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Q1 brings P&C carriers mixed blessings

Results from carriers that have reported Q1 earnings to date have proved something of a mixed bag, with positive headline results but somewhat disappointing commentary on pricing in some segments.

On the one hand, headline results have been solid, supported by stronger underlying loss ratios, prior-year development and favourable year-over-year comparisons due to the impact of the Ogden rate change in the prior period. Out of the 10 carriers to report to date, seven beat earnings expectations.

Additionally, for all the talk around creeping loss costs, underlying results remain strong, though partly due to a boost from personal lines at many carriers.

Combined ratios largely improved year over year despite elevated cat losses in the US, with only RLI, Travelers and Everest Re reporting deteriorating underlying loss ratios.

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However, rate commentary has been mixed at best. There is plenty to be positive about, with most carriers reporting increasing pricing momentum across US commercial insurance lines, except workers’ compensation. But there are notable pockets where pricing has proved disappointing, particularly in loss-affected property and reinsurance.

This is somewhat surprising given both the weak underlying margins prior to 2017 losses and the level of lip service the market paid to expectations of a market hardening.

There are parts of the market, though, that seem to be behaving rationally. Pricing is weaker in segments where results have been better, such as workers’ comp, and stronger in more challenged areas like commercial auto.

Perhaps the most surprising element of the first quarter figures is how well underlying results are holding up. In total, seven of the 10 firms that have reported to date disclosed a year-on-year improvement in the ex-cat accident-year loss ratio. One factor driving this was favourable trends in the “wheels” business among US primary insurers.

62146For example, at Travelers, the personal auto segment delivered a quarterly underwriting profit for the first time since Q1 2016. The accident-year ex-cat combined ratio decreased by 2.3 points year on year to 96.3 percent due to earned pricing improvements that exceeded loss cost trends.

This helped offset a 1.2-point decline in the business insurance underlying loss ratio to 63.7 percent.

Similarly, The Hartford recorded underlying margin improvement in both commercial and personal auto lines, helping its core loss ratio decrease. But the improvement was driven by personal lines, with a 3.1-point improvement to 65.8 percent versus a 0.5-point improvement in commercial to 56.8 percent.

However, the tailwind from auto was somewhat offset by non-cat weather losses in personal property, driven by winter weather in the US.

For example, Travelers’ personal property book generated its worst Q1 accident-year ex-cat underwriting margin since 2013. The underlying combined ratio was 2.6 points higher at 80.2 percent, driven by non-cat weather losses.

This echoed results at Chubb, which also posted a worse underlying experience in its P&C personal insurance division.

The accident-year ex-cat loss ratio was 90 basis points higher at 53.3 percent, which president of North America commercial and personal insurance Paul Krump attributed to "moderately elevated losses over expected resulting from random larger fires and some elevated non-cat weather".

WR Berkley CFO Rick Baio noted that his company had also seen elevated loss activity: "We did experience, similar to others, an increase in non-cat weather-related property losses, largely attributable to winter freeze, which did not meet the PCS definition as a catastrophe event.

62186“We also experienced several large fire losses during the quarter, although do not see this claims activity as a trend," he said on the firm’s Q1 earnings call.

Reported performance at Bermudian and reinsurance companies also showed favourable trends, partly due to M&A but also because of the impact of price increases, business mix shifts and loss trends.

The biggest core performance improvement was at Axis Insurance, where the core loss ratio dropped by 3.8 points to 54.5 percent from a pro-forma ratio of 58.3 percent, according to CFO Peter Vogt.

This was mostly thanks to the legacy Novae book, which experienced a 9.7-point improvement primarily driven by the favourable impact from discontinuing underperforming lines, Vogt added.

The legacy Axis primary book improved by 1.2 points at an underlying level, with the company pointing to the favourable impact of rate rises and loss trends.

In reinsurance, Axis reported an accident-year ex-cat loss ratio of 62.0 percent, down by 5.9 points from a pro-forma 67.9 percent, with the main driver being rate increases across a number of lines and favourable loss experience in property, said Vogt.

However, fellow Bermudian Everest Re disclosed a higher P&C reinsurance attritional loss ratio of 56.9 percent, up 3.2 points year on year.

Reinsurance CEO John Doucette attributed the rise to "a higher share of new property and casualty pro rata opportunities, additional long-tail treaties, some loss portfolio transfer business and higher retrocessional costs in the quarter compared to Q1 2017”.

Meanwhile across the Atlantic, Scor said its net attritional loss ratio benefited from low man-made loss activity in the quarter. The Q1 attritional loss ratio dropped by 7.7 points to 53.5 percent. However, when the metric is normalised for the 5.4-point impact of the UK’s Ogden rate change, the year-on-year improvement in the Q1 2018 attritional loss ratio would be 2.3 points.

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