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A.M. Best Report: Industry Profits Continue, Challenges on the Horizon

Source: A.M. Best

Posted on 15 Feb 2011

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The U.S. property/casualty industry continues to trudge through a difficult cyclical market plagued by persistent competition, rate decreases in practically all commercial lines, weak macroeconomic conditions, excess capacity and above-average catastrophe activity, as reportd in a special A.M. Best Report. Here's a recap of the report:

  •    A.M. Best Co. estimates net premiums written (NPW) increased approximately 0.5% to $429.8 billion in 2010 from $427.5 billion in 2009, driven primarily by personal lines price increases and marking the first year-over-year increase in NPW since 2006.

  •    The industry‘s underwriting performance deteriorated in 2010, as unusually high catastrophe-related losses—driven by increased frequency of low-severity perils, additional underwriting losses in the mortgage and financial guaranty segments and weaker results in the core commercial lines segment— took a heavy toll on overall underwriting results.

  •    A.M. Best estimates the industry’s overall net investment gains increased approximately 34% to $56.9 billion in 2010 from $42.4 billion in 2009, benefiting from a $16.4 billion swing in realized capital gains, which offset a continued decline in investment income.

  •    A.M. Best estimates the U.S. property/casualty industry will recognize net favorable loss reserve development on prior accident years of approximately $8.9 billion for 2010, representing the fifth consecutive year of prior year reserve redundancies and further eroding the industry’s overall loss reserve position.

  •    The U.S. property/casualty industry’s policyholders’ surplus position is estimated to be up by 9.5% to approximately $583.4 billion at year-end 2010 from $532.6 billion in 2009.

  •    Mergers and acquisitions (M&A) provide for alternative growth and a viable means of utilizing capital, but current low valuations may impede future acquisition activity. Additionally, while M&A typically involves seasoned business, comprehensive due diligence on loss reserves and the quality of the book is essential for a successful merger.

  •    A.M. Best has maintained a stable outlook for the personal lines and U.S. reinsurance segments, but the outlook for the commercial lines segment has been revised to negative from stable because of an anticipated sluggish economic recovery, continued price deterioration, erosion in reserve levels and higher accident year combined ratios.

   •    Over the next 12 months, the U.S. P/C industry will face increasing headwinds that will pressure operating performance and capital levels for many industry participants; nevertheless, A.M. Best does not expect an overall turn in the market over the near term.