December 11, 2002
Conning Research: Small P-C Insurers' Underwriting Success Trumped by Lagging Investment Results
- Second Study in a Series from Conning Research on Small P-C Insurers
(Hartford, CT) -- The competitive advantage that small property-casualty (P-C) insurers achieved in underwriting at the end of the last decade was nearly offset by lower investment returns, according to a new study from Conning Research & Consulting, Inc.
"Small Insurers - Trumped by Investments," the second study from Conning Research in its series on small insurers, reports that the returns earned by its small-insurer universe of 679 companies lagged those of the 46-company large-insurer benchmark group during the period from 1996 to 2000.
"During that five-year span, large P-C insurers earned an average net return on investment of 8.25%-almost 1.4 percentage points higher than the 6.87% return earned by the small insurer universe," said Jack Gohsler, Conning's Senior Vice President and one of the study authors. "The large-insurer benchmark group's comparative success is the combined result of a more aggressive asset mix and higher returns in every major asset class."
In the first study, Conning reported that its small-insurer universe had substantially higher direct premium growth than the benchmark group of the largest P-C insurers-24.7% versus 12.8%, between 1996 and 2000. The small-insurer universe also achieved significantly better underwriting results, with a 5-year average combined ratio of 104.3% versus 106.0% for the large-insurer benchmark group.
A closer examination of the data provides three insights relating to investment performance. First, large P-C insurers were expected to leverage their size and scale to achieve significantly lower investment expense ratios. Surprisingly, the opposite occurred, according to Gohsler. The small insurer universe had an average investment expense ratio of 0.46% during the 1996-2000 period, versus 0.57% for large insurers. Many small insurers appear to have taken what Conning terms the "minimalist" approach to investment management.
Second, the large-insurer benchmark group aggressively rode the bull market of the late 1990s more successfully than their small insurer counterparts. As a group, they allocated more assets to common stocks and also earned a higher average return on common stocks.
Finally, there was a great deal of variation in the results of companies comprising the small-insurer P-C universe in terms of investment returns, expense ratios, and asset mix. Conning's segmentation analyses found, for example, that the higher net returns of the largest companies in the small insurer universe were mainly the result of lower investment expenses and not higher gross returns. Also, mutual insurers and stock insurers achieved nearly identical five-year average net investment returns using somewhat different investment approaches.
Conning conferred upon 35 companies in the small-insurer universe its "Top Earners" designation-recognizing them for consistently earning high investment returns. Remarkably, these 35 companies earned an average five-year gross return of 10.24%, versus 7.32% for the entire small-insurer universe and 8.85% for the large-insurer benchmark group. Their five-year average investment expense ratio was a low 0.32%, resulting in an average five-year net return of 9.92%. Despite the lower overall investment returns earned by the small-insurer universe, there were some stars among small P-C insurers.
"Small Insurers - Trumped by Investments" is available from Conning Research & Consulting, Inc., by calling toll free (888) 707-1177 or (860) 520-1521. A complete listing of all Conning research products can also be found by visiting the company's Web site at www.conning.com.
About Conning Research & Consulting
The Conning name has represented excellence in independent insurance industry research for more than 90 years. As a result of its wealth of experience and intimate knowledge of the insurance industry, Conning understands industry challenges and opportunities and can provide in-depth insights and analyses. Conning provides both public and proprietary research as well as consulting services to the financial services industry. Conning has offices in New York and Hartford.
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