No signs of a softening despite improved insurer results

The year-end 2020 and first-quarter 2021 results published by leading German and international insurance groups were surprisingly healthy, despite the continuation of Covid-19.

In Germany, Allianz Global Corporate & Specialty (AGCS) and Talanx delivered good first-quarter results that showed reduced Covid-19 losses, lower claims generally and continued rate increases across the board, and particularly in commercial and industrial lines. Gothaer reported a similar story in its year-end 2020 results.

This theme was also reported by the other leading commercial and industrial insurers such as Chubb, AIG and Zurich.

Those carriers that were forced to carry out significant re-underwriting actions in recent times because of unacceptable combined ratios in commercial and industrial lines as the soft market reached its peak – AGCS, HDI, AIG and Zurich – appear to be on track.

The turnaround at AGCS carried out by Joachim Müller and his team after he took charge in December 2019 provides a good example of how this market has changed in recent times.

AGCS had struggled to provide a decent return to the group in recent times, delivering combined ratios well above 100% even before the arrival of Covid-19, as it struggled to cope with the extended soft industrial insurance market along with the rest of the sector.

Covid-19 arrived just as Mr Müller and his new management team kick-started the group’s re-underwriting process, which saw it walk away from significant business in difficult areas such as German auto recall, to focus firmly on profit and leadership in key selected lines rather than overall volume.

Any progress from the renewed focus on underwriting profitability was overshadowed at this point last year, however, as AGCS was forced to post €233m in Covid-19-related reserves. This meant the insurer reported a combined ratio of 117.5% and an operating loss of €141m at this point last year.

The big hit taken for Covid-19-related losses last year was, however, not repeated in the first quarter of this year to the same extent and, along with the remedial actions taken across the group since the relaunch began, enabled AGCS to report a much healthier set of figures for the first quarter of this year.

Gross premiums written decreased by €73m to €2.938bn in the first quarter of this year, compared with just over €3bn at the same point last year. AGCS said that a positive impact from effective rate changes of 22% for renewal business across the portfolio was offset by underwriting actions targeting loss-making accounts and segments.

The strongest rate increases were achieved in financial lines, property and aviation. AGCS also said that long-tail lines of business observed “strong momentum on rate improvement”.

Mr Müller and his management team will have been particularly pleased to see the impact of this, as well as a much reduced Covid-19-related reserve addition of €40m, on the combined ratio. For the first quarter of this year, it stands at 98.3% – some 19.2 points better than last year’s horrible number.

Apart from the much lower Covid-19 reserve addition, AGCS also benefited from much lower medium-sized and large losses during this period, while frequency was also down.

The impact on the operating profit was clear. For the first quarter of this year, AGCS reported a profit of €81m, compared with last year’s Q1 loss of €222m.

Allianz SE CFO Giulio Terzariol commented on the “very good path regarding AGCS” and the “disciplined growth” opportunities that the group is now after at AGCS.

“We see good rate increases across the board and a combined ratio below 100% in all lines of business. We did a lot of re-underwriting and exited segments last year. We are now coming to a point where we can expand our risk appetite in a cautious and disciplined approach and explore growth again (outside financial lines US)… the AGCS combined ratio of 98% is solid and can withstand some headwinds later in the year and still remain on target,” said Mr Terzariol.

The big question for risk and insurance managers in Germany and across Europe will be simple: Does this recovery among the leading commercial and industrial insurers mean that they can expect easier renewals in future?

Interviews carried out by Commercial Risk with the leaders of the major carriers such as Mr Müller, and analysis of the analyst conference call transcripts, suggest that risk and insurance managers should not expect a rapid turnaround in the market this year.

The carriers have got to a point where they are comfortable with the risk-adjusted rate of return from underwriting. But this comes after a long period of being nowhere near this point for many of the leading players and it has taken an often brutal process to reach that point.

Chubb has arguably performed the best and most consistently of the leading players, and under CEO Evan Greenberg’s long watch has delivered none of the nasty surprises that some of its rivals have been forced to deliver, such as hefty reserving additions.

Mr Greenberg reported an excellent set of first-quarter results, driven largely by a P&C combined ratio of 91.8% that still included catastrophe losses of 9.1 percentage points, compared with 3.3% last year.

One telling quote from Mr Greenberg from his analyst call does not suggest that he is going to be telling his underwriters to relax and go for growth at the expense of profitability any time soon. “We know what rate we need in order to achieve an adequate risk-adjusted rate of return from underwriting – and that is the objective. And it is a relentless focus, though we’re never perfect. Some lines are there. Others have a way to go,” he said.

My guess at this point would be that the best Germany’s risk and insurance management community could expect at coming renewals is stability overall, but probably still some difficult conversations in the more difficult lines such as D&O and cyber. All of which suggests another year in which the insurance manager and the broker will have to earn their money through a lot of hard work.