Combined ratio for U.S. P&C industry improves 0.4 points to 97.2% through the third quarter of 2015: A.M. Best

The property and casualty industry in the United States continued to post favourable underwriting and operating results through the third quarter of 2015, with the combined ratio improving 0.4 points to 97.2 compared with its prior-year mark, ratings firm A.M. Best Company said on Friday.

Overall underwriting profits increased 64.4% to US$5.7 billion through Sept. 30, 2015 compared with US$3.5 billion through the first three quarters of 2014. [click image below to enlarge]

The Best’s Special Report also noted that net premiums written (NPW) continued to show an increase over the prior-year level, but the pace of the increase has declined in each quarter of 2015. NPW for the first nine months of 2015 were US$392.7 billion, compared to US$380.8 billion in 9M2014. “The industry continues to benefit from both favourable current accident year loss trends – with catastrophe losses falling well below their 2014 levels through the third quarter – and from lower expenses associated with claims adjustment, relative to net premiums earned,” the report added.

A.M. Best said that the Personal Lines segment for the nine months of 2015 was 99.3%, compared to 99.6% for 9M2014. Net income was US$14.4 billion for 9M2015, compared with US$12.1 billion for 9M2014. The segment’s underwriting loss at Sept. 30, 2015 was US$568 million, compared with US$1.1 billion for the same period in 2014.

The Commercial Lines segment for 9M2015 declined 1.5 points from 96.5% in 9M2014 to 95% for the same period last year. Direct written premiums written increased 4.5% to US$200.2 billion through Sept. 30, 2015, with workers’ compensation, other (general) liability, and commercial auto liability remain the primary sources of this growth.

The U.S. Reinsurance segment’s combined ratio went from 90.5% in 9M2014 to 92.5% in 9M2015.

The industry’s direct premiums written (DPW) continued to increase, with most lines of business showing modest gains compared to the same period the previous year. The major exception was Fire and Allied Lines, in which DPW declined slightly year-over-year.

In addition, the level of catastrophe losses incurred by the industry declined to US$14.3 billion from US$17.1 billion year-to-date compared to 2014. The industry also has recognized an additional US$1.2 billion in favourable development of prior year’s loss reserves, with an additional US$150 million in loss reserve development related to reserves for asbestos and environmental claims more than offset by US$1.3 billion in additional favourable development of core loss reserves. [click image below to enlarge]

Offsetting these positive factors was a US$11.1 billion increase in current accident year incurred losses, producing a US$7.1 billion increase in incurred losses through the first nine months of 2015, the report said. “Much of this increase related to increased personal lines winter weather claims, occurring primarily during the first quarter. For the overall industry, however, rate increases that continue to earn through more than offset the negative effect of higher current accident year losses on underwriting performance.”

The report said that while companies report continued achievement of rate increases in most commercial lines, the “upward trajectory of those increases has ended. Anecdotal reports suggest that rate actions will be substantially less positive in 2016 and that decreases in rate for some lines may become more common. Competition for the ‘best’ customers has resulted in a growing divergence between new and renewal business pricing, with some insureds benefitting from substantial rate decreases when switching carriers, particularly in commercial lines. For personal lines of business that are generally more closely regulated, applications for additional rate increases may be more closely reviewed against a backdrop of profitable results.”

A.M. Best suggested that to some extent, the impact of these factors can already be observed. NPW growth has slowed in each quarter of 2015. Core accident year underwriting results have deteriorated in the most recent quarter, “which may be an anomalous result, but might also signal the beginning of a change in the favorable trends of recent years.”

The industry’s ability to consistently generate underwriting profits has historically been impacted by the deployment of capital into markets where underwriting profits are perceived to be the highest, resulting in rate declines as competition for business increases, the report noted. “While a combination of the challenging investment market and use of advanced technologies appears to have muted the most excessive of these cycles in recent years, negative pressure on underwriting results seems to be building.”