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Property/casualty insurer profitability slides

Posted On: Jan. 31, 2017 4:00 AM CST

The U.S. property/casualty insurance industry in 2016 will likely post an underwriting loss for the first time in four years due to higher catastrophe losses, competitive market conditions and auto liability challenges, A.M. Best Co. Inc. said Monday.

The Oldwick, New Jersey-based insurance ratings firm said in its 2017 Review & Preview Best’s Special Report, “Profitability Slides, Surplus Growth Slows and Competition Intensifies for Property/Casualty Insurers,” that the P/C industry is expected to post a combined ratio of 100.7% for 2016, a deterioration from 98.3% in 2015.

The decline in underwriting performance was driven by a return of catastrophe losses to a more historically average level, Best said, and a reduced benefit of favorable development of loss reserves. 

Increasingly competitive market conditions in commercial lines are also contributing to deteriorating underwriting performance, while the personal lines slide was magnified by the emergence of increased severity trends in automobile liability.

The report also said that despite these challenges, the industry’s solid capital base and potential for improvement in investment income, as rates begin to increase modestly and invested assets continue to grow, will balance the negative trend in underwriting performance expected to be produced in 2016 and 2017. 

As a result, Best said, the industry is expected to continue to add to its surplus through modest growth in net income.

Net premiums written for the industry are expected to increase 2.7% in 2016 to $533.5 billion, the report said, the slowest rate of growth of the past five years.

Best said that premium growth has been slowing since 2013 as market conditions have become increasingly competitive in key commercial lines, including workers compensation and other liability, such as general and executive, which had posted strong gains in prior years.

Premium growth across the industry’s major segments is greatly divergent, with personal lines growth more consistently reflecting trends in loss costs while the commercial and reinsurance segments tend to be more affected by competition fueled by capital availability and new market entrants. 

For 2017, Best said it expected premium growth to decline to 2.5%, primarily driven by flat premiums in the commercial segment and lower growth in the personal segment.

The modest increase in net investment income anticipated for 2016 could not offset the $12.6 billion reduction in underwriting income. As a result, Best said, pretax operating income is expected to decline by 22% to $43.2 billion in 2016. Pretax return on revenue, after reaching double digits for three consecutive years, will fall into the 8% range, measuring an estimated 8.3% in 2016. Net income for the industry is expected to be $43.4 billion in 2016, Best said, down from $55.6 billion in 2015.

For 2017, A.M. Best said it has maintained a stable outlook on the U.S. personal lines segment and a negative outlook on the commercial lines segment and global reinsurance industry.