P/C Insurance Results for Q1 Hurt by High Catastrophe Losses, Low Investment Income

July 8, 2016

Driven by the highest level of first-quarter catastrophe losses since 2011, the underwriting results of the U.S. property/casualty (P/C) industry in the first quarter of 2016 deteriorated from the prior year. The industry posted an underwriting gain of $2.1 billion for the quarter, down from $3.9 billion in the first quarter of 2015. The resulting combined ratio of 97.4 was 1.6 points worse than the 95.8 posted last year, according to an A.M. Best report.

The Best Special Report, titled, “Resurgent Catastrophe Losses and Declining Investment Income Impact U.S. Property/Casualty First Quarter Results,” states that net investment income and realized gains also fell in the quarter compared with the first quarter of 2015. This decline reflected increased market volatility early in the quarter and the continuing pressure on yields caused by the persistently lower rates on reinvestment.

With pre-tax operating income down 11.3 percent, to $13.6 billion, pre-tax return on revenue fell to its lowest first-quarter level of the recent five-year period, A.M. Best reported. Despite remaining in the double digits at 10.7 percent, it is nearly a full point lower than the second lowest mark, 11.5 percent, posted in 2014. In addition, this quarter is down nearly two percentage points from 12.5 percent in the first quarter of 2015.

After a substantial decline during 2015, the negative change in the industry’s accumulated unrealized gain position slowed in the first quarter of 2016. However, that change, although partially offset by a reduction in shareholder dividend payments, adversely impacted industry surplus growth, which was up by just 0.8 percent in the quarter to $685.2 billion. Similar to the pre-tax operating return decline, return-on-equity fell to 2.0%, its lowest level of the past five years.

Net premiums written (NPW) growth for the quarter was 3.4 percent. While this is lower than the 4.2 percent NPW growth rate in the first quarter of 2015, it is above A.M. Best’s projection for full-year 2016. Premium growth was steady in personal lines, with many commercial lines showing signs of increasing competition.

The industry’s direct premiums written increased 4.4 percent in the first quarter, up from 4.1 percent in the first quarter of 2015. The three largest lines on a direct basis, private passenger auto liability, auto physical damage and homeowners/farmowners multi-peril, posted continued solid growth, with the auto lines growing at a rate exceeding the industry average.

The industry’s underwriting results were also impacted by a decline in the level of favorable development of prior years’ loss reserves, according to the ratings agency.

Source: A.M. Best

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