The property and casualty insurance industry's underwriting andoperating profitability improved through the first nine months of2013 compared to 2012 thanks to lower catastrophe losses and firmerpricing, according to ALIRT Insurance Research.

Additionally, surplus growth remained solid—although not quiteas strong as 2012—among the insurers ALIRT follows.

The challenge for the industry, according to ALIRT, is that ithas too much capital and too little demand for that capital, allwhile in a “persistent low-rate environment.”

The firm says this challenge presents an opportunity forinsurers willing to embrace change, particularly with respect tonew analytical tools to mine big data, allowing insurers to bettertarget and price risk and determine their most profitabledistribution relationships.

“One might even ask if some of this new data technology isalready affecting the current pricing cycle,” ALIRT says, addingthat, if so, the industry may see a “soft landing” and a “morerational era of pricing in the years ahead” rather than the wildswings seen in a traditional market cycle.

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 comprised of 50 largeU.S. personal and commercial lines P&C insurers representingapproximately 53 percent of total industry net written premium. Thecomposite excludes professional reinsurers.

All charts are from ALIRT Insurance Research.

Accident-year underwriting ratios, which showed improvement in2012 compared to 2011, have improved at an even greater paceso far in 2013. ALIRT notes that reported results again benefittedfrom “substantial reserve releases. The underwriting ratios reacheda multi-year high in 2011 due in part to substantialcatastrophe/storm losses that year.

ALIRT says the underwriting results for 2013 so far are betterthan results in the previous five years and appear to be on animproving trend. The firm says this is an example of an “anomalous environment” where insurers continueto seek rate in the face of strong capital positions, low demandfrom insureds and strong underwriting profitability.

Direct-premium growth, which had flattened compared to 2012through the first half of 2013, has now slowed a bit through thefirst nine months of the year. Net-premium growth, though, hasspiked, although ALIRT says this is due to the reorganization ofalarge intercompany pooling arrangements at Liberty Mutual,Nationwide and W.R. Berkley “whereby the lead pool writers—membersof the ALIRT composite—retained far more premium than in prior-yearperiods.”

Normalizing for the pool changes, ALIRT says it still sees apositive trend for both direct- and net-premium growth, reflectinggrowing exposures as the economy improves as well as positive ratemovement.

ALIRT says nine-month surplus (above) grew on strong operatingearnings and net-capital gains as equity markets rose sinceyear-end, offset by $18.9 billion (among its composite) of netsurplus paid to parent organizations and other one-time changes tosurplus of $4.1 billion. ALIRT says the majority of returnedcapital came from AIG subsidiary National Union Fire ($11 billion),while the majority of miscellaneous charges came from State Farm($7.7 billion tied mostly to increased pension funding). On anannualized basis, ALIRT notes that while surplus growth is solid,it is below the annual median growth rate over the past decade.

Premium leverage (below) has risen through the first nine monthsof the year compared to 2012, but ALIRT says it remains low,“reflecting ample financial capacity to write business.”

Returns-on-equity (above) and earned premiums (below) fellsharply in 2011 after a bad year for catastrophe losses, but haverecovered since. ALIRT says 2013, on an annualized basis, has seena marked improvement in this area due to stronger underwritingresults. So far, 2013's pre-tax return-on-equity has risen abovethe 15-year average for the first time since 2009, and pre-taxreturn-on-earned-premium has risen above the 15-year average forthe first time since 2010.

The ALIRT composite showed a small underwriting profit (above)of $3.2 billion through the first nine months of the year,continuing the improvement seen since 2011, when the Compositereported an underwriting loss of $17.3 billion. Last year, the lossmoderated to $9.4 billion.

Investment yields (below) continue to be dampened by thelow-interest-rate environment, but ALIRT notes that the net-totalreturn was boosted by capital gains in 2012 and so far in 2013 asequity markets surged.

Despite talk of an inevitable easing of reserve development,reserve releases (above)—which had in fact eased in 2009 and2010—have again reached 2008 levels so far in 2013.

The favorable impact of reserve development on the composite'scombined ratio (below) through the first nine months of the yearwas 3.1 points, more than even 2008's 2.5 points.

ALIRT says its P&C Composite Index, which tracks industryfinancial performance, flattened through the six- and nine-monthperiods this year after rising sharply in the first quarter. Butthe index remains “steady and strong,” ALIRT notes, reflecting thecurrently strong financial profile of the broad P&Cindustry.