US P&C industry’s surplus level decreases by 9.3% to $744.9bn in Q1 2020

Written by Adam Cadle

26/05/2020

The US property/casualty (P&C) industry’s surplus level decreased by 9.3% to $744.9bn in the first quarter of 2020, compared with year-end 2019, based on preliminary results published by AM Best.

Part of that drop-off in surplus was attributed to an $83.4bn change in net unrealised capital losses. These findings are based on data derived from companies’ three-month 2020 first quarter statutory statements received by AM Best as of 19 May 2020. These companies accounted for an estimated 95% of total US P&C industry net premiums and 93% of policyholder surplus.

The report noted that the overall impact from the COVID-19 pandemic was limited in the first quarter 2020 reporting period and that there were greater changes in line of business underwriting results than normal, with personal lines displaying favorable movement. AM Best anticipates that the impacts will be considerably more apparent in second quarter 2020 results.

Jennifer Marshall, director, AM Best, said an initial look at the US P&C industry’s statutory results for the first quarter showed that investments overall for this sector seem to have held up well, with the exception of equity holdings. Total equity holdings were down approximately $103bn in the first quarter of 2020 compared with the same prior-year period, or about 21%. This returned the value of industry’s equity-level holdings to almost its year-end 2018 level.

“At this point, the best we can reasonably expect would be a continued improvement in equity markets through the end of the (second) quarter,” Marshall said. “We do anticipate a heightened level of investment market volatility to continue until the threat of COVID-19 abates. Net investment income may be affected as dividends received may decline with the reduction or suspension of dividends on owned equities.”

Marshall said another factor being monitored is the impact of widening credit spreads on bond holdings, as well as negative credit actions, particularly those that result in ratings moving below investment-grade. That would cause the valuation of those holdings to switch to mark-to-market, potentially adversely impacting capital levels.

With net investment and other income declining slightly in the first quarter of 2020 from the prior-year period, the improvement in underwriting income drove the 4% growth in pre-tax operating income. As the tax expense remained flat and realised capital gains declined $172m, industry net income increased 3.5% from the prior year period to $17.7bn.

The combined ratio for the US P&C industry improved slightly from the prior year period to 95.2%.

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