2015: First-half P&C results in charts

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M&A risks to the P&C industry

The acquisition activity is likely to absorb excess capacity and also should help limit price deterioration. At the same time, the report points out, "an absorption of excess capital can also ultimately result in more aggressively capitalized organizations." One major risk from all the M&A activity is that the parties will seek to maximize the profitability of a transaction by drawing sizeable dividends from the legal entity units of acquired companies. ALIRT will be watching for this potentiality closely, as it can directly affect the claims-paying ability of carriers.

Another risk is the distraction to management in absorbing a large acquisition, the report notes, as well as the potential loss of talent as employees seek new opportunities. And when very large organizations merge, it can lead risk managers and insureds to minimize exposure to the newly combined company as a means of diversifying risk within their own organizations.

Given the "anemic premium growth" in the domestic market, ALIRT expects that U.S.-based insurance holding companies—especially those in the smaller to mid-sized category—will be attractive targets to global purchasers.

Next page: 5 reasons why the numbers have improved in the first half of 2015

Composite surplus

The ALIRT Composite surplus rose 1.4% in the first six months of 2015 as operating earnings of $10 billion and net capital gains of $3.2 billion were partially offset by $6.8 billion of net capital paid out to parent companies.

Source: ALIRT

Underwriting profitability

The ALIRT P&C Composite reported a combined ratio of 98.9% in the first six months of 2015. The report notes that the 1.9 percentage point improvement over the prior year period reflects, in part, lighter weather-related losses in the current period but also likely the benefit of adequate/better than adequate pricing after four years of rising rates.

Source: ALIRT

Operating earnings

Annualized pretax and after-tax earnings and returns deteriorated in the first six months of 2015 relative to the results of the prior two-year periods. It appears, the report says, that profitability for the industry may have peaked in 2013 for the current firm market cycle given the very light catastrophe losses that year and the benefit of two year of rising price increases from mid-2011 until early 2013.

The price increases appear to have faded, indicating that what the report calls the "mini-'hard'" market of 2012 and 2013 has run its course. A reversion to the mean as concerns catastrophe losses in the latter half of 2015 would only make the decline in operating returns worse. As the report point out, clearly weaker investment income is also contributing to the weaker results.

Source: ALIRT

Loss reserve adequacy

The table below shows prior year loss reserve development for the ALIRT P&C Composite over the past nine calendar years and the first six months of 2015.

According to the report, large reserve actions tend to be take later in the year by commercial line predominant companies, and ALIRT will track this group's reserving actions throughout the year.

Operating earnings

Annualized pretax and after-tax earnings and returns deteriorated in the first six months of 2015 relative to the results of the prior two-year periods. It appears, the report says, that profitability for the industry may have peaked in 2013 for the current firm market cycle given the very light catastrophe losses that year and the benefit of two year of rising price increases from mid-2011 until early 2013.

The price increases appear to have faded, indicating that what the report calls the "mini-'hard'" market of 2012 and 2013 has run its course. A reversion to the mean as concerns catastrophe losses in the latter half of 2015 would only make the decline in operating returns worse. As the report point out, clearly weaker investment income is also contributing to the weaker results.

Source: ALIRT

Premium income

Annualized direct and net premiums rose 2.1% and 3%, respectively, for the composite in the first half of 2015 versus the prior year period. This represents an accelerating trend over the prior year, which the report attributes to an improved economy, given that year-over-year price increases are slightly negative.

The sharp spike in year-over-year net premium growth in 2013 is due in part to statistical "noise," the report says, given the impact of repooling arrangements at several composite insurers. This essentially reduced the number of insurers participating in pool results and thereby increased the premiums controlled by some of the composite carriers.

Underwriting leverage

Annualized underwriting leverage, on both a gross and a net basis were flat at 1.18 times and 0.75 times, respectively, for the first half of 2015. The low net premium leverage, the report says, continues to reflect ample financial capacity in the broad U.S. P&C market.

Source: ALIRT

For more information or to obtain a copy of the report, send an e-mail to info@Alirtresearch.com.