renewals.
“While we generally expect property catastrophe-reinsurance rates for peak zones and perils to remain acceptable for the balance of the year, we anticipate risk-adjusted rate reductions resulting from an influx of capacity into the marketplace,” Price said in opening remarks of his company’s first-quarter conference call.
Platinum, which reported an overall 6.2 percent decline in net premiums across the reinsurance book, recorded a 12.8 percent drop in its Property & Marine segment—with much of the drop attributable to a decision to reduce the company’s pro-rata crop portfolio. (See related article, “Back-To-Back Drought Years Statistically Likely, Platinum CEO Says,” for Price’s views on the crop market and more information about Platinum’s first-quarter results.)
As for property-cat business, Price said his company has already written 70 percent of its annual cat reinsurance budget. “So we’re much less focused on the midyear renewal period,” he said, adding that the influx of capacity, in particular into the Florida marketplace, is driving pricing expectations.
“Brokers are expecting significant reductions. They’re usually working with good information when they form these expectations. And so if they are anticipating significant reductions, I think it’s unlikely that you’re going to get increases coming out.”
“The increased supply is evident. You can see it coming in. And as a general proposition, I don’t see how you get rate increases if supply is increasing,” Price added.
“We believe it’s going to be a tough renewal period coming up,” he concluded.
Asked specifically by an analyst whether rates drops could fall in the 5-15 percent range, the CEO suggested that such estimates were reasonable for Florida at midyear.
“Whether everything else that might get renewed between now and year-end suffers that kind of erosion of rate adequacy, I don’t know….But for the peak-zone peril, Florida wind, I think we’re looking at reductions—and the order of magnitude you cited is not out of the question,” he said.
Casualty & Surety Assessments
The reinsurance executive and the specialty lines carrier leader delivered mixed messages on casualty and overall industry market conditions.
Reporting net income of $24.8 million for the first quarter, and an overall combined ratio of 86.2 for RLI, Stone and RLI CFO Thomas Brown said premium jumps—of 10 percent on a gross basis and 12 percent net—were the result of new products and rate growth.
Summing up the rate environment across the P/C insurance industry, Stone said that “the market is in limbo. Up a bit, then down a bit—so basically, going sideways [but] trending better.”
At RLI, the best trends seemed to be in casualty segments, while surety gross premiums fell 5 percent as a result of what Stone described as “continued heightened competition.”
New entrants seem to come into the surety space every month, he said.
Turning to casualty, where RLI’s first-quarter gross premiums soared 23 percent, Stone said that for casualty umbrella business, in particular, rates climbed 17 percent. Overall premiums for casualty umbrella increased more than twice as much as rates, with RLI’s umbrella premiums rising 36 percent. “We’re finding pockets of opportunity, allowing us to write business that other markets are walking away from,” Stone explained, giving similar reasons for double-digit premium spikes in directors and officers liability and transportation.
Noting that RLI’s transportation premiums rose some 55 percent, and adding that “transportation is generally a harbinger of a market change,” he was quick to point out that there was no big rate hike behind the premium rise. “In this instance, the distress in the marketplace is really from a few carriers, exiting the business—a few MGAs not being able to keep their carrier paper or losing their reinsurance,” he said, without identifying the carriers. “There is no real rate push here. But there’s still considerable opportunity and considerable competition.”
In the D&O market, Stone said that while RLI’s gross premiums rose 20 percent, rates were up about 6 percent. “We’re seeing more opportunities as companies pull back and, in some instances, seek significant rate increases, well beyond 15 percent. We’re able to move in and take certain layers of D&O excess programs at nice rates,” he said.
At Platinum, Price said competition in the casualty reinsurance market continued to be strong in the first quarter.
“We expect casualty insurance and reinsurance capacity to remain abundant for the rest of 2013, curtailing the potential for improvement in risk-adjusted rates,” he said.
“While insurance rates are continuing to improve in some casualty classes, positive loss costs trends and the effect of lower interest rates mean that many treaties do not meet our pricing standards,” he said, explaining a 4.8 percent decline in Platinum’s casualty net premium writings in the quarter.