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US P&C Industry Landscape Nov, 2010

Š 2010 Sutherland Global Services Inc., All rights reserved. Privileged and confidential information of Sutherland Global Services Inc.www.sutherlandglobal.com


US P&C Industry Landscape Client • The client is a leading provider of Non-Life Insurance based outside U.S., seeking a quick overview of the U.S. P&C industry to help formulate market expansion strategy

Project Scope • Key objectives of the study were to understand the U.S. P&C insurance market, identify key trends and challenges of the industry, identify key players of the P&C insurance industry in the U.S., identify key macroeconomic indicators for the insurance industry, and compare select players on the basis of financial performance

Sutherland’s Solution • SGS conducted extensive secondary research to size the U.S. P&C insurance industry, identified key players and major challenges of the industry and also identified macroeconomic indicators impacting the insurance environment. Key performance parameters were also identified • All financial and qualitative databases to which SGS holds subscription, were extensively used to identify key players in the insurance industry across U.S. as well as to collate the financial information for them

• Benefits to the Client • The project provided significant and exclusive intelligence to the client with regards to the overall market and competitive landscape therein • Identification of key challenges and trends helped client assess its strategy and take corrective course of action where required

www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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Executive Summary

About The Industry The U.S. P&C industry is currently in a soft-market phase, and has nearly completed a round trip through this decade - hitting the bottom of a soft market in 2000-01, then emerging into a hard market phase from 2003-07, and again hitting the soft-market in 2008-10, with no discernible catalyst for significant market turnaround in the immediate future

Analysts believe that companies need to follow a multi-faceted strategy to capitalize on this soft-market, and carry out groundwork not only to sustain themselves, but also to emerge as leaders when the markets bounce back •

Evaluate and diversify into underserved markets and geographies

Companies such as WR Berkley, Markel etc. have begun expansion into geographies such as Australia, Brazil, certain Scandinavian territories, China etc. The Chinese P&C industry is estimated at ~ $42.1bn in 2009, and with a CAGR of 19% over the past 10 years

Realign investment portfolios to get higher yields and offset lower underwriting incomes, while maintaining optimal risk levels

Leverage technologies such as SOA, Analytics etc. to proactively manage interactions with networks and customers, differentiate the brand while optimizing customer profitability, improve distribution capabilities and use customer intelligence for better relationship management

www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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Industry Overview The U.S. P&C industry is currently in a soft-market phase, and has nearly completed a round trip through this decade hitting the bottom of a soft market in 2000-01, then emerging into a hard market phase from 2003-07, & again hitting the soft-market in 2008-10, with no discernible catalyst for significant market turnaround in the immediate future •

US P&C Industry witnessed double whammy post the credit crisis - capital build up and lower demand, further aggravated by reducing investment incomes. E&S segment experienced a larger impact, with 15.4% decline in premiums over 2007-09, as compared to a 4.9% decline for the P&C industry (Refer Annexure 1 for further details) SGS research shows that entry of new players and desire to gain market share led to price discounts ranging from 10% to 30%. Recently, prices have almost flattened, but there is no discernible catalyst for significant market turnaround in the immediate future While the top 25 P&C companies contribute ~70% of the overall P&C premiums, less than half of them have significant presence in Surplus Lines, and of these, four companies that gained significant market share followed the inorganic route (Refer Annexure 2,3 for further details) E&S premiums declined for most companies from 2008 to 2009, except for a few companies like Ironshore, QBE etc. that used the market disruption to gain market share by investing and making acquisitions. Ironshore followed a three pronged strategy - M&A, Capital raising and leadership recruitment to gain market share. While this is still a comparatively new and small company, its aggressive growth strategy can make it a strong competitor (Refer Annexure 4, 5, 6 for further details) Companies followed the stock buy-back and divided payout route to reward shareholders instead of venturing into M&A activity as seen in prior years (Refer Annexure 7 for further details) We believe that companies need to follow a multi-faceted strategy to capitalize on this soft-market, and carry out groundwork not only to sustain themselves, but also to emerge as leaders when the markets bounce back • Evaluate and diversify into underserved markets and geographies • Companies such as WR Berkley, Markel etc. have begun expansion into geographies such as Australia, Brazil, certain Scandinavian territories, China etc. The Chinese P&C industry is estimated at ~ $42.1bn in 2009, and with a CAGR of 19% over the past 10 years • Realign investment portfolios to get higher yields & offset lower underwriting incomes, while maintaining optimal risk levels • Leverage technologies such as SOA, Analytics etc. to proactively manage interactions with networks and customers, differentiate the brand while optimizing customer profitability, improve distribution capabilities and use customer intelligence for better relationship management

Source: Insurance Information Institute and SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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Surplus lines, constituting ~ 8% of overall P&C, has been recently facing tremendous pressure in terms of volumes as well as margins Annexure 1 P&C Insurance Industry and E&S Segment - NWP bn $

Key Observations •

500 425.5 35.9

400

443.5

440.6

434.5

37.8

38.2

33.8

E&S premiums declined by 4.4% as compared to a 3.6% decline for the overall P&C industry across 2008-09, driven

419

largely by the following reasons:

32.3

300

Competition from Standard/Admitted Specialty players with similar or lower pricing, and flexible terms and conditions

200

100

Emergence of new competition with substantial capital and a desire for top-line growth – e.g., Ironshore and QBE

0

2005

2006

2007

2008

scaled-up their GWPs through acquisitions in E&S and

2009

other lines of P&C business between 2008-10 P&C NWP

E&S NWP

the P&C, due to the surplus industry’s freedom to set pricing

P&C Industry and E&S Segment - Combined Ratios Combined Ratio % 120 108.0

110.3

107.2

110

100.1

100 90

105

98.9

105.1

101.2 92.4

105.3

The gap between combined ratios of E&S and P&C industry, has been decreasing over the past few years due to increased competition from admitted players and the softening

95.5

of the market

99.8 93

92.2

93.5

’03

’04

93.2

80

79.4 76.1

93.6

70 ’99

and coverage terms •

115.7

Combined ratio of surplus lines has traditionally outperformed

’00

’01

’02

’05

’06

’07

’08

One or more catastrophic events measuring a loss estimate to the tune of $50 to 100bn can be expected to lead a sharp correction in the prices

P/C Industry

E&S

Source: Insurance Information Institute and SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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While the top 25 P&C companies contribute ~70% of the overall P&C premiums, less than half of them have significant presence in Surplus Lines … Annexure 2 Changes in P/C Industry Market Share 1999-2009 50.0

                         2009 Market Share

1999 Market Share

12

2009 NWP 9

30.0 6 20.0

% Market Share

2009 NWP ($ bn)

40.0

3 10.0

 significant* presence in Surplus Lines  Indicates that company has

* Significant presence in E&S indicates companies with NWP >$200 mn

Metropolitan P&C Group

Cincinnati Insurance Group

Companies that garnered most of the increase in market share (~30%) between the period of 1999 - 2009

FM Global

Transatlantic Re

W.R. Berkley

ACE Group

Erie Insurance Group

Munich Re America

Auto Owners Group

Zurich North America

Fireman’s Fund

American Family

CNA

Chubb

Hartford

USAA

Farmers Group

Progressive

Nationwide

Travelers

Liberty Mutual

American International Group

Berkshire Hathaway

Allstate

0 State Farm

0.0

Indicates that company does not have significant* presence in Surplus Lines

Source: Highline Data, Fitch Ratings, SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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… of these, four companies that gained significant market share followed the inorganic route Annexure 3 Liberty Mutual (2.1%*)

Berkshire Hathaway (2.0%*)

Travelers Cos. (1.9%*)

American International Group (1.0%*)

Net Premium earned 1999 ($M)

10,537#

14,306

5,103

31,024

Net Premium earned 2009 ($M)

27,791

28,560

21,418

64,702

CAGR

10.2%

7.2%

15.4%

7.6%

Acquisitions made

- Ohio Casualty corporation (May 2007) for $2.7B in cash - Safeco Insurance (April 2008): $6.2B

- American All-Risk Insurance Services (AARIS) - July 2006 - American Commercial Claim Administrators (ACCA) - July 2006

- Merged with The St. Paul Companies, Inc. in 2004

- Acquired GE Edison Life Insurance Company in Japan and GE's U.S.based auto and home insurance business in 2003 for $2.15B

Impact of acquisition (major)

The net premium earned grew 10% and 17% in 2007 and 2008 respectively

The net premium earned grew 31% in 2007 compared to 2006

Net premiums increased 52% in 2004 vs. 2003

Net premiums increased 22% in 2004 compared to 2003

* Increase in market share for the period 1999-2009; # The net premium earned for Liberty Mutual is for 2001 since the number for 1999 is not available Source: Company Annual Reports, Bloomberg, SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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E&S premiums declined by 4.4% from 2008 to 2009; Companies like Ironshore and QBE used the market disruption to gain market share by investing and making acquisitions Annexure 4 $ mn

Berkshire Hathaway Ins. Group

Zurich Insurance Group

Markel Corporation Group

ACE Ltd Group

WR Berkley Group

Allianz Insurance Group

Argo Group

RLI Insurance Group

Nationwide Group

AXIS Capital Group

XL America Group

Travelers Group

Chubb & Son Group

Arch Capital Group

First Mercury Financial Group

CNA Insurance Group

HCC Insurance Holdings Group

Allied World Assur Holding Group

Munich American Holding Group

Max Specialty Group

Endurance Group

Ironshore Group

QBE Insurance Group $ mn 500

Alleghany Group

US E&S Premiums 2008*

1,800 1,600 1,400 1,200 1,000 800 600 400 200 0

400

300 200 100 0 -100 -200 -300

Companies that gained volumes – mostly through acquisitions

Change in US E&S Premiums in 2009

* Chartis Group has been excluded from the list for better graphical representation. It had Direct Written Premiums of $6,142mn in 2008, and a decrease of $1,089mn in 2009 Source: Highline Data and SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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Thank You

www.sutherlandglobal.com Š 2010 Sutherland Global Services Š 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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