OLDWICK, N.J.--(BUSINESS WIRE)--AM Best expects the financial performance of the U.S. property/casualty (P/C) industry to show improvement for 2019, with results benefiting from a lower level of catastrophe losses and an improving rate environment in key lines, particularly short-tail property lines, according to AM Best’s 2020 Review/Preview market segment report.
The new Best’s Market Segment Report, titled, “Review & Preview: Lower Cats Lift P/C Results, But Challenges Continue,” states that the 2019 combined ratio is expected to improve by 1.4 points to 98.2, reflecting these lower catastrophe losses and a lower expense ratio. However, a return to a more normal level of catastrophe losses is expected to produce a higher combined ratio in 2020, even though AM Best expects the industry to maintain underwriting profitability.
Property-predominant lines of business played a key role in the improved underwriting results. These lines are expected to post some of the most substantial declines in the absolute level of losses, with catastrophe losses sustained by U.S. statutory insurers down $6.8 billion, to $27.6 billion for the year. In addition, some of the largest price increases in 2019 were concentrated in these lines, reflecting higher losses in recent years and upward momentum in the cost of reinsurance.
Pre-tax operating income is expected to increase in 2019 to $65.1 billion for the year, a 17.5% increase from the $55.4 billion achieved in 2018. The lower catastrophe costs and higher premiums that produced higher underwriting income, in combination with higher net investment income, drove the changes. Net income is also projected to increase in 2019, but with a lower level of realized gains expected, the increase will be more modest.
AM Best expects loss experience in the commercial segment to be impacted adversely by loss reserve development trends in 2019 and 2020. While casualty lines are expected to show the most deterioration in movement of prior years’ loss reserves, driven by factors such as higher jury awards and broader interpretations of policy language — collectively described as social inflation — even property lines will contribute to the lower estimated level of favorable development. Insurers began re-evaluating reserves for the other liability line of business, of which general liability is the largest component, as current accident years are being impacted by the same social inflation factors. Compounding the issue for general liability are emerging social trends, including “reviver statutes” that extend and/or reopen statutes of limitations for filing certain sexual molestation claims. AM Best’s expectation for general liability is for continued deterioration in performance. Should results prove to be more negative than expected as the year progresses, the stable outlook for the commercial lines segment will be re-evaluated.
The market segment report also details AM Best’s expectations for the diverse lines of business that comprise the P/C industry along with the rating agency’s market segment outlooks for these segments. Overall, AM Best expects the P/C industry to continue to post modestly favorable underwriting results, with investment income generating the bulk of its profits in 2020. Risk-adjusted capitalization will remain very solid, although individual companies may face challenges based on the lines of business and jurisdictions in which they write.
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