Best’s Special Report: Hurricanes, Wildfires Weigh Down U.S. Property/Casualty Performance for Second-Straight Year

The aggregate financial performance of U.S. publicly traded property/casualty insurers deteriorated slightly in 2018, driven mainly by above-average catastrophe losses that counteracted gains from the implementation of tax reform, according to a new AM Best special report.

The analysis in the Bests Special Report, Hurricanes, Wildfires Weigh Down U.S. Property/Casualty Performance for Second-Straight Year, covers a majority of the U.S. property/casualty primary insurers that file U.S. GAAP statements. According to the report, a number of historic catastrophes, including California wildfires and multiple hurricanes, led to higher-than-average loss totals for commercial and personal property lines of coverage, as well as auto physical damage. Expenses also again slightly outpaced revenues in 2018, as a 3.2% decline in net investment income exceeded the segments 3.1% increase in premium revenue. The growth in premium revenue, along with a double-digit increase in other income, was not enough to increase operating income. Property/casualty insurers experienced a 6.7% decrease in total operating income, which was largely due to an end-of-year downturn in the equity market. In addition, the implementation of tax reform in calendar-year 2018 resulted in the recognition of $17.8 billion in deferred tax asset write-downs. The cumulative change in deferred tax expense caused a 70% decline in the overall provision for income taxes, resulting in net income for the segment to more than double to $17.1 billion in 2018. However, a portion of this increase from tax cuts likely will be passed down to shareholders through stock repurchases and dividends during 2019.

Average pre-tax returns on equity declined again for a fourth straight year, to 7.0% in 2018. Increased competition has pressured premium growth and higher-than-expected claims costs continue to trouble multiple lines of business such as commercial automobile, especially trucking risks, along with the professional and management liability lines. Mergers and acquisitions also played a large role in the slight deterioration of 2018 financial results, and publicly traded companies stockholders equity decreased 4% due to large-scale acquisitions.

Property/casualty insurers continue to face numerous challenges, which may provide opportunities to transform business. Reliance on favorable macroeconomic factors to augment performance is not a strategy likely to yield long-term success. AM Best believes insurers must acknowledge the realization that technology and changes in the global economy is necessitating the development of different types of policies, products and services as imperative to remain relevant.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=284075.

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Josie Novak
Associate Analyst
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David Blades, CPCU
Associate Director, Industry Research
and
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Christopher Sharkey
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