How Disasters, Tax Reform Affected P/C Insurers’ Performance in 2018

Mainly due to above-average catastrophe losses, the aggregate financial performance of U.S. publicly traded property/casualty insurers deteriorated slightly in 2018, according to a new A.M. Best special report.

The catastrophe losses counteracted gains from the implementation of tax reform, according to the report.

A number of historic catastrophes, including California wildfires and multiple hurricanes, led to higher-than-average loss totals for commercial and personal property lines of coverage, as well as auto physical damage. Expenses also again slightly outpaced revenues in 2018, as a 3.2 percent decline in net investment income exceeded the segment’s 3.1 percent increase in premium revenue.

The Best’s Special Report, “Hurricanes, Wildfires Weigh Down U.S. Property/Casualty Performance for Second-Straight Year,” covers a majority of the U.S. property/casualty primary insurers that file U.S. GAAP statements.

The growth in premium revenue, along with a double-digit increase in other income, was not enough to increase operating income. Property/casualty insurers experienced a 6.7 percent decrease in total operating income, which was largely due to an end-of-year downturn in the equity market.

In addition, the implementation of tax reform in calendar-year 2018 resulted in the recognition of $17.8 billion in deferred tax asset write-downs. The cumulative change in deferred tax expense caused a 70 percent decline in the overall provision for income taxes, resulting in net income for the segment to more than double to $17.1 billion in 2018. However, a portion of this increase from tax cuts likely will be passed down to shareholders through stock repurchases and dividends during 2019, according to A.M. Best.

Average pre-tax returns on equity declined again for a fourth straight year, to 7.0 percent in 2018. The analysts write that increased competition has pressured premium growth and higher-than-expected claims costs continue to trouble multiple lines of business such as commercial automobile, especially trucking risks, along with the professional and management liability lines.

Mergers and acquisitions also played a large role in the slight deterioration of 2018 financial results, and publicly traded companies’ stockholders equity decreased 4 percent due to large-scale acquisitions.

Source: A.M. Best