Property casualty insurance insiders predicted 2008 will be a year of marginal growth as continued pricing competition will keep premiums low and profits lower, although that could quickly worsen if a natural catastrophe strikes.
Those predictions – which follow two years of double-digit profits for the industry as a whole -were the general consensus of CEOS during an industry panel held last week by the Insurance Information Institute in New York that featured the top execs of several major companies from across the property casualty spectrum.
Evan G. Greenberg, chairman and CEO of commercial insurer and reinsurer ACE Limited, a commercial insurer and reinsurer, predicted a “marginal year” for the industry as a whole, although Greenberg did say he expected underwriting to turn a profit for ACE.
Echoing those comments was Ramani Ayer, chairman and CEO of The Hartford Financial Services Co., who added that commercial lines in particular “will be challenging for the industry as a whole,” and that at the Hartford in particular, he did not “anticipate commercial lines generating a lot of top line revenue.”
Putting 2007 in perspective, Ayer pointed out that, although the industry enjoyed profit margins north of 13 percent, the S&P for instance had average profits over 14 percent. “It was a terrific year, but if you go back to 1990 or 1950, you really are looking at two good years over a period of anemic years. It’s not a large return over longer period of time. Shareholders would share that sentiment.”
The audience, comprised largely of CEOs and other top executives in the industry, echoed Ayer’s and Greenberg’s comments in an informal poll where more than three quarters of the roughly 200 surveyed said they expected commercial and personal lines profits to flatten or fall this year.
The declining premiums and profits will come as balance sheets remain significantly higher and reserves go untouched by any major natural catastrophe over the last two years.
Indeed, the prospect of a natural catastrophe continues to be the elephant in the room, said Steven N. Weisbart, chief economist for the III.
“We’ve gone two years in a row without anything like (hurricanes) Katrina or Rita,” he said. “To go three years in a row would be the first time in a long time.”
Thomas J. Wilson, president and CEO of The Allstate Corp., said auto insurance would work under a similar dynamic of falling premiums, adding that Allstate would build growth around new products, such as higher-priced “green” auto policies in which the company buys carbon offsets for a car’s emissions.
“Price is important but it’s not the only thing,” Wilson said. “Auto’s a little different than commercial; it’s a different type of competition. Investing in new products and services is a good thing – it raises value for consumers.”
Acquisitions could also continue to be a major dynamic in the property casualty industry in 2008, some execs said.
Greenberg, whose ACE Limited last month bought Combined
Insurance Company of America and several other subsidiaries of Aon Corp., said “there will be activity” in mergers and acquisitions next year.
Much of that could come from overseas, as a relatively weak U.S. dollar makes acquisition more attractive for European companies, said Anthony J. Kuczinski, CEO of Munich Re America.
“In terms of U.S. versus foreign… if someone is looking to acquire and wants to be in the largest market in world, it’s a good time,” he said.
Tempering that acquisitions-frenzy would be lower earnings in 2008, said Allstate’s Wilson.
Another factor would be board room jitters, said Gerald P. Schmidt, president and CEO of Mutual of Enumclaw.
“Governance is different than even a year ago,” he said. “It’s not as easy to get permission to buy or merge as it was a year ago. Boards are savvier to the fact that only 20 percent of acquisitions work.”
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