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24 November 2017

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Q3 cats kill US specialty underwriting margins

Iulia Ciutina 14 November 2017

US specialty combined ratios escalated well into triple digits in the third quarter following elevated catastrophe losses, while ex-cat underwriting performances improved overall year-on-year.

The Insurance Insider's US specialty composite posted a combined ratio of 111.7 percent for the three months to 30 September 2017 - 16.8 percentage points above the corresponding result a year ago.

The vast majority of the increase was attributable to higher catastrophe loss ratios, with the group's metric standing at 19.2 percent of net earned premiums (NEP), as all the companies in our analysis reported HIM losses as well as exposure to the Mexican earthquakes.

This compared to a weighted average cat loss ratio of only 0.9 percent in Q3 2016, when half of the companies reported no cat-related claims during the period.

However, excluding catastrophes, US specialty carriers recorded a better underwriting result as an increased contribution from reserve releases offset underlying erosions, while expense ratios improved year-on-year.

The aggregate's reserve releases ratio to NEP increased year-on-year for the first time since the second quarter of 2016, going up by 1.4 percentage points to 3.8 percent for the period.

However, half the group posted lower contributions compared to the same quarter of last year, with Navigators strengthening its reserves for the first time since Q4 2013.

Meanwhile, accident-year ex-cat loss ratios were up by 1.1 points to 63.2 percent on a weighted average basis. This was the first year-on-year increase in the group's Q3 underlying loss ratio since 2014.

Looking at costs, the composite's expense ratio declined by 1.2 points to 33.2 percent, with all the companies but Argo posting lower expense ratios than in the same period of 2016.

This was mostly due to lower bonus accruals, a trend also noticed at Bermudian carriers, where expense ratios improved across the board by 4.9 points on a weighted average basis to 29.2 percent.

Cat impacts
The largest catastrophe impact occurred at Markel, which reported $503.0mn of cat losses in the third quarter, following HIM and the two Mexican earthquakes. This represented 5.6 percent of the company's shareholders' equity at the end of June 2017 and added 45.7 percentage points to the Q3 combined ratio.

Click to open In the prior-year period, the carrier did not report any cat losses.

Argo suffered the second-biggest cat hit of $90.0mn, excluding a cat-related premium adjustment of $14.5mn that was a direct reduction to earned premiums, according to CFO Jay Bullock, with 80.9 percent of the losses incurred in the specialty division.

This negatively impacted the company's combined ratio by 23.1 points, compared to an impact of 3.6 points in Q3 2016.

Neither Markel nor Argo reported losses by event.

At Navigators, catastrophes damaged the combined ratio by 24.2 percentage points, with claims from the cat events standing at $72.8mn. This represented a 6.1 percent hit to shareholders' equity at 30 June 2017 - the biggest equity impact among the peer group.

Hurricanes Maria and Irma generated a similar amount of claims of $26.4mn at $25.8mn, respectively. Losses from Hurricane Harvey stood at $17.1mn, whereas the earthquakes in Mexico had a $3.5mn negative impact.

RLI was the only other US specialty player to report a double-digit cat ratio, with the metric at 17.4 percent for the third quarter.

Prior-year developments
Looking at reserve releases, Navigators surprised the market by strengthening its reserves by $29.5mn, which added 9.8 points to the carrier's Q3 combined ratio.

This contrasted with the prior-year period, when the specialty player released just $1.0mn of its reserves to widen the underwriting margin by 36 basis points.

Navigators said it had experienced adverse development in the professional liability and P&C operating segments within its US and international primary books, as well as in its international marine division.

Argo and WR Berkley were the only other carriers to report lower year-on-year contributions from reserve releases, both of which were reduced to under half a point - the smallest in the composite.

On the other side of the spectrum, Markel and RLI recorded significant increases in their reserve release contributions.

Markel nearly doubled its Q3 reserve releases to $151.1mn, or 13.7 percent of NEP, with the rise emanating almost entirely from US insurance lines of business.

And RLI went from reporting $1.4mn of reserve strengthening in Q3 2016 to releases of $14.9mn a year later, mostly in casualty, which lowered the company's combined ratio by 8.2 percent.

Underlying margins contract
Excluding cats and reserve releases, the core performance worsened for most US specialty players in our analysis.

Markel and Navigators were the only two carriers to post underlying improvements, with their accident-year ex-cat loss ratios down by 2.0 and 3.5 percentage points to 65.8 percent and 57.7 percent, respectively.

Meanwhile, Argo and RLI both reported a 5.9 point rise in their core loss ratios to 61.1 percent and 58.4 percent, respectively.

This was Argo's highest quarterly underlying loss ratio since at least 2012, as the metric has historically been around 55 points on the combined ratio.

CEO Mark Watson noted in the Q3 conference call that the carrier incurred $15mn more in attritional losses in the property lines of its Lloyd's Syndicate 1200, but that the business was short-tail and expected to earn out in the next quarters.

Click to open "We've not renewed the poorest-performing accounts, have refined our risk appetite and are using new pricing models to better predict the future loss cost of the written business," he continued.

At RLI, COO Craig Kliethermes underlined the carrier's "cautious approach" to writing new casualty business as well as "any product that has experienced unusual loss activity".

Expense ratios improve
Navigators posted the biggest year-on-year decrease in the expense ratio of 4.5 percentage points to 30.3 percent, with most of the reduction due to a fall in short- and long-term incentive compensation accruals, according to CFO Ciro DeFalco.

Lower accrued profit commissions also contributed to the 2.5 point decrease in AFG's expense ratio to 27.9 percent and to a 2.2 percentage point reduction in Markel's expense ratio to 36.0 percent.


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This article was published as part of issue November 2017/2

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