Capital Letters

P&C industry shows improved underwriting, higher net income during first half of 2015

By October 12, 2015 No Comments
Oct. 12, 2015 | BY Melissa Hillebrand,

The U.S. P&C industry improved underwriting results and net income through the first six
months of 2015, according to an A.M. Best Special Report, and barring any late-year catastrophic
events, the industry appears to be on track to post a third consecutive year of underwriting profits.

Net premiums written increased by 3.9% to $258.8 billion, while net income jumped 17.9% to
$31 billion (see Exhibit 1, below, click image to enlarge).

However, policyholders’ sutplus remained flat from its 2014 position, due to increased
stockholder divdends, other changes in surplus and unrealized capital losses.

Both commercial and personal lines underwriting improved in the first half of 2015. All major
lines showed higher premiums and growth of net premiums earned outpaced growth in losses,
which benefits the loss ratio. Outpacing other lines, Accident & Health jumped 13% to $3 billion. Also
showing marked increase are the Commercial Auto (8.4%) and Auto (7.1%) lines.

Just like the first six months of 2014, Private Passenger Auto leads all lines in direct premiums
written, with $59.5 billion. Hoemowners & Farmowners multi peril follows, at $45.8 billion, then
Auto. For more details, see Exhibit 4, below

Both personal and commercial lines show improvement in core underwriting through June 30,
2015, where pure loss ratio gains were seen of 0.5 and 1.2 points, respectively. However, underwriting
expense growth has outpaced premium growth through the first two quarters of 2015, with total
underwriting expenses up 4.5% to $71.7 billion.

The insurance industry saw a higher level of favorable development of prior years’ core loss
reserve (meaning, those not related to asbestos and environmental losses), with the combined ratio
benefiting from 3.6 points.

“Over 50% of the $8.1 billion in favorable reserve development was reported by two groups:
State Farm Group, which posted $3.1 billion in favorable development, and Berkshire Hathaway
Insurance Group, which had a $1.4 billion favorable change in its prior years’ loss reserves,” A.M.
Best writes in its report. “The largest reserve increases were $244 million and $207 million by
American International Group and Hartford Insurance Group, respectively.”

Investment results

Net investment income increased by 1.2% through June 30, to $23.5 billion, although equity
holdings declined by 1.9% from their year-end 2014 value. A.M. Best predicts that the volatility in
U.S. equity markets factored as a key driver in the decline. Increased underwriting and investment
income drove the indsutry to a 14% increase in pre-tax operating income through June 30, compared
to the same period a year prior. An increase in capital gains and a decline in incurred income taxes
boosted net income by 17.9% to $31 billion, according to the report.

Personal lines

After-tax net income for personal lines came in at $9.9 billion through June 30, an increase
from $7.3 billion for the first six months of 2014, due to capital gains and pretax operating income, the
report says.

Severe weather and incurred claims have driven rates up for Homeowners’ multi-peril,
medical cost inflration has affected the severity of claims in Private Passenger Auto, and the rising
prices of parts and labor have driven Auto Physical Damage rates up, which all benefit the top line.
At $7 billion, pretax operating income was up by 17.1%. Net premiums written increased by $11.7
billion to $142.4 billion, and net premiums earned rose by a similiar number–$11.6 billion to $139.4

Combined ratios came in at a break-even 100 through June 30, an improvement from 101.6
through the first half of 2014.

Commercial lines

Workers’ Compensation, other (General) Liability, Auto Liability and Inland Marine are
driving the increase in direct premium written in commercial lines, which recorded a 5.4% increase
through June 30, to $134.7 billion. The Workers’ Compensation market represents 20.2% of the total
direct premium written. Rates are down for most states, with the exceptions of California and New
York, the report says.

Underwriting performance improved to a combined ratio of 95.7, compared to 97.7 for the
first six months of 2014. The 2.0 point improvement is due to lower catastrophe-related losses,
higher levels of core favorable loss reserve development, better accident year loss performance and a
decrease in policyholder dividends, A.M. Best says in its report.

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