February 23, 2016 by Canadian Underwriter
The property and casualty industry in the United States is expected to produce a third consecutive underwriting profit in 2015, despite a slight deterioration in the combined ratio as rate increases slow and the level of favourable loss reserve development modestly declines, ratings firm A.M. Best Company said in a special report released on Monday.
With net investment income also declining, pre-tax operating profit is projected to fall by 2.1% to US$59.9 billion, Oldwick, N.J.-based A.M. Best said in a press release. Net income, while also expected to decline in 2015, will remain well above its five-year average, according to a special report, titled Property/Casualty Industry Expected To Produce Third Consecutive Underwriting Profit While Net Income and Surplus Growth Slow.
The report said that despite positive net income, the industry’s capital base is expected to increase by just 0.5%, to US$695.6 billion, primarily as a result of a US$21.4 billion negative change in its accumulated unrealized gain position. This is the smallest increase in policyholders’ surplus since 2011’s 1.1% decline, the ratings company reported.
The industry’s reported combined ratio deteriorated slightly to 98% in 2015, an increase of 0.6 points from 2014. For 2016, the combined ratio is projected to deteriorate further by 1.2 points to 99.2%. The primary driver of this decline in underwriting performance is the factoring in of a more normal level of catastrophe activity for the industry overall, A.M. Best suggested.
Pre-tax operating income for the industry is projected to decline by US$1.3 billion in 2015 to US$59.9 billion, with slower premium growth, less favourable development of prior years’ loss reserves and lower investment income contributing to the decline. Net income also is expected to fall, to US$60.1 billion in 2015 from US$63.5 billion in the previous year, the release said.
With regards to reinsurance, the global reinsurance sector remains by all accounts over-capitalized. “The reinsurance market has proven for some time to be a bit more resilient and disciplined than other sectors,” A.M. Best said in the release. “However, most companies continue to indicate returns are lower for new business booked and intense competition is leading to reductions in premiums and a decrease in margins for certain lines of business; consequently, the need for disciplined underwriting should remain the focus.”
The industry as a whole continues to dedicate significant resources toward improving technologies, brand awareness and advertising. Companies are continuing to move away from legacy systems and install technology that improves and streamlines all facets of the insurance business in order to reduce expenses and maintain any possible competitive advantage, according to the report.
A.M. Best is maintaining a stable outlook for the personal lines industry segment and a negative outlook for the commercial and reinsurance segments. The stable outlook for personal lines reflects A.M. Best’s expectation that downgrades and upgrades will be balanced. While the commercial and reinsurance segments are expected to continue to post favourable results in aggregate, macro-issues are creating headwinds that are expected to drive a higher level of negative rating actions than positive ones.