U.S. Property & Casualty Insurers Headed For Rough Patch, Finds S&P Global Market Intelligence Analysis
New Research Projects Acceleration of Industry Underwriting Profit Erosion in 2016
For property and casualty insurers, 2016 could be a tough year, according to a new report published today by S&P Global Market Intelligence, a leading provider of multi-asset class research data and insights. The firm’s 2016 U.S. P&C Insurance Market Report suggests that a combination of elevated catastrophe losses, unfavorable results in the private passenger auto business, and declining bond yields could crimp underwriting results and reduce overall profitability.
Using a bottom-up analysis of statutory financials for almost 2,700 individual, U.S.-domiciled property and casualty entities filing NAIC statements, this report tracks performance over a 10-year period ending in 2015. Both historical and projected results are offered on a line-of-business basis in order to capture diverging trends across industry product types and produce projections that encapsulate how micro and macro factors affect growth rates, losses, and expenses. The report illustrates historical and projected pre-tax returns on equity (ROE) by business line.
Following are some of the key observations:
- Reduced Profitability: The P&C industry’s pre-tax return on equity is projected to decline roughly 2 percentage points in 2016 while its combined ratio, which measures expenses incurred relative to premiums earned, is projected to increase to 99.5%, the highest level since 2012.
- 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.
- Weak First Half: Big increases in the amount of insured catastrophe losses during the first half of 2016 will negatively impact loss ratios in several business lines that have produced historically favorable results during the past three years.
- Personal lines: Historically unfavorable results in the private-passenger auto business are projected to deteriorate further in 2016 as miles driven by Americans continue to rise in a time of low gas prices. They will begin to improve once broad-based rate increases fully take hold, but this will take some time.
- Financial Results Hinge on Auto Line Performance: Private auto lines accounted for 34.4% of the industry’s 2015 direct premiums and, as financials demonstrated, the performance of those lines have played a significant role on the fate of underwriting.
- 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.
“Profit margins are projected to be much narrower than they have been in the last few years, in the absence of any potential market-changing events,” 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.”
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