By the Numbers: P&C Industry's First Quarter 2014 in Charts

ALIRT says, "What this tells us is that while weak investment income may be a convincing rationale for the firmer pricing in the personal-lines segment—where it is, ironically, not often cited—it is not for the commercial-lines segment, at least not any longer."

The firm contends commercial-lines rates have been rising because loss ratios had deteriorated to the point where greater discipline was needed in 2011. Another reason, according to ALIRT: "There is so much capital sloshing around the commercial-lines industry that earnings need to be higher for carriers—especially those owned by publicly traded parents—to make target returns on equity."

ALIRT concludes, "Investment income has been a good red herring for the commercial-lines industry, but brokers and insureds are likely getting smart to the real reasons behind the firming pricing and will perhaps be more skeptical of future increases…."

In Q1, large weather losses impacted results for the carriers in ALIRT's composite of insurers. Surplus continued to rise, as did rates, albeit at a moderating pace. 

On the following pages, ALIRT breaks down the industry's performance, based on its composite, 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

Weather-related losses took their toll on insurers' underwriting results in Q1 2014. Carriers reported a combined ratio just barely under 100, at 99.6, compared to 97.5 in 2013 and 94.8 in last year's first quarter.  

The accident-year combined ratio, which removes the impact of prior-year reserve adjustments, climbed to 104 compared to 99 in 2013 and 99.4 in 2013's first quarter, showing the continued benefit companies are seeing from reserve releases. 

Explaining the Q1 deterioration, ALIRT says, "On Q1 analyst calls, insurer-management teams cited the impact of 'severe winter weather' on both personal and commercial lines of business—higher incidence of heating-related fires, pipes bursting, roof collapses, slips and falls, physical damage to vehicles, etc."

The nearly seven-point deterioration in the operating ratio reflects both weaker underwriting results and a decline in investment income, ALIRT says.

ALIRT notes the underwriting and operating results exclude results for two Geico subsidiaries due to reinsurance/inter-company pooling transactions that resulted in these companies reporting negative net-premium written.

Premiums 

Net-written premiums dropped sharply, but ALIRT notes this is largely due to a repooling arrangement at AIG as well as "the large amount of premium that flowed into Berkley Insurance Company in the year-prior period, as that company assumed most business from the group's other domestic insurers, including 100% of prior-period liabilities. 

In fact, when net-written premiums spiked for the composite in 2013, ALIRT noted the role played by reorganization of large inter-company pooling arrangements. Adjusting for these arrangements, ALIRT estimates the composite's net-written premiums would have grown by about 1% or 2% in Q1, "continuing a positive, though waning, trend that reflects growing exposure units as the U.S. economy improves as well as positive rate movement across most lines of P&C insurance."

Direct-premium growth picked up slightly for the period, climbing by 2.6% over the prior-year's first quarter. ALIRT says the velocity of rate increase "has steadily moderated over the past year, but is still positive." The firm adds, "However, given the industry's current underutilized capital position, somewhat slack demand and sharply falling reinsurance rates, this trend of ebbing price increases may well continue over the coming near-to-medium term."

Surplus and Premium Leverage

Q1's 2.1% growth in surplus (above) is "on par with growth rates over the past couple of years," says ALIRT. The growth was due, "on almost equal amounts," to operating earnings and net-capital gains, reported at $5.37 billion and $5.42 billion respectively, partially offset by net surplus paid to parent organizations. 

ALIRT says the Q1 growth on an annualized basis would result in surplus growth of over 8%—about the annual median growth over the past decade. But ALIRT says the continued surplus growth "creates a somewhat perplexing problem for the industry."

While noting balance-sheet strength is a plus for policyholders, insurers are finding it difficult to put their excess capital to use. "Whether insurers may seek greater underwriting and/or investment risk—or merger and acquisition opportunities—in an attempt to put some of this surplus to work remains to be seen," the firm says. 

Gross-premium leverage (below) rose slightly in the quarter while net-premium leverage fell slightly. ALIRT says, "Nonetheless both measures reflect ample financial capacity to write business."

Earnings

Returns on equity (above) and returns on earned premium (below) were dampened in the first quarter due in part to the weather losses. ALIRT notes that, annualized, ROE and ROP would still be above 2011 and 2012 levels, even as they drop below 2013 levels.

Still, the firm says, "It is interesting to note that the composite continues to lag long-term averages on a return on equity basis, given the sizable build-up in surplus over the past five years." ALIRT reiterates its view that the poor returns on capital may be a prime reason why carriers continue to seek rate increases.

On a return on earned premium basis, though, Q1 results remained above longer-term averages, ALIRT says. 

Earnings (Continued)

Underwriting income (above) was slightly positive in Q1, although ALIRT notes this was helped by large reserve releases associated with the two Geico subsidiaries mentioned earlier, which in reality were transfers rather than releases. "Without this distortion," says ALIRT, "operating results would have been somewhat lower given the very large weather-related losses in the period and the weak net-investment income."

Net-investment yield (below) "continues to be dampened by low-interest rates and declined notably in the first quarter of 2014," says ALIRT. Net capital gains, which had boosted total investment return in recent years, were lower in Q1 due to flat equity markets.

Reserves

After normalizing for the Geico transaction, reserve releases (above) eased in Q1, says ALIRT. The firm notes 87% of the composite's reserve releases for the current accident year were reported by two State Farm subsidiaries. "This indicates, perhaps, that we should pay closer attention to the adequacy of the commercial-lines-predominant companies going forward." 

ALIRT notes that of the nine major commercial-lines groups in its composite, just three—Chubb, Hartford and Travelers—continued to report aggregate prior-reserve releases as of Q1 2014.

The impact of releases on the combined ratio (below) was considerable, shaving 4.4 points. ALIRT says this "outsized impact could level out as the year develops."

ALIRT Commercial-Lines Index and Personal-Lines Index

Click image above to enlarge.

ALIRT's P&C Composite Index measures industry financial performance. The index declined for both personal- and commercial-lines insurers, dampened by deteriorating underwriting results and lower investment yields. ALIRT says the scores are still "fairly robust" despite the declines. The sharper drop among personal lines, says ALIRT, reflects the weather-related losses in the quarter.