The industry has benefitted from a string of years without a major U.S. catastrophe event, but Marshall notes that is not the only reason for the sustained underwriting profitability, and the industry’s increasing use of data and analytics to better understand and underwrite risks has been a major contributing factor.

“I think the industry should be given respect for how much it has leveraged the use of tools,” Marshall says. “I think, at its core, things are different and I think the extreme cyclicality the industry used to experience is probably not something that, on a broad scale, we’re going to see return.”

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Read on for a breakdown and analysis of the industry’s 2015 performance:

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Written and earned premiums

For nearly every P&C line, growth in net premiums written was under 5%.

In general, A.M. Best notes rate increases slowed and competition pressures increased. Net premiums written decreased in Fire & Allied Lines and Medical Professional Liability. For Fire & Allied Lines, competitive reinsurance pricing and low catastrophe activity held rates down, while favorable loss trends did the same in Medical Professional Liability.

Commercial Auto Liability and Physical Damage led the way for growth in net premiums written in 2015, A.M. Best notes, as insurers sharply increased rates to address increasing losses. The higher losses also led to a substantial level of adverse reserve development for this line, going back to the 2011 and 2012 accident years.

Marshall explains that insurers in Commercial Auto have seen a greater increase in severity of losses than what they expected. Contributing factors include miles driven increasing faster than expected, inexperienced drivers on the roads as companies step up hiring coming out of the economic slowdown, and delays in when injured people are filing lawsuits. “When they file,” says Marshall, “they’ve already had substantial medical expenses,” which is leading to higher medical costs and higher liability settlements.

The slower growth in the overall industry’s net premiums written led to slower growth in net premiums earned. A.M. Best notes that losses and loss adjustment expenses increased at a higher rate — 4.3% — than the 3.4% growth in net premiums earned, resulting in a higher loss and loss adjustment expense ratio — 69.8 compared to 69.3 in 2014.

Investments

Net investment income declined 11.2% in 2015 to $47.6 billion.

A.M. Best says, “Interest income from fixed income holdings continued to decrease, despite a slight increase in the value of the industry’s bond holdings.” The primary driver of the net investment income reduction, though, “was a decline in revenue from affiliated investments, which was unusually large in 2014, driven by transactions at the insurance subsidiaries of Berkshire Hathaway,” states the report. “Revenue from affiliated investments returned to a more normal level in 2015.”

Realized capital gains fell to $10.3 billion in 2015 from $12 billion in 2014 due to declining equity markets, which also caused a “significant drop in the industry’s accumulated unrealized gain position,” A.M. Best says. “Losses in the value of the industry’s equity portfolio resulted in a $19.6 billion negative change in the industry’s unrealized gain position, a substantial change from the $13.2 billion increase in 2014.”

While insurers have responded to the prolonged challenging investment environment with a greater focus on underwriting results, Marshall points out that, in 2015, net investment income was still over $47 billion while underwriting income was over $6 billion. “Net investment income continues to be a substantial driver of industry income and profitability, and I would not expect that would be something that will change over time,” she says.

On the investment environment overall, she notes that yields are declining, but invested assets are increasing. So, while there are lower yields, she notes the lower yields are on a higher invested asset base, which is holding up investment income.

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Loss reserves

Through nine months in 2015, the industry enjoyed a higher level of favorable prior-year reserve development, A.M. Best says. But in the fourth quarter, “AIG recognized approximately $3.6 billion in adverse development on prior accident-year losses, most of it in its U.S. statutory companies,” the report states.

Consequently, favorable development for the industry as a whole dropped to $7.8 billion in 2015 compared to $7.8 billion in 2014, with the benefit to the combined ratio falling to 1.5 points compared to two points in 2014.

For years now, as reserve redundancies have continued to support earnings, A.M. Best and others have warned that insurers will at some point have to recognize loss-reserve deficiencies in their balance sheets. But the 2015 results may not be the beginning of a trend in that direction, as there were very specific fourth-quarter actions that shifted the industry’s overall reserve position.

David Paul, a principal at Windsor, Conn.-based Alirt Insurance Research, recently said he does not see 2015’s reserve strengthening among the industry composite he follows as the beginning of a trend, noting he sees the individual fourth-quarter actions “as the exception of what’s going on in the general market.”

Still, Marshall says A.M. Best maintains its long-held view on reserves: “Our position is we expect that, over time, the industry will be in a position that it will have to recognize that there are some shortfalls in the reserves,” she says. She points to companies taking favorable development from more recent accident years, part in longer tail lines, as a reason why.

“We continue to anticipate that the industry will recognize progressively less favorable development,” Marshall says, but she adds it remains to be seen whether the scale will tip to adverse development as it has in some prior periods.

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Personal Lines and catastrophe preparedness

The moderate catastrophe losses in recent years has greatly benefitted Personal Lines insurers, A.M. Best notes, although lower underwriting income and flat investment income led to a 3.3% decline in 2015 net income for Personal Lines (to $18.4 billion).

For Personal Auto, rates have increased but results have still weakened in recent years. Marshall points to increased frequency and modestly higher severity as the reasons. She says frequency is likely driven by lower gas prices and the resulting higher amount of miles on the road.

Distracted driving, she adds, is “another issue that the industry and society need to come to grips with.”

With respect to severity, Marshall says the cost of vehicle manufacturing has gone up as more technology is made available in new cars. This, Marshall says, has increased the cost of repairs.

Some of the liability issues seen in Commercial Auto, such as the noted delay in the filing of lawsuits, may also be affecting severity, she adds.

The Homeowners line has benefitted from increasing rates as well as changes in coverages and rating criteria. As previously noted, lower catastrophe losses have played a major role in this line as well.

But Marshall points out the industry as a whole appears to be well positioned even if a significant U.S. catastrophe event was to occur. She notes that, after the last wave of major storms earlier in the 2000s, national insurers began addressing concentrations in coastal areas. They have also maintained an expectation of cat losses as they have priced their property books, even though no major events have occurred in recent years.

In addition, Marshall says the wide availability of reinsurance has allowed primary companies to think about how to use their capital. Companies, she says, are buying either more reinsurance coverage or opting for lower attachment points.

As a result, Marshall says a major catastrophe would likely be an income event rather than a capital event for the industry. “Obviously they’re going to have an impact on their underwriting income [if a major cat strikes the U.S.]; there’s going to be an impact on their earnings,” she says. But there may not be a huge shift in the industry’s overall capital position.

Multiple catastrophe events could be a potential issue for insurers, but for the industry overall, Marshall says “you have to really start thinking of magnitudes of storm losses we haven’t seen to come up with something that really would be” a major capital event.

A bigger concern for local or regional insurers, explains Marshall, is an accumulations of smaller events, for example 10 storms with million-dollar losses each rather than one event with a $10 million loss. In the case of a string of smaller events, an insurer would retain all $10 million, whereas with one storm, the insurer may retain, say, $5 million.

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Commercial Lines

Commercial Lines’ underwriting performance slipped in 2015 compared to 2014, but remained favorable. The combined ratio was 97.4, up from 97 in 2014.

Rate increases from 2013 through early 2015 helped improve the loss ratio for Commercial Lines (53 for 2015 compared to 54.2 in 2014). Lower cat losses and, aside from AIG’s previously mentioned issues, favorable core-loss development helped as well.

The lower underwriting gains, though ($3.9 billion in 2015 compared to $4.7 billion in 2014), helped drive down the segment’s net income by 7.1%, to $25.6 billion in 2015. Pre-tax operating income was up slightly for the year, driven by increases in net investment income and other income.

A.M. Best notes that the use of new technologies for pricing and underwriting has helped insurers more accurately assess risks.

Given this greater use of data and analytics, as the Commercial Lines sector encounters increasingly challenging market conditions, one question is whether the competition and softer rate environment will impact Commercial Lines insurers the way previous soft markets have, or whether insurers will be better able to manage the cycle with the tools at their disposal.

Marshall says, “We do expect some deterioration in Commercial Lines because of the market softening.” But she adds that, with the deployment of technology and the adjustments insurers have made in the challenging investment environment, companies appear to be approaching this soft market differently than in the past.

While she notes that with more capital available, prices will decline, she does not expect to see the wild swings in premiums and profitability that defined previous soft markets.

Related: What insurers expect in 2016, according to A.M. Best survey