U.S. property/casualty insurers, fresh off a third consecutive year of underwriting profit in 2015, will likely achieve this again in 2016. At the same time, the market will develop some cracks along the way, according to a new A.M. Best report.

“For 2016, when factoring in a return to a more historically average level of catastrophe losses combined with the absence of any significant changes in prior year loss reserves, further deterioration in the calendar year combined ratio is expected,” A.M. Best said in its 2016 Review & Preview report for the U.S. insurance industry. “However, a fourth consecutive year of underwriting profitability is anticipated.”

A.M. Best predicted that policyholders’ surplus should increase by 1.9 percent during 2016 and surpass $700 billion. This will come, according to the ratings entity, “without considering any potential realized or unrealized capital gains or losses.”

A.M. Best said it sees premium growth continuing to slow during the year and anticipates a modest increase in net premiums written.

In other words, 2016 trends will be a continuation of 2015. For 2015, final tallies will show an underwriting profit for U.S. property/casualty insurers overall, even with a slight deterioration in the combined ratio and a modest decline in the level of favorable loss reserve development, A.M. Best said.

This trend, combined with a decline in net investment income, is expected to leave the industry with pretax operating profit of just under $60 billion for 2015, a 2.1 percent dip.

While there will be positive net income, A.M. Best said that the industry’s capital base will grow by just 0.5 percent to $695.6 billion. This is due to a $21.4 billion negative change in the industry’s accumulated unrealized gain position, A.M. Best added, also noting that the 2015 increase in the policyholders’ surplus is the smallest since a 1.1 percent decline in 2011.

Among other A.M. Best P/C predictions for 2016:

• A combined ratio of 99.2, following an estimated combined ratio of 98 for 2015.
• A net investment yield of 3.1 percent versus an approximately 3.3 percent investment yield for 2015.
• $2 billion in net underwriting income for 2016 versus an estimated $8.2 billion for 2015.
• A stable outlook for the personal lines sector.
• Negative outlooks for both the commercial and reinsurance sectors, due to market headwinds.
• Moderate rate increases for personal auto and homeowners.
• Rate declines for commercial lines.

Source: A.M. Best