RLI Corp sets results tone, citing “significant competitive pressure”

RLI Corporation, a traditional specialty insurance and reinsurance company, has set the tone as the first to report in the second quarter results season, citing the “significant competitive pressure” in catastrophe exposed business lines.

RLI underwrites a range of property insurance and reinsurance business, including commercial property insurance, earthquake and flood insurance and property facultative reinsurance. As a result, the re/insurer is operating in some of the areas of the market where companies have begun to focus in order to avoid some of the steepest rate declines in pure property catastrophe reinsurance business.

RLI Corp. Chairman & CEO Jonathan E. Michael commented; “Our property segment remained challenged, with premium down 9%, excluding crop, due to catastrophe exposed businesses experiencing significant competitive pressure.”

This is a story that we can expect to be told numerous times over the next few weeks as the results flow in. With pressures in catastrophe reinsurance remaining high and rates depressed, large reinsurance firms have been increasingly flowing capacity into commercial property and other catastrophe exposed lines.

It’s also worth considering the knock-on effect of initiatives that have seen some insurance-linked securities (ILS) or collateralized capacity diverted to support primary insurance lines, in catastrophe exposed property business as well, such as the Nephila Capital and State National arrangement.

As capital and capacity increasingly targets these business lines, the prospects for underwriters like RLI Corporation may not get any easier for some time.

With catastrophe reinsurance rates depressed and further declines likely while the industry remains awash with capital and catastrophe losses remain low, the spill over effect into catastrophe exposed property insurance could ramp up significantly.

Despite the pressures RLI Corp still beat analysts consensus, largely helped by its low combined ratio as catastrophe losses remain well below the average.

To a degree, insurer and reinsurer success is going to be dictated by their ability to navigate softening areas of the market, particularly if catastrophe losses were to pick up more towards their normal levels.

“Overall market conditions remain relatively flat,” Michael explained. “However, our underwriters are adept at navigating such conditions and we expect they will continue successfully identifying opportunities to support and grow our business while maintaining underwriting discipline.”

As we move through this results season we’re likely to see numerous reports of competitive pressures in commercial property lines that are catastrophe exposed and also some personal or homeowners as well. This business is going to become a target for displaced reinsurers and ILS capital, with the number of start-up fronting initiatives alone perhaps a warning of where the pressure is going to be most acutely felt.

We can expect to see further shifts of business mix, as reinsurers look to casualty lines or primary risks to offset price declines and pressure in catastrophe reinsurance. At the same time even the primary specialists are likely to begin to avoid certain areas of catastrophe exposed property business, as we can see with RLI today.

The expanding influence of lower-cost alternative reinsurance capital and ILS, combined with the continued build-up of excess capacity in traditional reinsurance markets, is certain to continue to pressure the market.

Hopefully the results season will also show up a few truly innovative new ventures, as some re/insurers find ways to outperform thanks to initiatives that enable them to gain an edge or to better navigate the pressured market than others.

With the tone now set by RLI we can wait to see who else is feeling competitive pressures in these catastrophe exposed insurance and reinsurance lines. The spill-over of pressure from reinsurance into insurance is set to continue as many companies have nowhere else to turn.