A.M. Best Special Report: While Underwriting Profits Continue, Surplus Down on Equity Market Declines

The U.S. property/casualty (P/C) industry continued to post favorable 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. However, an unfavorable change of $22.4 billion in the industry’s unrealized capital gain position resulted in an $8.1 billion (or 1.2%) decline in policyholders’ surplus (PHS) from its year-end 2014 level, according to a recent A.M. Best special report.

The Best’s Special Report, titled, “While Underwriting Profits Continue, Surplus Down on Equity Market Declines,” states that net premiums written (NPW) continue to show an increase over prior-year level, but the pace of that increase has declined in each quarter of 2015. The industry continues to benefit from favorable 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 (NPE).

Although the investment environment continues to be challenging with yields remaining in a declining trend, net investment income increased modestly, driven by growth in key components of the asset base. As equity market volatility increased in late summer of 2015, the value of the P/C industry’s investment portfolio declined by $22.4 billion, or 5%, from its year-end 2014 level. Stockholder dividend payments continued to outpace their 2014 level, up 8.5% to $25.9 billion. Other surplus losses also increased during the year, although these were mostly offset by increases in contributed capital. In total, these factors combined to generate an $8.1 billion decline in PHS through the first nine months of 2015. At Sept. 30, 2015, the industry’s PHS stood at $669.7 billion. While total return-on-equity (ROE) was negative for the period, after-tax ROE improved from its level for the same period of 2014 to 6.4%, up from 5.5% in the previous year.

Direct premiums written for the commercial lines segment increased 4.5% to $200.2 billion through Sept. 30, 2015. The workers’ compensation, other (general) and commercial automobile liabilities remain the primary sources of this growth. The segment’s underwriting performance continues to improve, with the combined ratio declining to 95.0 from 96.5 at Sept. 30, 2014. Catastrophe losses have declined by 18.2% year-over-year, a 0.6 point reduction.

The personal lines segment’s earnings showed continued substantial increases in the third quarter of 2015 compared to the prior year-to-date. Net income was $14.4 billion for the nine months ended Sept. 30, 2015, compared with $12.1 billion in the prior-year period. The increase was attributed primarily to higher realized capital gains and slightly higher pretax operating income.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=245338.

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