P&C Industry's 2017 Underwriting Loss Expected To Rise to $29 Billion

A.M. Best believes the US property and casualty (P&C) industry will post a second consecutive underwriting loss in 2017, driven mainly by catastrophe losses. As a result, the industry 2017 combined ratio is estimated to deteriorate to 105.1 from 100.9 in the previous year, according to the Best's Market Segment Report, titled "US Property/Casualty 2018 Review & Preview."

The report states that the expected net underwriting loss of $29.3 billion in 2017, which followed a $6.5 billion loss in 2016, will cause pretax operating income to decline substantially to $14.8 billion from $41.1 billion in 2016. The report also states that pretax return on revenue will fall sharply as well, to 2.7 percent from 7.8 percent in 2016. However, higher realized capital gains and lower tax payments, driven in part by the increased underwriting loss, will benefit net income, which will decline by a smaller margin of 37.7 percent to $26.3 billion from $42.2 billion in 2016.

Overall, surplus grew 2.5 percent in 2017, down from 4.3 percent in 2016 and the second-lowest growth of the past five years. A.M. Best projects surplus growth of 2.0 percent for 2018, primarily as a result of lower underwriting losses and modest growth in investment income. This modest change reinforces the impact of realized and unrealized capital gains on surplus growth in recent years, as A.M. Best does not project these items.

The increase in catastrophe losses to a level that has exceeded historical averages has had a widespread impact on the industry, although a strong capital base allowed most companies in the primary and reinsurance spaces to emerge with capital remaining comfortably supportive of their risks, despite the decline in operating and net income. Some market observers and participants predicted that these losses would drive a broad hardening in the reinsurance market, which would then affect primary company rates, but January 1, 2018, reinsurance renewals suggest that this is unlikely to be the case. Loss-affected accounts are seeing substantial rate increases, but most companies are seeing reinsurance prices remaining flat or rising only slightly.

For 2018, A.M. Best expects rate increases to remain in the low single digits for most lines throughout the country. Rates for property lines will vary substantially, depending on 2017 experience and exposure to catastrophes. Commercial and personal auto liability will likely see rate filings in the mid-single digits, driven by adverse development of prior years' losses.

A.M. Best maintains a stable outlook on the US personal lines segment for 2018 and has revised its market outlook on the commercial lines segment to stable. A.M. Best also maintains a negative outlook on the US P&C reinsurance and global reinsurance sectors, reflecting the pronounced pressure on US property catastrophe rates over the last several years, as alternative capital has set its sights on US property catastrophe exposures.

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