North American Specialty Insurer Operating Earnings Soared in 2015: Fitch

March 15, 2016

EarningsNorth American specialty insurers saw their aggregate operating earnings jump to $3.4 billion in 2015, up almost 11 percent versus the previous year. The data, from a new Fitch Ratings special report, points to fresh evidence of the sector’s growing prowess in an otherwise limp marketplace.

In sharp contrast, aggregate operating earnings for property/casualty insurers and reinsurers dropped 7.5 percent, according to Fitch’s compilation of full-year GAAP financial results for 45 P/C insurers and reinsurers.

Fitch isn’t the only market observer/analyst that sees specialty insurers as a sector with increasing clout. Late last fall, Standard & Poor’s issued a new report that determined 13 specialty insurers “significantly outperformed the U.S. P/C industry” in terms of underwriting and were potential takeover targets by both rival carriers and investors. Earlier in March, Conning Inc. issued a report that asserted specialty property/casualty insurers are now a dominant force in the market and generate more than half of the industry’s premiums.

According to the Fitch report, specialty insurers also improved their aggregate operating return on investment to 9.5 percent in 2015, up from 8.9 percent in 2014 “as strong underwriting drove group results.”

At the same time, there are complexities in the sector. Many specialty insurers reported after-tax realized losses. What’s more, two of the larger carriers in the sector—Assurant and American Financial Group¨—saw significant charges relating to runoff business, Fitch noted. As a result, specialty insurers’ net income return on investment dipped to 8.9 percent in 2015 versus 10.3 percent in 2014, according to the report.

Still, specialty insurers in 2015 enjoyed an upswing in many additional metrics. The group’s aggregate combined ratio for 2015 improved to 93.4 versus 94.1 the previous year. According to Fitch, Assurant was the only specialty insurer in its compilation to report a 2015 operating loss, due to a higher expense ratio and an 18.4 percent plunge in earned premiums that negatively affected its results.

One benefit of specialty insurers is that they typically see fewer exposures to catastrophe losses versus other insurance segments. With that in mind, the sector reported 0.7 points of losses connected to catastrophes in 2015 versus 0.6 points in the previous year.

The North American P/C insurance sector reported $42.3 billion in operating earnings for 2015, down 7.2 percent over the previous year. Fitch said the result underscored both the “competitive operating environment and low investment yields that challenge insurers’ earnings growth potential.”

P/C insurers’ operating return on equity dipped to 7.6 percent in 2015 versus 8.4 percent in 2014. Fitch said that just 17 out of 45 companies in its compilation saw a double-digit return on investment in 2015.

U.S. P/C insurers in the compilation saw their 2015 aggregate combined ratio dip to 94.5 in 2015 compared to 93.4 in 2014. Competitive pricing drove the numbers, Fitch said.

Source: Fitch Ratings