Higher catastrophe losses drive disappointing Q1 U.S. P&C results

The U.S. property and casualty industry’s 2016 first-quarter net income fell 24%, to $13.7 billion, as underwriting results — as well as net investment income and realized gains — deteriorated compared to the first quarter of 2015, according to insurance industry rating agency A.M. Best’s latest "Special Report."

Despite the negative results, the industry maintained a combined ratio under 100 in the quarter, and the observed deterioration may be more a result of weather events in the quarter than a sign of where the industry is heading going forward.

It is worth noting that underwriting results fell because of the highest level of first-quarter catastrophe losses since 2011. “Among key events driving losses in the quarter were a series of severe storms that impacted nearly all sections of the country in March, a significant winter storm in mid-February that was followed later in the month by systems that brought both winter and spring storm conditions across the central and eastern sections of the country, and flooding and severe weather in California in January,” says A.M. Best.

The report cites National Weather Service Storm Prediction Center statistics showing 102 confirmed tornadoes in February 2016 — the highest number recorded for the month since 2008 — and 205 tornadoes in the first quarter overall, making it the fifth most active first quarter for tornado activity since 2000.

The result was $5.1 billion in first-quarter catastrophe losses, according to A.M. Best’s Quarterly Underwriting Survey, the highest first-quarter total since 2011’s $6.4 billion. A.M. Best says catastrophe losses caused an estimated four-point impact on the industry’s first-quarter combined ratio, up from a 3.2-point catastrophe-loss impact in the first quarter of 2015.

The industry’s underwriting gain of $2.1 billion in the quarter was down from $3.9 billion in the first quarter of 2015, and a 5.8% increase in incurred losses — to $72.5 billion — drove a 1.2 point increase in the industry’s loss ratio to 57.1.

A decline in favorable prior-year development of loss reserves also affected underwriting results. According to A.M. Best, the overall first-quarter 2016 benefit to the industry from favorable loss-reserve development was 4.2 points, down from 4.9 points in in the same quarter of 2015 and the lowest level over the most recent five-year period. A.M. Best says with both recent and older accident years having already seen reserves reduced, it expects the overall level of favorable development to continue to decline going forward.

Overall, the 2016 first-quarter combined ratio was 97.4, up from 95.8 in the previous year’s first quarter and the highest Q1 combined ratio over the past five years.

Related: A look at 2015 P&C insurance industry results, in charts

Underwriting was steady

While the story for the first quarter of 2016 may be deterioration in results, A.M. Best points out that the industry’s core underwriting results remained steady: The commercial lines loss ratio improved year-over-year by 3.9 points, with significant improvements in workers’ compensation and products liability. This was offset by a 2.1% increase in the personal lines loss ratio because of catastrophe losses in the quarter.

Jim Lynch, chief actuary and vice president of research and information services at the New York City-based Insurance Information Institute, points out that while the A.M. Best report shows the combined ratio was up in in the first quarter, it remains under 100, demonstrating that insurers are maintaining a level of pricing discipline.

As to whether the first quarter might be the start of a trend toward deterioration, Lynch notes catastrophe losses played a big role in the first-quarter's results. “It’s always hard to call catastrophes a trend, because they either happen or they don’t happen,” he says.

Premium growth in the quarter reflected the market realities in personal and commercial lines: Rate increases in personal lines resulted in stronger premium growth for that sector, while competition in commercial lines largely held back premium growth there. As A.M. Best states, “Premium growth was steady in personal lines, with many commercial lines showing signs of increasing competition.”

The industry’s net premiums written grew by 3.4% in the first quarter, below the 4.2% growth a year ago but above A.M. Best’s projection for the full year 2016. Personal lines net premiums written grew by 6.2% while commercial lines net premiums written fell by 2.8%, with almost all lines showing decreases in growth compared with last year.

Commercial auto liability and commercial auto physical damage were two of only four exceptions, and A.M. Best says these lines will likely continue to be standouts as insurers look for rate increases to address increased accident frequency and severity.

Related: For Auto insurers, the rate is there but where's the profit?

Net premiums earned for the industry grew 3.6%, the lowest level of growth over the past five years. Direct premiums written grew 4.4%, up from 4.1% in the first quarter of 2015.

Strongest direct premiums written growth was in personal auto physical damage (7.8%), driven by a high rate of new vehicle sales; fire and allied lines (7.8%), driven primarily by an accounting change at QBE North America; and surety (7.7%), driven by increased construction spending. Ocean and inland marine, and medical professional liability were the only lines to experience a decline in direct premiums written in the first quarter.

Net investment income and realized gains fell in the first quarter compared to the year before because of continued market volatility and continuing pressure on yields caused by the persistently lower rates on reinvestment.

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