A.M. Best expects that higher catastrophe losses, competitive market conditions and automobile liability challenges will result in an underwriting loss in 2016 for the U.S. property/casualty (P/C) insurance industry, its first such loss since 2012, according to a new A.M. Best special report.

The 2017 Review & Preview Best’s Special Report, titled, “Profitability Slides, Surplus Growth Slows and Competition Intensifies for Property/Casualty Insurers,” states that the P/C industry is expected to post a combined ratio of 100.7 for 2016, a deterioration from the 98.3 recorded in 2015. The decline in underwriting performance was driven by two major factors: a return of catastrophe losses to a more historically average level and a reduced benefit of favorable development of loss reserves. In commercial lines, increasingly competitive market conditions also are contributing to deteriorating underwriting performance, while the personal lines’ slide was magnified by the emergence of increased severity trends in automobile liability.

However, despite these challenges, the industry’s solid capital base and potential for improvement in investment income, as rates begin to increase modestly and invested assets continue to grow, will balance the negative trend in underwriting performance expected to be produced in 2016 and 2017. As a result, the industry is expected to continue to add to its surplus through modest growth in net income.

Net premiums written (NPW) for the industry are expected to be up 2.7% in 2016, the slowest rate of growth of the past five years. NPW growth has been slowing since 2013, as market conditions have become increasingly competitive in key commercial lines, including workers’ compensation and other liability, which had posted strong gains in prior years. Premium growth across the industry’s major segments is greatly divergent, with personal lines growth more consistently reflecting trends in loss costs while the commercial and reinsurance segments tend to be more affected by competition fueled by capital availability and new market entrants. For 2017, A.M. Best projects NPW growth to decline to 2.5%, primarily driven by flat premium in the commercial segment and lower growth in the personal segment.

The modest increase in net investment income anticipated for 2016 could not offset the $12.6 billion reduction in underwriting income. As a result, pre-tax operating income is expected to decline by 22.0% to $43.2 billion in 2016. Pre-tax return on revenue, after reaching double-digits for three consecutive years, will fall into the 8% range, measuring an estimated 8.3% in 2016. Net income for the industry is expected to be $43.4 billion in 2016, down from $55.6 billion in 2015.

A.M. Best has maintained a stable outlook on the U.S. personal lines segment, and a negative outlook on the commercial lines segment and global reinsurance industry, for 2017.

To access a copy of this report please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=258112.

In addition, to view an interview with the Senior Managing Director and Chief Rating Officer Stefan Holzberger discussing the P/C sector, visit http://www.ambest.com/v.asp?v=pc117.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries. ALL RIGHTS RESERVED.