This year could be a tough one for U.S. property/casualty insurers as catastrophe losses, private passenger insurance woes and declining bond yields erode underwriting results and profitability, according to a report by S&P Global Market Intelligence.
The firm’s 2016 U.S. P&C Insurance Market Report projects that the P/C insurance industry’s pre-tax return on equity will decline about two percentage points in 2016 while its combined ratio will increase to 99.5, the highest level since 2012.
The commercial lines combined ratio is projected to increase to 95.1 from 93.4 in 2015. For workers’ compensation, S&P anticipates that insurers will not be able to do as well as the 93.9 combined ratio they achieved in 2015.
In personal lines, the study projects that results in the private passenger auto business will deteriorate further in 2016 as Americans drive more and gas prices remain low. The results will not begin to improve until rate increases fully take hold in 2017. The combined ratio in the private passenger auto business is expected to rise in 2016 to nearly 105.1, up from 104.6 in 2015.
Increased catastrophe losses during the first half of 2016 will negatively impact loss ratios in several business lines including homeowners that have produced favorable results during the past three years, according to the report.
S&P says the industry’s financial results hinge on the performance of the auto lines, which accounted for 34.4 percent of the industry’s 2015 direct premiums and greatly influence the fate of underwriting.
“Profit margins are projected to be much narrower than they have been in the last few years, unless something dramatic happens,” according to Tim Zawacki, senior editor and Terry Leone, manager of Insurance Research at S&P Global Market Intelligence and the authors of the report. “While insurers have wisely accounted for the fact that they haven’t been able to depend on investment gains to subsidize underwriting losses, they still need to practice restraint as they seek growth.”
According to a recent A.M. Best report, the U.S. P/C industry reported the highest level of first-quarter catastrophe losses since 2011 in the first quarter of this year and the underwriting results 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 the A.M. Best report. Net investment income and realized gains also fell in the quarter compared with the first quarter of 2015.
Insurers including Travelers have been reporting high catastrophe losses for the second quarter as well.
Insured losses in the U.S. for the first half of the year topped $14 billion, fueled by hail and thunderstorms in Texas and other states, according to Impact Forecasting, Aon Benfield’s catastrophe model development team.
Analyzing statutory financials for 2,700 individual, U.S.-domiciled property/casualty companies, the S&P report tracks performance over a 10-year period ending in 2015. The report illustrates historical and projected pre-tax ROE by business line.
Additional observations of the S&P study’s authors:
- Increased Investment Risk: Declining Treasury yields in the aftermath of the U.K.’s Brexit referendum have reinforced the challenges the industry faces to earn reliable, low-risk investment income, putting additional pressure on underwriting discipline.
- Future Issues: Favorable reserve development, broad access to reinsurance capacity, and a series of benign hurricane seasons have provided tailwinds to the industry in recent years. But none of those elements will continue in perpetuity and the absence of any one of them could create additional hurdles for the industry from a profitability perspective in 2016 and beyond.
Source: S&P Global Market Intelligence, 2016 U.S. P&C Insurance Market Report
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