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P&C Insurers Face Lower Profit Margins

High insured losses from natural catastrophes, challenges from the personal auto business and pricing competition will make it more difficult for the property and casualty industry to maintain the favorable underwriting results it has seen for the past three years, according to S&P Global Market Intelligence.

In its U.S. P&C Insurance Market Report, S&P predicts an increase in the industry’sDown chart2 statutory combined ratio to 99.5% in 2016 from 97.6% in 2015 and reduction of pretax returns on equity to 8.7% from 10.8%—or to 7.5% from 9.9% when adjusting for the impact of prior-year reserve development.

“Profit margins are projected to be much narrower than they have been in the last few years, unless something dramatic happens,” report authors Tim Zawacki, senior editor and Terry Leone, manager of insurance research at S&P Global Market Intelligence said in a statement. “While insurers have wisely accounted for the fact that they haven’t been able to depend on investment gains to subsidize underwriting losses, they still need to practice restraint as they seek growth.”

Commercial Lines
The commercial lines combined ratio is projected to increase to 95.1% from 93.4% for 2015, which represented the third-consecutive year that the measure of underwriting profitability had ranged between 93.3% and 93.5%.

According to the report, premium growth in the commercial lines has benefited from factors such as slow, but steady macroeconomic growth and rate increases in commercial auto business, offset by continued downward pressure on commercial property rates. The outlook anticipates that the 93.9% combined ratio in the workers compensation line in 2015—which marked the first sub-100% result in that business since 2006—will not be repeated and that historically favorable results of the past three years in commercial multiperil and the fire and allied lines will begin to normalize over time.

Factors such as abundant reinsurance capacity, favorable underwriting results and relatively high levels of capitalization have contributed to downward pressure on commercial lines rates. The outlook assumes that carriers will continue to exhibit discipline in their underwriting, as recent contractions in Treasury yields in the aftermath of the U.K.’s June Brexit vote offer a reminder of the reinvestment risk the industry continues to confront, in what remains a low-for-long interest rate environment, S&P said.

Key observations
• Reduced Profitability: The P&C industry’s pre-tax ROE is projected to decline about 2 percentage points in 2016 while its combined ratio, which measures expenses incurred relative to premiums earned, is projected to increase to 99.5%, the highest level since 2012.
• Increased Investment Risk: Declining Treasury yields in the aftermath of the U.K.’s Brexit referendum have reinforced the challenges the industry faces to earn reliable, low-risk investment income, putting additional pressure on underwriting discipline.
• Weak First Half: Large increases in the amount of insured catastrophe losses during the first half of 2016 will negatively impact loss ratios in several business lines that have produced historically favorable results during the past three years.
• Personal lines: Historically unfavorable results in the private-passenger auto business are projected to deteriorate further in 2016 as miles driven by Americans continue to rise due to low gas prices. They will begin to improve once broad-based rate increases fully take hold, but this will take some time.
• Financial Results Hinge on Auto Line Performance: Private auto lines accounted for 34.4% of the industry’s 2015 direct premiums and, as financials demonstrated, the performance of those lines have played a significant role on the fate of underwriting.
• Future Issues: Favorable reserve development, broad access to reinsurance capacity, and a series of benign hurricane seasons have provided tailwinds to the industry in recent years. But none of those elements will continue in perpetuity and the absence of any one of them could create additional hurdles for the industry from a profitability perspective in 2016 and beyond.

The Best of the Best: The Top 50 S&P Performers

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With the economy on a slow climb back to (hopefully) pre-recession levels, many companies are seeing an improvement to their battered balance sheets. As Bloomberg Businessweek states, its list of the top 50 “is a reminder of the American economy’s ceaseless ability to renew itself.”

Here is a snapshot of the top 10:

  1. Priceline.com
    Surprised at this ranking? So was I, but it seems that this online discount travel agency has thrived thanks to CEO Jeffery H. Boyd‘s management. Boyd took the helm soon after September 11 and saved the company from what looked like a dismal death. The William Shatner-branded company “reinvented itself and went on to score a total return of 911.9% for shareholders over the past five years.”
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  2. Intuitive Surgical
    This company is rocking in the “computer-assisted surgery market,” helping doctors remove tumors by looking at a monitor that shows robotic arms equipped with scalpels and needles. Its 2009 net income was recorded at $232.6 million.
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  3. Southwestern Energy
    This domestic natural gas exploration and production company is enjoying the limelight (in both revenue and reputation) after its energy industry rival (oil) has been shown in a negative light recently.
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  4. Apple
    A no-brainer here, Apple has consistently ranked high compared to other, high performing companies. As Boston Analytics company, Trefis, states, “sales of iPhones account for nearly half the stock’s value.”
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  5. Salesforce.com
    A power player in the customer relationship management (CRM) software field since its founding in 1999, Salesforce.com has kept up with the continuously changing landscape of technology. The company is set to announce a “set of Facebook-like tools” that will allow users to share data in real time.
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  6. Express Scripts
    This pharmacy benefits company has enjoyed reduced costs and increased profits due in part to CEO George Paz’s application of “behavioral economics” to encourage smarter consumer practices.
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  7. Flowserve
    A dominant company within the diversified machinery industry, Flowserve has thrived by “selling and servicing valves, pumps, seals and other machinery for energy producers.”
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  8. FMC Technologies
    Though 2009 was a prosperous year for this company’s offshore drilling and production technology, the current moratorium on offshore drilling may hurt its bottom line in the short-term.
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  9. Cliffs Natural Resources
    As North America’s number one iron ore producer, this company has benefited from Chinese demand. CEO Joseph A. Carrabba “expects more than $1.5 billion in cash from operations in 2010.”
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  10. Amazon.com
    A veteran in the realm of successful companies, Amazon.com just keeps improving. The company’s sales surged a whopping 28% last year.

For a complete listing Bloomberg Businessweek‘s ranking of the top 50 winning stocks in the S&P 500, click here.