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Ice dams torpedoed New England homeowners writers' loss ratios in otherwise benign 2015

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Ice dams torpedoed New England homeowners writers' loss ratios in otherwise benign 2015

The U.S.property and casualty industry continued to produce historically favorable resultsin the homeowners multiperil line during 2015, but as is typical in a business proneto catastrophes, geography served as a key factor in determining the loss ratiosachieved by individual companies.

As revealedin S&P Global Market Intelligence's recently published report on 2015 homeowners market share, the P&C industry'sdirect incurred loss ratio and net loss ratio on U.S. homeowners business totaled49.89% and 52.90%, respectively. It marked the third consecutive year in which thedirect loss ratio totaled less than 50%, a result the industry had only achievedonce between 1996 and 2012. Homeowners directincurred loss ratios for the two largest homeowners writers, the group led by and Allstate Corp., totaled48% and 46%, respectively, and in both cases represented improvement from 2014.

For companieswith a heavy concentration of homeowners business in New England, however, 2015served as an especially challenging year as the industry confronted unusually severewinter storm activity during the first quarter. Massachusetts and Rhode Island representedthe biggest trouble spots within the region and the nation as a whole, accordingto a review of data reported on the state pages of annual statements.

The industry'sdirect incurred loss ratio on Massachusetts homeowners business of 109.1% followedthree years of results in a tight range of between 33.4% and 35.1% and a nine-yearperiod in which the ratio had been below 40%. The commonwealth's 2011 homeownersdirect incurred loss ratio of 80.5% stands as the worst result achieved by the industrybetween 1996 and 2014. The commonwealth's five-year average homeowners direct incurredloss ratio for 2011 through 2015 was 58.5%.

The homeownersdirect incurred loss ratio in Rhode Island also compared unfavorably from an historicalperspective. At 91.8%, the 2015 result marked an increase from 36.2% in 2014. LikeMassachusetts, the ratio had been under 40% seven times during a nine-year periodended in 2014. And, prior to 2015, it had only equaled or exceeded 54% a singletime between 1996 and 2014. Its five-year average ratio is 53.1%.

SouthDakota was the only other state in which the industry's homeowners direct incurredloss ratio equaled or exceeded as little as 66% during 2015. Its ratio of 83.5%marked improvement from results in excess of 100% in both 2013 and 2014, and itcompared favorably to the five-year average result of 95.7% — the highest in thenation by nearly 6 percentage points. The bordering states of North Dakota and Nebraska,conversely, had homeowners direct incurred loss ratios of less than 40% in 2015.Nebraska rebounded after suffering from what one insurer described as the worststorm season in the state's history in 2014 as evidenced by a homeowners directincurred loss ratio of 131.7% for that year.

Giventhe extent to which results in Massachusetts and Rhode Island exceeded the nationwidefigure, it should come as little surprise that carriers with homeowners businessconcentrated in those states produced atypically high direct incurred loss ratiosin that line.

A totalof 35 individual P&C entities generated 50% or more of their homeowners directpremiums earned from the combination of Massachusetts and Rhode Island in 2015.Their homeowners direct incurred loss ratio, on an aggregate basis, totaled 96.5%in all states and approached 111% in the combination of the two New England states.

,which generated 60.8% of its 2015 homeowners direct premiums earned from Massachusettsand Rhode Island, produced direct incurred loss ratios in the homeowners line of100.6%, overall, and 135.8% in the two New England states.

SNL Image

The management'sdiscussion and analysis section of the 2015 annual statements of members of the Andover Cos. pool, includingMerrimack Mutual Fire, provided context regarding the challenges the winter of 2015produced.

"TheNortheast experienced one of the worst winters ever with record snowfall throughoutthe region," the filing said. "For example, Boston had 110.6 inches ofsnow for the winter season. The previous record was 64.8 inches." More than94 inches fell during a stretch from Jan. 24, 2015, through Feb. 22, 2015, alone,the filing added.

"Thisamount of snow produced the most losses we have ever experienced," the AndoverCos. reported. It estimated that water damage losses from ice dams totaled $160million on a gross basis and $104 million net of reinsurance recoveries.

Only11 SNL P&C groups and top-tier entities with at least $1 million in 2015 directpremiums earned in the homeowners line generated 50% or more of that business fromthe combination of Massachusetts and Rhode Island. Seven of them produced homeownersdirect incurred loss ratios of more than 100% in the two states in 2015; four hadhomeowners direct incurred loss ratios of more than 100% on a total-filed basis.

Amongthem, the Norfolk & Dedham Group posted a homeowners direct incurred loss ratioof 111.4%, overall, and 132.3% in the combination of Massachusetts and Rhode Island.Group member Dorchester Mutual InsuranceCo., which generated nearly all of its homeowners business from Massachusetts,produced a direct incurred loss ratio in that line of 153.5%.

"Thispast winter served as another reminder of how volatile a property business can beand the need to pursue rate adequacy, appropriate reinsurance coverage and exposurecontrols," the group said in its 2015MD&A. The Massachusetts homeowners book "was particularly unprofitablelast year due to unprecedented ice dam and winter related losses," the groupadded, noting that it had taken "modest" rate increases in that line during2015 and planned to put additional hikes in place by mid-2016.

,which had been hit hard by the rough Nebraska weather in 2014, is well aware ofthe volatility that can be associated with the business. The company reported inits 2015 MD&A thatthe year brought "a return to some sort of 'normalcy," but, the companyadded, "Normalcy has become a much more complex and imprecise term" inlight of its 2014 experience.

"Whatis a reasonable expectation for annual storm losses after you have experienced astorm season that our computer models suggest has a 0.3% probability of happeningagain next year?" the filing said. "That's three-tenths of one percent!Once every 300 years! Do we just throw out and ignore our experience in 2014 aswe attempt to recalibrate our expectations for annual storm losses going forward,or do we roll up our sleeves and go about the hard work of taking the experienceof 2014 and using it to make us wiser about our storm loss expectations for thefuture."

FarmersMutual of Nebraska said it chose the latter and its rhetorical questions are onesa number of homeowners carriers have been asking themselves in recent years.

Theremay be no better example of the divergence between the headlines associated withthe work product of catastrophe models and recent results than that provided bythe state of Florida. After dodging a landfall-making hurricane for a 10th consecutiveyear, the Sunshine State delivered the nation's lowest homeowners direct incurredloss ratio in 2015 at just 28.5%, excluding insurer of last resort , andthe second-lowest at just under 30% when including the state-run carrier.

Floridaproperty insurers have long kept a wary eye to the sky, knowing that it is a matterof when, not if, a hurricane will hit. And non-hurricane-related challenges threatento drive up the homeowners direct incurred loss ratio in 2016 even if the hurricane-freestreak reaches an 11th year. A handful of publicly traded Florida companies reportedin recent days that their first-quarter results had been adversely impacted by anunusual amount of tornadic activity and other severe weather in the state.