P/C Insurers Net Income Up 60%, Combined Ratio at 97.6 for 2013: A.M. Best February 10, 2014

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1 P/C Insurers Net Income Up 60%, Combined Ratio at 97.6 for 2013: A.M. Best February 10, 2014 A relatively quiet year for catastrophes helped the U.S. property/casualty industry achieved an underwriting profit for the first time in four years, according to A.M. Best. The industry managed its way to a nearly 60 percent increase in net income to $63.2 billion, which helped drive an estimated record year-end surplus of $666.3 billion. The surplus level is particularly noteworthy given the headwinds that are anticipated in 2014, A.M. Best said. In a special report, the ratings agency said underwriting results reached their best level since 2007 and the industry s combined ratio for the year is expected to come in at The estimated underwriting profit of $8.5 billion for 2013 ranks as the third best in the past decade next to $28.9 billion in 2006 and $23.0 billion in In 2012, the industry suffered a $12.5 billion underwriting loss.

2 The drop in catastrophe losses shaved 4.3 points off the industry s expected combined ratio in While cat losses represented 7.5 points on the 2012 combined ratio, they dropped to 3.2 points in Unlike Superstorm Sandy in 2012, no major storm made landfall in the U.S. last year. However, A.M. Best Co. said it is estimating a more normal level of catastrophe losses in the coming year. Profitability for 2013 was further bolstered by considerable investment gains achieved in strengthened U.S. equity markets, the report said. Net income is projected to be $52.9 billion, a 7.9 percent increase over last year. Additional highlights from last year s performance include a 4.8 percent increase in net premiums written. Workers compensation was again the fastest-growing line with a 9.7 percent increase. Looking ahead to 2014, A.M. Best said it expects premiums to continue growing through price increases, but the pace of these rate changes should slow and temper growth in premium. Although core accident-year underwriting results should improve slightly on the rate level achieved in recent years, A.M. Best said it anticipates less favorable development of prior years loss reserves. In addition, the report says the P/C industry will continue to be challenged by the relatively low investment yields that are expected to persist through 2014, and the slow recovery from the recession of A.M. Best has assigned stable outlooks to both personal lines and reinsurance. However, it has assigned a negative outlook to commercial lines, citing a highly competitive market, expected low investment yields and the potential for future adverse development of loss reserves. Source: A.M. Best, Special Report: U.S. Property/Casualty Review & Preview. P/C Segment s Net Income Estimated to Be Up Nearly 60% in 2013

3 P/C Insurers Face Challenge to Match 2013 Results in 2014 By Young Ha January 15, 2014 The U.S. property/casualty insurance industry reported strong performance in 2013, but in 2014, the industry may find it difficult to match last year s results as insurers begin to face more headwinds, according to executives who spoke at the Insurance Information Institute s annual Property/Casualty Insurance Joint Industry Forum in New York Tuesday. We saw 2013 being the best year since the financial crisis, said Matthew Mosher, senior vice president and chief rating officer at A.M. Best Co. Mosher oversees over 125 analysts who rate and report on over 4,000 insurance companies around the world. Commenting on below-average insured catastrophe losses in 2013, Mosher said, We saw a low level of Cats. So you would expect in 2014 that you are going to see some rebound there.

4 Additionally, the industry could see fewer loss reserve releases, so there could be some adverse impact from that as well, he said. So I wouldn t necessarily expect that 2014 is going to be as good as 2013, just based on a return to more normalized catastrophe losses. But overall, Mosher said, what we have seen is an industry that has done very well in terms of managing its business. And for the most part, the underwriting is there. Another panelist, Jay Gelb, managing director and senior equity analyst at Barclays, further noted potential challenges insurers could face this year. Barclays last week lowered its outlook for the overall property/casualty insurance sector to neutral from positive. Gelb said the industry has already achieved peak cyclical earnings, so the earnings are unlikely to get much better this year. And the commercial insurance pricing is poised to weaken, he forecast. In fact, we are saying it could turn negative by the middle of this year, Gelb said. I would view there being a little chance of cyclical strengthening for the P/C insurance industry in 2014 because fundamentals just don t support it. And there are really four factors contributing to that, which leads us I think closer to a soft market, Gelb said. He listed strong underwriting results; robust industry capital, with strong capital positions and roughly stable demand that are likely to push pricing lower; a weakening reinsurance environment; and emerging signs of a little less underwriting discipline. So with 2013 being a great underwriting year probably coming out at around a 96 percent combined ratio for the industry for the year that should lead to worse pricing, Gelb said. He also shared a set of data points that he said shows the P/C insurance market in commercial lines is probably poised to weaken in He said Barclays just completed a semi-annual update to its commercial insurance buyer survey, where it interviewed 75 large company or large institution risk managers.

5 From a directional standpoint, Gelb said, the update showed that half the commercial insurance buyers are still getting price increases, while the remainder are seeing pricing being somewhere between flat and down. A year ago, when we polled the same group, 85 percent of the buyers were seeing price increases and the rest were seeing stable pricing, he said. So I would make the argument we are at a negative inflection point on pricing. Gelb also said it s interesting to note that looking back, just a little more than a year ago, people were all looking very closely at the impact from Hurricane Sandy. It turned out to be a $19 billion insured industry event, he said. Yet the industry seems to have moved past it pretty quickly. And I think it s safe to say that Sandy could have been a much more significant event for the insurance industry and also for the economy as a whole. Fed s Tapering Plan Weighing in on the Federal Reserve s strategy to taper its economic stimulus, Barclay s Gelb said the insurance industry likely wouldn t see much difference in its investment income in the short term. I would say despite the Fed s tapering of easy monetary policy, we are not expecting a rise in the industry investment income in 2014, Gelb said. The industry s net investment income has declined every year since 2007 due to falling investment yields once the Fed began flooding the system with liquidity, he commented. If you look at the first nine months in 2013, the overall net investment income was down 3 percent. We would expect net investment income to be roughly flat through 2015 as interest rates rise, Gelb said. He said Barclays view is that the 10-year U.S. Treasury yield would gradually rise from around 2.85 percent currently to around 3.5 percent by the end of 2014, signaling a gradual rise in base interest rates. A.M. Best s Mosher provided a more optimistic forecast. You are not necessarily seeing the investment income increasing dramatically. But you will start seeing an increasing movement, at least off the negative trends you have been seeing, he said.

6 I guess my point is, when you look at what could have been, and what could be impacted, it s better than what it was, Mosher said. So we are seeing some increase in investment income. We do expect an increase in investment income in 2014 over 2013 going forward. Still, when looking at it from an operating ratio basis, only about half-apoint improvement is expected in 2014, Mosher said. So I don t think it s going to be something that will be overly material to what companies are doing and how they are acting in the marketplace. But it certainly is better, he said. The reinvestment rates are getting better than what they could have been, has there not been the tapering aspect. A.M. Best s Commercial Lines Outlook Last week, A.M. Best affirmed its negative outlook for the P/C commercial insurance sector, citing uncertainty around loss-reserve development and continued low investment yields. Mosher also provided commentary on the announcement at the I.I.I. panel discussion. One thing maybe just to clarify is that when we put a negative outlook on a segment, what we are looking at is the movement of breaking within that segment, Mosher said. I think the issue that we see in terms of reserves is, we are seeing a continued movement of adverse development as opposed to favorable development in reserves, he said. We recognize some of the issues that are there and we expect we will see some activities related to that. Overall, he said, one may look at the industry and say reserves overall aren t a major issue at this point. However, there is no overall insurance industry company, he said. You have strong and you have weak. When one looks at what the impact might be on ratings, there will probably more negative impact in terms of movement of ratings rather than positive, he said. When you look at the majority of industry, there are companies that are very well managed in terms of maintaining that solid reserve base on the stronger side, Mosher said. But that s not necessarily going to move their rating up.

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