Pressure on rates is likely to continue in the coming quartersas the property and casualty industry remains flush with cash,according to a recent analysis.

ALIRT Insurance Research, in its “Year End 2013 P&C IndustryReview,” says its composite of insurers has seen financialstrength move “sharply higher” to 2006-2007 levels. ALIRT says,“This is not a financial environment that is traditionallyconducive to hard-market pricing, as strong balance sheets usuallyprovoke greater pricing competition among carriers.”

The firm says insurers have pointed to low interest rates,volatile weather and “implicitly, the slowly evaporating benefit ofprior-year reserve redundancies” when justifying higher rates. ButALIRT contends that while these factors are defensible to a certaindegree, “we wonder how long they will be viewed as valid byinsurance brokers/buyers given the industry's underlyingbalance-sheet strength coupled with anemic demand vis-à-vis currentcapacity.”

For 2013, ALIRT says its composite reported “appreciably better”underwriting and operating results compared to 2012, and surpluscontinued its upward trend.

On the following pages, ALIRT breaks down the industry'sperformance in several areas through charts and analysis based onthe reported results of its composite of insurers.

The ALIRT P&C Composite is comprisedof 50 large U.S. P&C insurers, representing about 53% oftotal industry net-written premium. The composite excludesprofessional reinsurers.

All charts are from ALIRT Insurance Research.

Underwriting and OperatingResults

Accident-year underwriting ratios improved for the second yearin a row. The reported combined ratio crept up a point from ALIRT's2013 nine-month analysis, but the accident-year combined ratioimproved by a point. The operating ratio, which takes bothunderwriting and investment income into account, improved by sixpoints compared to 2012 and by one point compared to the nine-monthanalysis.

Lower catastrophe losses played a part in the improving ratios,as did continuing reserve releases, although ALIRT points out thatthe benefit from reserve releases is declining. ALIRT says theimpact of higher rates was also an important factor. “Withcompanies now flush with cash and sitting on historically largesurplus positions, one wonders if rates can continue their upwardclimb,” says ALIRT

Premiums

Growing exposure units in a slowly improving economy as well asP&C rate increases contributed to positive growth for bothdirect and net premiums written across most lines. Net premiumgrowth spiked for the year, but ALIRT points out this is due to the“reorganization of large intercompany pooling arrangements atLiberty Mutual, Nationwide and W.R. Berkley” whereby the lead poolwriters retained more premium than in prior-year periods.

At plus-2.3%, direct-premium growth remained unchanged comparedto ALIRT's 2013 nine-month analysis. ALIRT says eight companies inits composite reported declining net premium in 2013.

Surplus and Premium Leverage

Higher underwriting profits, net-capital gains and “modestlyincreased” investment income drove strong surplus growth in 2013(above). The 7.9% growth was offset by $24 billion of net surpluspaid to parent organizations, with $11 billion of that coming fromAIG subsidiary National Union Fire.

ALIRT says 41 companies in its composite reported higher surplusin 2013, with five companies reporting increases of 25% or more,including two Liberty Mutual subsidiaries that received “sizeablesurplus infusions tied to the revamping of the Liberty Mutualpool.” Two Geico subsidiaries also reported surplus growth inexcess of 30%, and Travelers Casualty & Surety saw surplus growby 27.4%.

Nine companies reported surplus declines, ALIRT says, but onlytwo, both AIG subsidiaries, incurred losses of 10% or more.

The industry's ample capacity to write business is reflected inits low premium leverage (below).

Earnings

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Returns on equity (above) and earnedpremiums (below) continued an upward trend for the second straightyear, with a particularly strong growth in 2013 thanks to strongerunderwriting performance and higher investment income. Thecomposite's returns on equity and earned premium had dipped belowthe 15-year average in 2011 and 2012, but finished above that markin 2013. ALIRT says 12 companies in its composite reported pretaxreturns on earned premium that exceeded 20%, which six above30%.

But growth may not be quite as strong as it could be. Tied tothe industry's surplus position, ALIRT notes that difficultiesputting excess capital to use have resulted in lower returns onequity. “Given this,” says ALIRT, “some publicly traded holdingcompanies may continue to upstream surplus to pay out toshareholders,” while other parents may price more aggressively orseek acquisitions.

Earnings (continued)

Pre-tax net income (above) soared in 2013 as underwriting incomecrept into positive territory and investment returns (below)improved for the second straight year. Despite the improvement innet total investment returns (boosted by capital gains), lowinterest 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 2013nine-month analysis, but instead reserve releases came in at justunder $4 billion (above), moderating for the second straight year.The figure still outpaces reserve releases in both 2009 and2010.

ALIRT says $2.6 billion in reserves were released fromaccident-year 2012. The firm says 97% of aggregate reserve releaseswere reported by personal lines-predominant carriers in 2013. ALIRTsays $25 billion in reserves have been released since calendar-year2004, driven by “relatively large and consistent releases incalendar-years 2006-2013. Meanwhile, $28 billion of reserves wereadded 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 financialperformance. The firm says the relatively high scores “reflect thecurrent strong financial profile of the broad P&C industry.