Buyers must prepare for leaner times ahead

The major carriers of European corporate insurance coverage have promised investors a tougher stance on terms and conditions for some time now but until now there has been little evidence of real action at the core underwriting level. But, statements from the insurers in their first quarter reports that promise action coupled with a level of comfort provided by decent life numbers and recovering investment returns suggest that they may actually have the strength to follow through tough words with tough action this time around. The good news for European corporate insurance buyers is that the leading groups reported decent results and generally higher profits that helped to deliver stronger solvency ratios, well above statutory requirements.hideSecurity does not appear to be an issue for buyers, despite the tough times experienced over the last couple of years and weak demand for commercial risk coverage in particular. There are a few obvious signs of reserving problems on the liability side of the business caused by competitive market conditions in recent times, rising losses and a worrying inflationary outlook as was discussed by CEOs at the recent JLT seminar in Salzburg (see related story). But, mild reserve releases continue in some cases. And, the market seems to be comfortably capable of swallowing the glut of catastrophe losses experienced in the first three months, despite the fact that loss and combined ratios generally took a turn for the worse. The possible bad news for corporate insurance buyers is that the leading European corporate insurance carriers are doing rather well in their life and health lines. This is clearly good news from a security standpoint. But, this positive position, combined with markedly improved investment results in most cases, looks like it could enable the big primary insurers to take a much tougher line on rates charged for commercial and large corporate lines without worrying too much about lost volumes. Zurich delivered healthy numbers as it managed to raise total volumes by 11%, net profit by 13.2% and its Solvency I ratio by 17%. Total Group business volumes reached $19bn. This represented an increase of 11%, or 6% on a local currency basis. The Group’s business operating profit (BOP) for the quarter was $1.3bn, up 19% on the first quarter of last year. This delivered an annualised BOP return on equity (ROE) after tax of 13.5%. Zurich’s net profit for the quarter reached $935m, an increase of 76% on the first quarter of last year, representing an annualised ROE of 13.2%. Shareholders' equity for the period was $28.2bn, a 4% decrease on the year-end figure after the deduction of a $2.2bn dividend paid to shareholders. Zurich’s solvency I ratio was up a healthy 17% to reach 212% by the end of the period. Zurich’s total general insurance revenue rose 2% from $9.8bn for the first quarter last year to $10bn. The BOP for the business fell 30% from $889m last year to $621m so far this year on the back of a combined ratio of 95.8% for the first three months of 2009 compared to 99% in the first quarter of this year. The net underwriting result fell by $227m to $68m. The Group said that the fall in BOP was driven largely by the earthquake in Chile, higher weather-related losses and reduced investment income driven by lower yields for reinvested premiums. Zurich said that rate changes ‘continued to be positive’ and were applied by the business in a ‘targeted way to maintain margins’, and all major territories contributed to these rate increases. “Past rate increases feeding through earned premium compensated for the lower investment income. However, the result was impacted by the worst winter weather in many years in Europe and parts of the U.S. as well as a high incidence of hail and storm damage in Australia, all of which contributed to a deterioration in the combined ratio,” explained the Group. Zurich said that gross written premiums and policy fees overall fell by 4% in local currency terms, as ‘selective growth’ in some European corporate lines in Asia and in Latin America was offset by lower volumes elsewhere. The Group said that lower volumes were driven by both a continued decline in insured customer exposure and a competitive market environment. “The Group's continued disciplined approach to rates necessarily constrains growth in the current competitive market environment,” it added. The Zurich global corporate business reported an increase in gross written premiums of 4% from $2.4bn to $2.5bn while the net underwriting results improved an impressive 44% up from $74m to $106m. The business operating profit rose 10% up from $207m to $226m on the back of an improved loss ratio by 3.7% from 75.3% down to 71.6%. The combined ratio improved by 2.4% from 93.8% last year to 91.4% so far this year. Zurich said that the global corporate result was based upon the improved underlying underwriting result despite the losses that major corporate customers suffered as a result of the Chilean earthquake. “The focus continues to be on underwriting and pricing discipline, and as a result average rate increases of 2.5 percent were achieved on business written in the first three months of the year,” said Zurich. The Group added that customer insured exposures reduced, particularly in liability lines in both Europe and North America, while customer retention levels have ‘improved’ over the same period in the previous year. It said that the market environment remains very competitive in North America and has led to reduced volumes because of the focus on profitability. Zurich said that new business production was strong in Europe and has led to an overall increase in premiums. The Group’s Asia-Pacific and Middle East businesses have grown by 26%, albeit from a small base, reflecting the strategy to expand the Group’s presence in the growing Asian economies. The Group’s 3.7% improvement in the loss ratio was driven by a ‘significant’ improvement in the attritional loss ratio following efforts to increase rates, improved risk selection and the active refusal of business which did not meet technical price, said Zurich. The global corporate business result was aided again by the favourable development of reserves from previous years though the group did not state by how much. Allianz also reported a solid first quarter. It increased its group operating profit by 20.4% to €1.7bn in the first quarter of this year on the back of revenues up 10.3% to €30.6bn against €27.7bn for the same period last year. Strong profit growth in the life and health and asset management business offset high natural catastrophe claims of €555million during the quarter in the property and casualty business. Net profit rose strongly to €1.6bn from €424m for the same period last year, up 274.5%. Allianz group reported a solvency ratio of 168% at March 31, 2010, some 4% higher than the 164% at the end of 2009. Shareholders' equity totalled €43.5bn at the end of March, which was 8.2% higher than the year-end 2009 figure of €40.2bn. Allianz said that a combination of tariff increases, portfolio cleaning and selective underwriting in the property and casualty business resulted in gross premiums written of €14.0bn against €13.9bn in the first quarter of last year. Overall non-life premiums increased by 0.8%. The P&C operating profit fell by 26.5% to €712m compared with €969m for the equivalent quarter last year driven by the nat cat losses of €555m during the first quarter. Allianz said that the catastrophe events increased the combined ratio to 100.4%, compared to 98.7% in the first quarter of 2009. Claims from natural catastrophes comprised 5.9% of the combined ratio against 2.1% last year. "It is too early to say whether NatCat claims will revert to a normal level for the year as a whole, but we will be watching this closely," said Oliver Bäte, Chief Financial Officer. AXA reported a more disappointing revenue increase of only 1% up from €27.598bn in the first quarter of this year to €27.91bn during the same period last year. The Paris-based group does not provide profit figures for the quarter, but did report that its Solvency I ratio had risen again up to 180% compared with the 171% reported at year-end, itself a 44% increase on 2008. “Our revenues were up 1% in the first quarter and we remain focused on further improving the profitability of our operations, with Life & Savings already exhibiting strong improvement in new business margin”, said Henri de Castries, recently voted Chairman and CEO of AXA in a reorganisation of its structure that led to the creation of a single board. AXA said that price increases accelerated in the first quarter in most countries and that it remains confident in its ability to pursue its ‘re-pricing actions’ while exercising ‘selective underwriting.’ Overall P&C revenues were stable at €9.243bn as a 3% growth in individual lines largely driven by 2% average price increase was offset by a 3% fall in commercial lines. Commercial lines business managed a 2%2 average price increase, but, this was ‘more than offset’ by lower volumes from ‘portfolio pruning’ and a ‘reduced insured basis’ following the economic recession of last year, said the Group. AXA reported that its commercial motor revenues, that represent about 8% of total P&C revenues, were down 0.4% as a healthy 9% increase in Mexican revenue was more than offset by negative contributions notably from Spain (-17%) and the U.K. (-4%). The Group said that the reductions reflected its ‘focus on profitability.’ Commercial non-motor revenues, that represent 34% of total P&C revenues, were down 3.3%. The Group said that this was mainly caused by the U.K., which reported a fall of 14% following decisions to exit a number of property accounts because of ‘competitive pressures’ that pushed up commission rates. Swiss business was down 4% as a result of lower volumes mainly in the competitive health market. The Belgian commercial non-motor business was also down 4% as a consequence of ‘portfolio pruning’ in workers compensation business. The French group’s international insurance revenues were up 3% to €1.2bn. AXA Corporate Solutions Assurance reported a revenue increase of 4%, driven mainly by motor and construction lines and AXA Assistance reported an increase of 2%. Trieste, Italy-based Generali Group reported the strongest increase in gross written premium, up by 16.2% up from €18.5bn for the first quarter of last year to €20.9bn so far this year. The group reported a net profit of €527m up from €104m in the first quarter of 2009. Generali said that the improvement reflects a growth trend that began in the second half of 2009 and was driven by a strong performance of the life business, the improvement on the financial markets and cost containment. Generali’s life operating result rose to €866m (+60.8%) that helped deliver a growth in the total operating result to €1.2bn, up 22%. The 16.2% increase in gross written premiums was driven by what the group described as an ‘outstanding’ performance in the life business, which reported total premiums of €14.2bn, up 25.7%. Non-Life premiums were stable at €6.6bn. Shareholders' equity rose to just over €18bn from €16.7bn at the end of 2009. The Solvency I ratio was 129% and therefore up 1% from the end of 2009, despite the capital absorbed by the strong growth of the life business. Looking forward, Generali said that, given current macroeconomic conditions, it expects ‘substantially stable’ premiums and an improvement in technical margins in from its P&C business. This will be achieved through increased operating efficiency and ‘appropriate’ action on policy rates that will deliver ‘positive effects’ for the combined ratio, said the Italian group. The stable non-life gross premiums written came as a result of a 1.1% growth in direct business premiums in the non-motor lines and a fall of 1.6% in the motor sector. Generali said that ‘positive contributions’ to premiums came from France (+5%) and Italy (+0.8%). The group said that reduced premiums in Germany of 1.5% and Central and Eastern Europe of 1.6% was mostly because of negative trends in the motor business. The Group combined ratio was 98% compared with 96.3% in the first quarter of last year. Generali said that this mirrored a rise in the loss ratio from 68.8% to 70.2% as a result of the string of catastrophic events such as the Xynthia windstorm in Europe and the Chilean earthquake that accounted for 1.4% against the first quarter of 2009. Catastrophic events hit the P&C result by €115m which was down 25.4% to €335m from €449m in the first quarter of 2009. The group said that the result was also affected by the fall in short-term interest rates. Spanish insurance group MAPFRE managed a net profit of €273.1m in the first quarter of this year, a fall of 4.8% compared with the same period last year. The Madrid-based group reported that the net result of its insurance business rose 11.1%, despite the impact of the Chile earthquake, that is estimated to cost the company €80.8m coupled with high losses from severe weather conditions in Spain and in the U.S. Revenues reached €5.9bn, up 8.9% on the same quarter last year. Direct insurance and accepted reinsurance premiums reached €4,9bn, a 9.6% increase. The Group’s equity rose by over €262m (3.7%). In Spain, total premiums from direct insurance and accepted reinsurance amounted to €2.6bn, an increase of 9.8%. This compared with a decline in the sector of 3.75%, said MAPFRE. Premiums generated by Spanish commercial insurance, including the large corporate Global Risks operation, reached €475m, roughly the same as during the first quarter of last year. MAPFRE’s international business, which accounts for just under half of the Group’s total premiums, rose by 10.7% to reach €2.6bn. Premiums at MAPFRE GLOBAL RISKS rose 9.4%, to reach €251.3m. This reflected ‘strong growth’ of its property, engineering and aviation lines, said the Group. Accepted premiums at MAPFRE RE exceeded €615m, an increase of 18.4%. U.K. insurer RSA announced that its net written premiums were up 5% to £1.9bn for the first quarter of this year. The Group also said that its surplus held steady at £1.7bn; some 2.4 times the level required by regulators. The Group said that during the first quarter, it completed its U.K. and Scandinavian cost savings programmes and continued to push rates across the business. RSA said that it is the largest insurer in Chile and expects an estimated cost from the event of around £30m, net of reinsurance. In the first three months the group said that it also experienced increased large losses and severe winter weather across the U.K., Ireland and Scandinavia that would cost it about £80m more than it would normally expect. Despite this, RSA still expects to deliver a combined ratio of around 95% this year, it stated. The RSA U.K. business delivered £697m of premiums, up 7% on last year. The company said that it will maintain its strategy of ‘pushing rate, targeting profitable growth and selective capacity withdrawal where we cannot achieve target returns.’ Commercial premiums reached £417m, up by 7% on last year. Liability business was up by 6% and motor by 19% following the development of ‘strong’ new business in large motor schemes, and rate increases and double digit growth in small commercial vehicles. RSA said that specialty lines continued to grow with marine up by 14% and its European Risk Solutions business up by 6%. “We continue to take the right action on rate and have achieved a 9% rate increase in personal motor and 3% in household. In commercial, we achieved increases of 6% on liability, 5% on property and 4% on motor,” stated the group. RSA’s international premiums were up by 3% to just over £1bn with ‘good’ growth reported in Canada, Ireland and Scandinavian personal lines. In Scandinavia, premiums of £663m were ‘in line’ with 2009 that the group said was driven by ‘continued action’ on rates and positive foreign exchange. Commercial lines premiums were down 6% with growth in Danish renewable energy business and Norwegian business offset by the impact of the withdrawal of capacity and reductions in exposures, said RSA. During the quarter the Group completed the acquisitions of Sveland, the ninth largest private insurer in Sweden and TrygVesta’s marine portfolio in Denmark. It also said it achieved its cost savings target of an additional £25m ahead of its mid-2010 schedule. In other European territories, premiums were down 2% to £135m. In Ireland, growth of 3% was driven by ‘positive’ rate action across all lines of business, which was offset by continued management actions in Italy, stated the company. In Central and Eastern Europe, premiums of £47m were up by 9%. In the Baltic states, the company said that the insurance market continues to be impacted by the economic downturn. Premiums written by the Group are down 30%. But, RSA said that it continues to take the ‘right action’ and has maintained its market leading position. “This premium reduction was offset by our direct businesses across Poland, the Czech Republic and Russia,” stated the company. RSA’s shareholders’ funds as at 31 March, 2010 stood at £3.9bn compared with £3.8bn at 31 December, 2009. This was driven by retained profits, fair value gains and positive foreign exchange, said RSA. The group’s pension fund deficit of £262m at 31 December was reduced to a deficit of £226m driven by fair value gains partially offset by changes in assumptions, said the company. Total shareholders’ funds, including the pension deficit, were £3.7bn, compared with £3.5bn at 31 December. Zurich-based ACE Group reported net profit strongly up 33% despite a 5.3% increase in the combined ratio from 87.5% in the first quarter of last year to 92.8% so far this year and flat investment income at $504m. The group managed a net profit of $755m for the period against $567m on the back of net premiums written that were up 4% from $3.4bn last year to $3.6bn in the first quarter of this year. The result was also boosted by favourable prior period development of $96m pre-tax that included $41m of 2009 crop insurance favourable development. This compared with $68m in 2009. ACE’s total catastrophe losses for the quarter were $173m, including reinstatement premiums. Net after-tax catastrophe losses were $149m compared with only $34m for the first quarter of 2009. Losses from late-quarter storms in Perth, Australia, and the North Eastern United States were $32m after-tax, stated the company. ACE’s Overseas General insurance business reported net premiums written up by 7% to $1.4bn.The combined ratio for this book, that includes European corporate business, was 95% compared with 88.7% in the first quarter of 2009. This business delivered an operating profit of $156m. Net premiums written by the reinsurance business increased 3% and the combined ratio was 78.8% compared with 63.0% last year. Group shareholder’s equity rose 5.1% from $19.7bn to $20.6bn while the annualised operating return on average equity was 12.0%. XL Capital, that has recently re-located its headquarters to Dublin, Ireland, reported a 28.2% fall in net profit from $178.4m in the first quarter of 2009 to $127.9m so far this year. The combined ratio for the P&C operations surged by 8.4% in the quarter from 92.1% last year to 101.6% in the first three months of this year. The combined ratio for the insurance operations rose by 2.7% from 98.9% to 101.6%. The loss ratio for all P&C business for the quarter was 70.6% compared to 59.8% for the first quarter of 2009. Included in the current quarter loss ratio was prior year favourable development of $86.7m compared to $90.2m in the first quarter of 2009. This was more than was offset by the impact of catastrophes, net of reinsurance and reinstatement premiums, of $181.1m during the quarter compared to $27.3m last year. The Chilean earthquake resulted in the recognition of losses, net of reinsurance and reinstatement premiums, of $159.7m, of which $78m was borne by the insurance segment and $81.7m by the reinsurance segment. Windstorm Xynthia caused losses, net of reinsurance and reinstatement premiums, of $21.4m. XL’s group investment income fell by 11.4% from $348m down to $308.3m in the first quarter of this year. The combination of high catastrophe losses, thin premium growth, lower investment income and a slightly lower contribution from favourable reserve development delivered the fall in net profit. Chief Executive Officer Mike McGavick described the result as solid given the scale of the first quarter catastrophe activity that was the highest in history. He explained that the group’s P&C combined ratio of 100.5% included a 14.3 point impact from the Chilean earthquake and Windstorm Xynthia, that was only partially offset by 6.9 points of positive prior year development. XL’s group net premiums earned for P&C business fell by 4.4% down from $1.32bn to $1.26bn while the insurance operation reported an increase of 8.3% from $832m up to 901m. The insurance business combined ratio rose by 2.7% from 98.9% up to 101.6%. Mr. McGavick said that this demonstrated a disciplined underwriting approach. "We believe these results demonstrate our continued commitment to disciplined underwriting and vigorous risk management. We grew our [group] top line by 2.3% over the prior year quarter, and did so in a manner we believe is consistent with that commitment. In fact, when we strip out all the changes from the prior year quarter, our underlying growth is stronger than it first appears,” he said. XL managed to grow its book value for the fourth consecutive quarter, recording a 7% increase in book value per ordinary share to $26.38 and an 8% increase in tangible book value per ordinary share to $23.92. Total shareholders' equity increased 6.4% from $9.4bn to $10.0bn in the first quarter. Mr. McGavick concluded: "XL's first quarter 2010 results continue trending in the right direction. While the entire industry faces challenges in deploying capital and pricing discipline, we believe we can build on our success by providing XL's brokers and customers the coverage they value."

Buyers must prepare for leaner times ahead

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