Pressure on rates is likely to continue in the coming quarters as the property and casualty industry remains flush with cash, according to a recent analysis.
ALIRT Insurance Research, in its “Year End 2013 P&C Industry Review,” says its composite of insurers has seen financial strength move “sharply higher” to 2006-2007 levels. ALIRT says, “This is not a financial environment that is traditionally conducive to hard-market pricing, as strong balance sheets usually provoke greater pricing competition among carriers.”
The firm says insurers have pointed to low interest rates, volatile weather and “implicitly, the slowly evaporating benefit of prior-year reserve redundancies” when justifying higher rates. But ALIRT contends that while these factors are defensible to a certain degree, “we wonder how long they will be viewed as valid by insurance brokers/buyers given the industry's underlying balance-sheet strength coupled with anemic demand vis-à-vis current capacity.”
For 2013, ALIRT says its composite reported “appreciably better” underwriting and operating results compared to 2012, and surplus continued its upward trend.
On the following pages, ALIRT breaks down the industry's performance in several areas through charts and analysis based on the reported results of its composite of insurers.
The ALIRT P&C Composite is comprised of 50 large U.S. P&C insurers, representing about 53% of total industry net-written premium. The composite excludes professional reinsurers.
All charts are from ALIRT Insurance Research.
|Underwriting and Operating Results
Accident-year underwriting ratios improved for the second year in a row. The reported combined ratio crept up a point from ALIRT's 2013 nine-month analysis, but the accident-year combined ratio improved by a point. The operating ratio, which takes both underwriting and investment income into account, improved by six points compared to 2012 and by one point compared to the nine-month analysis.
Lower catastrophe losses played a part in the improving ratios, as did continuing reserve releases, although ALIRT points out that the benefit from reserve releases is declining. ALIRT says the impact of higher rates was also an important factor. “With companies now flush with cash and sitting on historically large surplus positions, one wonders if rates can continue their upward climb,” says ALIRT
|Premiums
Growing exposure units in a slowly improving economy as well as P&C rate increases contributed to positive growth for both direct and net premiums written across most lines. Net premium growth spiked for the year, but ALIRT points out this is due to the “reorganization of large intercompany pooling arrangements at Liberty Mutual, Nationwide and W.R. Berkley” whereby the lead pool writers retained more premium than in prior-year periods.
At plus-2.3%, direct-premium growth remained unchanged compared to ALIRT's 2013 nine-month analysis. ALIRT says eight companies in its composite reported declining net premium in 2013.
|Surplus and Premium Leverage
Higher underwriting profits, net-capital gains and “modestly increased” investment income drove strong surplus growth in 2013 (above). The 7.9% growth was offset by $24 billion of net surplus paid to parent organizations, with $11 billion of that coming from AIG subsidiary National Union Fire.
ALIRT says 41 companies in its composite reported higher surplus in 2013, with five companies reporting increases of 25% or more, including two Liberty Mutual subsidiaries that received “sizeable surplus infusions tied to the revamping of the Liberty Mutual pool.” Two Geico subsidiaries also reported surplus growth in excess of 30%, and Travelers Casualty & Surety saw surplus grow by 27.4%.
Nine companies reported surplus declines, ALIRT says, but only two, both AIG subsidiaries, incurred losses of 10% or more.
The industry's ample capacity to write business is reflected in its low premium leverage (below).
Earnings
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Returns on equity (above) and earned premiums (below) continued an upward trend for the second straight year, with a particularly strong growth in 2013 thanks to stronger underwriting performance and higher investment income. The composite's returns on equity and earned premium had dipped below the 15-year average in 2011 and 2012, but finished above that mark in 2013. ALIRT says 12 companies in its composite reported pretax returns on earned premium that exceeded 20%, which six above 30%.
But growth may not be quite as strong as it could be. Tied to the industry's surplus position, ALIRT notes that difficulties putting excess capital to use have resulted in lower returns on equity. “Given this,” says ALIRT, “some publicly traded holding companies may continue to upstream surplus to pay out to shareholders,” while other parents may price more aggressively or seek acquisitions.
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Earnings (continued)
Pre-tax net income (above) soared in 2013 as underwriting income crept into positive territory and investment returns (below) improved for the second straight year. Despite the improvement in net total investment returns (boosted by capital gains), low interest rates dampened net investment yield.
Reserves
Reserve releases for ALIRT's composite appeared set to reach the $6 billion mark for the first time since 2008 in ALIRT's 2013 nine-month analysis, but instead reserve releases came in at just under $4 billion (above), moderating for the second straight year. The figure still outpaces reserve releases in both 2009 and 2010.
ALIRT says $2.6 billion in reserves were released from accident-year 2012. The firm says 97% of aggregate reserve releases were reported by personal lines-predominant carriers in 2013. ALIRT says $25 billion in reserves have been released since calendar-year 2004, driven by “relatively large and consistent releases in calendar-years 2006-2013. Meanwhile, $28 billion of reserves were added to balance sheets from 2001-2005.
The impact of reserves on the combined ratio for 2013 (below) moderated compared to both 2011 and 2012.
ALIRT Commercial Lines Index and Personal Lines Index
ALIRT's P&C Composite Index measures industry financial performance. The firm says the relatively high scores “reflect the current strong financial profile of the broad P&C industry.
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