There were still positive signs for the U.S. property and casualty industry during Q1 2014, but financial performance was not as robust as the same period in 2013 as weather losses mounted and the pace of rate increases slowed.

The good news for carriers: the industry managed an underwriting profit for the fifth consecutive quarter (Q4 2012, when Superstorm Sandy struck, remains the last time the industry reported an underwriting loss), and rate increases, while moderating, remained in place for most lines, according to an A.M. Best Q1 Financial Review.

The industry posted Q1 net income of $13.9 billion, down 39.8% from Q1 2013. Underwriting income was $2.2 billion, a 67.1% drop compared to Q1 2013.

Catastrophe losses, which A.M. Best defines as an industry event that causes $25 million or more in insured property losses, climbed to $1.8 billion compared to $772 million in Q1 2013. The report cites the impact of the Polar Vortex this past winter as a primary driver of the losses.

All told, cat losses added 3.4 points to the industry’s Q1 combined ratio, compared to 2.1 points the year before. The 2014 Q1 combined ratio was 96.4, up from 92.7, A.M. Best says.

Net premiums written grew, but more slowly in Q1 2014 (2.7%) than in the same period the year before (4.6%). Direct premiums written grew 3.8%, compared to 5.3% a year ago. A.M. Best says, “Growth rates have declined across the board, with premium reductions accelerating sharply in the accident and health line.” In workers’ comp, A.M. Best says DPW grew 5.4%, compared to 11.1% in Q1 2013.

Explaining the slower premium growth, A.M. says it believes “market conditions are becoming more competitive, driven by reinsurance capacity, capital availability and customer resistance to price increases, particularly in more desirable classes and for more desirable insureds.”

Next pages -- breakdown of personal lines, commercial lines and policyholder surplus

Personal lines

Personal lines Q1 net income was $4.7 billion, down slightly from $4.9 billion a year ago. Higher realized capital gains and lower income taxes partially offset lower pretax operating income ($4.7 billion compared to $5.6 billion), says A.M. Best.

Top-line growth continues as insurers were still able to get rate increases, mainly on the homeowners side, but also in auto liability to a lesser extent, the report says (justified by a higher rate of incurred claims due to more frequent and severe weather losses in recent years for homeowners, and by higher claim severity due to medical-cost inflation for auto liability).

A.M. Best notes that decreases in net-premiums written, net-premiums earned and net loss and LAE “were attributed primarily to the impact of Geico’s execution of a 50% loss-portfolio agreement and the implementation of a 50% quota-share reinsurance agreement with its affiliate, National Indemnity Co."

The calendar-year combined ratio through the first three months of 2014 was a profitable 98.9, compared to 96 at the same point last year. The accident-year combined ratio, though, which does not include $9.1 billion in favorable prior-year reserve development, was 115.5.

“However,” says A.M. Best, “when the Geico transaction is excluded, the ratio is 101.5 and is comparable to the accident-year combined ratio of 101.6 through the first quarter of 2013.”

In general, A.M. Best says while the personal-lines segment remains competitive, it “continues to exhibit strong capitalization and generally positive operating performance. In addition, actions the industry continues to take to strengthen enterprise risk management practices and tighten underwriting standards have benefitted the personal-lines segment.”

Commercial lines

While the commercial-lines segment saw profitable Q1 underwriting results, performance deteriorated, A.M. Best says.

The combined ratio was 97.8, compared to 90.6 in Q1 2013, with the increase attributable to less favorable prior-year reserve development, higher catastrophe-related charges, higher relative expense ratios and less-favorable core accident-year loss performance.

In fact, with respect to reserves, A.M. Best says that despite the continued trend of favorable development, it views reserve levels as deficient, in total. “Additionally,” A.M. Best contends, “the estimated deficiency continues to be compounded by the concern that the more recent accident years’ reserves were established by some commercial-lines companies at levels that might not account for a change in macroeconomic conditions or the potential for an increase in claims costs associated with medical and other inflationary pressures.”

Rate increases moderated, and A.M. best notes that growth for the segment is “generally impacted significantly” by workers’ comp, which accounts for about 20% of commercial-lines DPW. A.M. Best explains that workers’ comp rates had begun rising earlier than most other lines – as early as 2011. “As a third consecutive round of rate increases begins, it is not surprising that the pace of increases has slowed,” the ratings agency says.

Policyholder surplus

The industry’s surplus was up 1.4% in Q1 2014, says A.M. Best, down from Q1 2013’s pace of 3.3%. Still, surplus stands at a record $671.8 billion.

A.M. Best says, “The industry’s overall capital position remains strong. However, the potential re-emergence of catastrophes as a significant driver of losses, the slowing of rate increases and reports of increasingly competitive conditions could present significant challenges to sustained underwriting profitability as the year progresses.”

Special Reports /

Q1 P&C performance deteriorates; A.M. Best charts, analysis show why

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