The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
If the biggest insurance companies were university students receiving their midterm marks, there would be a lot of celebrating as they headed into reading week. Across the board – except perhaps one or two exceptions of insurers whose problems have been brewing for a while – these ‘students’ would be at the top of their classes for their Q4 2019 and full year financial results. However, a storm is brewing for the years ahead, even as the skies look clear now.
Among the pack of high achievers, some companies stood out. AIG saw a significant turnaround, announcing a full year net income of US$3.3 billion – a dramatic improvement from a net loss of US$6 million the year prior. Meanwhile, Beazley reported profit before tax of US$267.7 million – a big jump from last year’s US$76.4 million – and gross written premium growth of 15%. QBE was also among the straight-A students, reporting a net profit spike of 41% from the previous full year, up to US$550 million from US$390 million.
Other companies reported respectable numbers, too. Marsh & McLennan Companies (MMC) exceeded expectations in its fourth quarter and full year 2019 results, after what president and CEO Dan Glaser described as “a historic year.” The firm grew total revenue by 11% and generated 4% underlying growth while increasing its adjusted operating income by 14% and its adjusted earnings per share (EPS) by 7%. Marsh, the insurance brokerage arm of MMC, also saw full year revenue growth of 17%, which was up to US$8.01 billion from US$6.87 billion the year before.
Not to be left off of the honour roll, CNA Financial revealed a net income of US$273 million bringing its full year total to US$1 billion, Zurich Insurance Group reported a 16% lift in operating profit for the year, and Willis Towers Watson’s results went up across the board as total revenue increased by 6% to US$9.04 billion for the year, in addition to the firm getting a 5% organic revenue boost across all businesses.
Behind these financial grades, underwriting discipline and the streamlining of operations were the metaphorical late night study groups and increased participation in classrooms that helped insurance companies’ performance improve over previous years’ spottier results. However, they also had another element to thank as natural catastrophes took a backseat in 2019, giving the industry some breathing room following a disaster-filled 2017. Insured losses from major natural catastrophes in 2019 totalled around US$53 billion or 18% lower than the annual average since 2011, according to a report by Willis Re. The impacts are evident in the 2019 results – just look at CNA’s net catastrophe losses, which were US$51 million for Q4 2019 compared with US$146 million for Q4 2018.
In a similar vein, AIG’s reduced combined ratio was credited to lower catastrophe losses, as well as continued underwriting and reinsurance actions, and expense discipline, alongside a return to underwriting profitability in general insurance. Losses also played a role for Beazley, which despite its overall success saw its combined ratio stay at 100% for the year compared to 98% in 2018 because of “an adverse claims experience across several lines of business,” according to CEO Andrew Horton.
On the other hand, high performer QBE benefitted from an upgrade to core capabilities thanks to cell reviews and its Brilliant Basics program (a focus on improving underwriting quality, pricing and claims handling). Zurich, too, saw some streamlining, with leading man Mario Greco highlighting the fact that the group is now “simpler, more agile and more efficient.” Nonetheless, weather and natural disasters did take a toll on QBE’s financials. The insurer reported a FY19 combined operating ratio of 97.5% above the FY19 target range of 94.5%-96.5%, primarily due to adverse weather conditions that severely impacted its US crop insurance business. QBE’s results were also hurt by claims coming from the Australian bushfires.
It’s clear then that after a stellar results season, insurance companies aren’t immune to the effects of natural disasters when a comparatively lax catastrophe year still brought the intense fires in Australia and several other notable events, such as Japan’s Typhoon Faxai in September and Typhoon Hagibis in October, and Hurricane Dorian in the US. And among those who performed well, limiting exposure to high-hazard CAT events in part helped them succeed. As a result, like that strict parent who sees a report card full of As and still demands more, it’s important to remember that as the climate changes, there’s a greater possibility of severe events occurring with more frequency and in turn, these clear skies might not last for much longer.
With some experts saying that the property insurance market is hardening along with other lines of business, there’s not a ton of wiggle room looking ahead. Many commercial and personal lines insureds are already finding it difficult to find property coverage at a reasonable price, with the perils of flood, hail, and wildfire looming overhead.
As insurance companies continue to whittle their underwriting discipline, the challenge of finding insurance to prevent significant losses at the insured level will probably be amplified. That also means more challenges for brokers and agents navigating hard marketplaces to secure coverage for their clients. At the same time, the reinsurance market is forecasting tough times ahead, with Swiss Re’s outlook for the current re/insurance market suggesting that for the reinsurance market to remain sustainable, the upward trend in rates has to continue.
So, as the world’s biggest insurance companies celebrate their report cards, the insurance industry more broadly needs to remember that there are years of finals ahead. Moreover, one key question will probably keep popping up on their exams, best summed up by one climate law expert from the Peter A. Allard School of Law at the University of British Columbia who recently spoke with Insurance Business.
“The question is: Who bears the entire [financial] burden of what’s happening?” said Dr. Janis Sarra. Who indeed?