By just about every measure, the Property and Casualty industrycontinued to grow in 2015, but the rate of growth in key areas hasslowed, a recent A.M. Best Special Report shows.

According to the report on P&C 2015 results, titled “U.S.P/C Industry Marks Third Consecutive Underwriting Gain, but SurplusDeclines on Investment Results,” P&C net income fell 11.4% in2015 to $56 billion, net premiums written and net premiums earnedwere each down 3.4% to $519 billion and $509.8 billionrespectively, realized capital gains were down 14.2% to $10.3billion and underwriting income fell 40.1% to $6.2 billion.

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Still, A.M. Best Vice PresidentJennifer Marshall says while some challenging market conditionsre-emerged in 2015, particularly in the Commercial Lines space, “Idon’t think you want to be too pessimistic. The industry did have athird consecutive year of underwriting profitability, which, we’velooked back at our data and haven’t seen a time previously whenthat’s happened.”

The industry has benefitted from a string of years without amajor U.S. catastrophe event, but Marshall notes that is not theonly reason for the sustained underwriting profitability, and theindustry’s increasing use of data and analytics to betterunderstand and underwrite risks has been a major contributingfactor.

“I think the industry should be given respect for how much ithas leveraged the use of tools,” Marshall says. “I think, at itscore, things are different and I think the extreme cyclicality theindustry used to experience is probably not something that, on abroad scale, we’re going to see return.”

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Read on for a breakdown and analysis of the industry’s 2015performance:

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Written and earned premiums

For nearly every P&C line, growth in net premiums writtenwas under 5%.

In general, A.M. Best notes rate increases slowed andcompetition pressures increased. Net premiums written decreased inFire & Allied Lines and Medical Professional Liability. ForFire & Allied Lines, competitive reinsurance pricing and lowcatastrophe activity held rates down, while favorable loss trendsdid the same in Medical Professional Liability.

Commercial Auto Liability and Physical Damage led the way forgrowth in net premiums written in 2015, A.M. Best notes, asinsurers sharply increased rates to address increasing losses. Thehigher losses also led to a substantial level of adverse reservedevelopment for this line, going back to the 2011 and 2012 accidentyears.

Marshall explains that insurers in Commercial Auto have seen agreater increase in severity of losses than what they expected.Contributing factors include miles driven increasing faster thanexpected, inexperienced drivers on the roads as companies step uphiring coming out of the economic slowdown, and delays in wheninjured people are filing lawsuits. “When they file,” saysMarshall, “they’ve already had substantial medical expenses,” whichis leading to higher medical costs and higher liabilitysettlements.

The slower growth in the overall industry’s net premiums writtenled to slower growth in net premiums earned. A.M. Best notes thatlosses and loss adjustment expenses increased at a higher rate —4.3% — than the 3.4% growth in net premiums earned, resulting in ahigher loss and loss adjustment expense ratio — 69.8 compared to69.3 in 2014.

Investments

Net investment income declined 11.2% in 2015 to $47.6billion.

A.M. Best says, “Interest income from fixed income holdingscontinued to decrease, despite a slight increase in the value ofthe industry’s bond holdings.” The primary driver of the netinvestment income reduction, though, “was a decline in revenue fromaffiliated investments, which was unusually large in 2014, drivenby transactions at the insurance subsidiaries of BerkshireHathaway,” states the report. “Revenue from affiliated investmentsreturned to a more normal level in 2015.”

Realized capital gains fell to $10.3 billion in 2015 from $12billion in 2014 due to declining equity markets, which also causeda “significant drop in the industry’s accumulated unrealized gainposition,” A.M. Best says. “Losses in the value of the industry’sequity portfolio resulted in a $19.6 billion negative change in theindustry’s unrealized gain position, a substantial change from the$13.2 billion increase in 2014.”

While insurers have responded to the prolonged challenginginvestment environment with a greater focus on underwritingresults, Marshall points out that, in 2015, net investment incomewas still over $47 billion while underwriting income was over $6billion. “Net investment income continues to be a substantialdriver of industry income and profitability, and I would not expectthat would be something that will change over time,” she says.

On the investment environment overall, she notes that yields aredeclining, but invested assets are increasing. So, while there arelower yields, she notes the lower yields are on a higher investedasset base, which is holding up investment income.

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Loss reserves

Through nine months in 2015, the industry enjoyed a higher levelof favorable prior-year reserve development, A.M. Best says. But inthe fourth quarter, “AIG recognized approximately $3.6 billion inadverse development on prior accident-year losses, most of it inits U.S. statutory companies,” the report states.

Consequently, favorable development for the industry as a wholedropped to $7.8 billion in 2015 compared to $7.8 billion in 2014,with the benefit to the combined ratio falling to 1.5 pointscompared to two points in 2014.

For years now, as reserve redundancies have continued to supportearnings, A.M. Best and others have warned that insurers will at somepoint have to recognize loss-reserve deficiencies in their balancesheets. But the 2015 results may not be the beginning of a trend inthat direction, as there were very specific fourth-quarter actionsthat shifted the industry’s overall reserve position.

David Paul, a principal at Windsor, Conn.-based Alirt InsuranceResearch, recently said he does not see 2015’s reserve strengtheningamong the industry composite he follows as the beginning of atrend, noting he sees the individual fourth-quarter actions “as theexception of what’s going on in the general market.”

Still, Marshall says A.M. Best maintains its long-held view onreserves: “Our position is we expect that, over time, the industrywill be in a position that it will have to recognize that there aresome shortfalls in the reserves,” she says. She points to companiestaking favorable development from more recent accident years, partin longer tail lines, as a reason why.

“We continue to anticipate that the industry will recognizeprogressively less favorable development,” Marshall says, but sheadds it remains to be seen whether the scale will tip to adversedevelopment as it has in some prior periods.

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Personal Lines and catastrophe preparedness

The moderate catastrophe losses in recent years has greatlybenefitted Personal Lines insurers, A.M. Best notes, although lowerunderwriting income and flat investment income led to a 3.3%decline in 2015 net income for Personal Lines (to $18.4billion).

For Personal Auto, rates have increased but results have stillweakened in recent years. Marshall points to increased frequencyand modestly higher severity as the reasons. She says frequency islikely driven by lower gas prices and the resulting higher amountof miles on the road.

Distracted driving, she adds, is “another issue that theindustry and society need to come to grips with.”

With respect to severity, Marshall says the cost of vehiclemanufacturing has gone up as more technology is made available innew cars. This, Marshall says, has increased the cost ofrepairs.

Some of the liability issues seen in Commercial Auto, such asthe noted delay in the filing of lawsuits, may also be affectingseverity, she adds.

The Homeowners line has benefitted from increasing rates as wellas changes in coverages and rating criteria. As previously noted,lower catastrophe losses have played a major role in this line aswell.

But Marshall points out the industry as a whole appears to bewell positioned even if a significant U.S. catastrophe event was tooccur. She notes that, after the last wave of major storms earlierin the 2000s, national insurers began addressing concentrations incoastal areas. They have also maintained an expectation of catlosses as they have priced their property books, even though nomajor events have occurred in recent years.

In addition, Marshall says the wide availability of reinsurancehas allowed primary companies to think about how to use theircapital. Companies, she says, are buying either more reinsurancecoverage or opting for lower attachment points.

As a result, Marshall says a major catastrophe would likely bean income event rather than a capital event for the industry.“Obviously they’re going to have an impact on their underwritingincome [if a major cat strikes the U.S.]; there’s going to be animpact on their earnings,” she says. But there may not be ahuge shift in the industry’s overall capital position.

Multiple catastrophe events could be a potential issue forinsurers, but for the industry overall, Marshall says “you have toreally start thinking of magnitudes of storm losses we haven’t seento come up with something that really would be” a major capitalevent.

A bigger concern for local or regional insurers, explainsMarshall, is an accumulations of smaller events, for example 10storms with million-dollar losses each rather than one event with a$10 million loss. In the case of a string of smaller events, aninsurer would retain all $10 million, whereas with one storm, theinsurer may retain, say, $5 million.

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Commercial Lines

Commercial Lines’ underwriting performance slipped in 2015compared to 2014, but remained favorable. The combined ratio was97.4, up from 97 in 2014.

Rate increases from 2013 through early 2015 helped improve theloss ratio for Commercial Lines (53 for 2015 compared to 54.2 in2014). Lower cat losses and, aside from AIG’s previously mentionedissues, favorable core-loss development helped as well.

The lower underwriting gains,though ($3.9 billion in 2015 compared to $4.7 billion in 2014),helped drive down the segment’s net income by 7.1%, to $25.6billion in 2015. Pre-tax operating income was up slightly for theyear, driven by increases in net investment income and otherincome.

A.M. Best notes that the use of new technologies for pricing andunderwriting has helped insurers more accurately assess risks.

Given this greater use of data and analytics, as the CommercialLines sector encounters increasingly challenging market conditions,one question is whether the competition and softer rate environmentwill impact Commercial Lines insurers the way previous soft marketshave, or whether insurers will be better able to manage the cyclewith the tools at their disposal.

Marshall says, “We do expect some deterioration in CommercialLines because of the market softening.” But she adds that, with thedeployment of technology and the adjustments insurers have made inthe challenging investment environment, companies appear to beapproaching this soft market differently than in the past.

While she notes that with more capital available, prices willdecline, she does not expect to see the wild swings in premiums andprofitability that defined previous soft markets.

Related: What insurers expect in 2016, according to A.M.Best survey