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First-Half 2019 Records Drop in P/C Insurers' Underwriting Income; Downgrades Outpace Upgrades: A.M. Best.

First-Half 2019 Records Drop in P/C Insurers' Underwriting Income; Downgrades Outpace Upgrades: A.M. Best

The U.S. property/casualty industry's net underwriting income declined by 9.6% to $4.8 billion in the first half of 2019, compared with $5.3 billion in the same prior-year period, A.M. Best reports.

Also, ongoing negative effects from the 2017-2018 catastrophes led to more P/C insurer rating downgrades during the first half than rating upgrades for the first time in five years, according to the rating organization. Net earned premiums grew by 3.8% in first-half 2019, and underwriting expenses and policyholder dividends were stable. However, this was offset by a 5.6% increase in losses and loss adjustment expenses (LAE) incurred.

As a result, the combined ratio for the P/C industry weakened by one percentage point from the prior-year period to 97.4. A.M. Best estimates catastrophe losses accounted for 4.5 percentage points on the six-month 2019 combined ratio, up from an estimated 4.2 percentage points in the prior-year period.

The Best's Special Report titled, "First Look: Six-Month 2019 Property/Casualty Financial Results," used data from companies' six-month 2019 interim statutory statements representing an estimated 97% of the total P/C industry's net premiums written.

A $432 million increase in net investment income during first-half 2019 offset most of the underwriting decline, resulting in pre-tax operating income remaining unchanged at $33.1 billion. Due to a $1.2 billion reduction in realized capital gains, industry net income declined 2.4% from the prior-year period to $32.7 billion.

Rating Actions

In terms of ratings during the first half of this year, the commercial lines segment recorded 11 upgrades and 13 downgrades, while in the personal lines segment, upgrades totaled 10 compared with 9 downgrades.

The second Best's Special Report, "Downgrades Outpace Upgrades for the First Time in Five Years," notes that loss-affected companies saw declines in risk-adjusted capitalization, volatility in operating performance and reassessments of the appropriateness of their enterprise risk management. Positive rating actions were driven by tighter underwriting standards that led to favorable results over several years and improved risk-adjusted capitalization. Additional factors that led to rating upgrades included recognition of a company's enhanced importance within its organization, increased parental support and merger and acquisition (M&A) activity.

Downgrades of Long-Term Issuer Credit Ratings (Long-Term ICR), as a percentage of all rating actions on U.S. P/C carriers, increased to 7.1% of total actions, up from 6.3% in the first half of 2018. Conversely, Long-Term ICR upgrades were 6.2% of total actions, compared with 7.1% in the same prior-year period. A.M. Best took action in the first half of 2019 on the Long-Term ICRs of 680 rating units, which describes either an individual insurer or a consolidation of companies and is the financial basis on which A.M. Best performs its credit rating evaluations.

The rating agency said the overwhelming majority of the rating actions were affirmations (81.7%), reflecting the overall stability of the U.S. P/C industry. The following are other findings from the report:

* Included in the total number of rating changes in the first half of 2019 were the assignment of 10 P/C ratings, or 3.0% of total rating changes. Nine of the initial assigned ratings were in the commercial lines segment and involved new or recently formed companies;

* The number of ratings placed under review in first-half 2019 dropped to nine from 21 in the previous year, although the number of companies placed under review in first-half 2018 was elevated due to the implementation of the updated Best's Credit Rating Methodology;

* In first-half 2019, 81.3% of the U.S. P/C industry's credit ratings carried a stable outlook, a modest increase from the first half of 2018.

A.M. Best said it has a stable market segment outlook on the personal and commercial lines segments of the U.S. P/C industry, although the analysts note that industry continues to face challenges including elevated catastrophic weather activity; rising frequency, severity and competitive issues in the automobile segment; system implementations and, in the reinsurance segment, the push for diversification and scale as M&A continues.

A.M. Best also maintains a stable outlook on the reinsurance segment.
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Publication:Insurance Journal
Geographic Code:1USA
Date:Sep 2, 2019
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