The flow of prior-year reserve releases that has helped support US P&C underwriting results in recent years is not sustainable, according to Standard & Poor's (S&P).
The ratings agency said its outlook on the sector remains stable, as carriers have benefited from "a bit of luck" in the form of benign loss experience, and displayed a "staunch focus on underwriting discipline".
Nevertheless, the agency warned of the challenges facing insurers, including the inevitable drying up of reserve releases.
"It is only a matter of time before the 10+ year track record of reserve releases turns a fateful corner," said S&P.
It added that it believes insurers have now released most of the redundant reserves they built up during the hard market years of 2003-2007.
"Time will tell if reserve releases from more recent accident years were premature," the firm said in a report ahead of its flagship US insurance conference this week in New York.
S&P said it was surprised that reserve releases had remained robust for so long.
According to its own data, the P&C insurance industry released $6.7bn of reserves in 2015 - including the offsetting impact of American International Group's $3.4bn reserve strengthening in the fourth quarter, which was primarily focused on its casualty business.
The 2015 total was well down on the $9.6bn released in 2014, and the agency noted that the level of releases in personal lines in particular had diminished in recent years.
Indeed, from a peak of $6bn in 2012, reserve releases in personal lines had fallen by more than two thirds to $1.7bn in 2015.
In commercial lines, however, the decline was less severe, as reserve releases slid from $6.8bn in 2014 to $5.0bn last year.
S&P also noted that 2015 reserve releases were bolstered by a favourable swing in development on workers' compensation business primarily driven by releases from recent accident years, compared to deterioration in 2014.
It said that lower-than-expected medical inflation was the primary cause of the improvement.
However, commenting on all lines of P&C business, S&P said: "We still believe favourable development will diminish and contribute less to underwriting results."
Despite the prospect of dwindling releases, S&P highlighted improving frequency loss-cost trends in recent years.
And it noted that despite steadily growing excess organic capital and readily available reinsurance and third party capital, the P&C sector has broadly retained its discipline.
"Such a windfall could have set the stage for irrational pricing had it not been for the industry's staunch focus on underwriting discipline and optimisation of data analytics.
"Moreover, the prolonged low interest rate environment has not propelled the sector to chase yields with riskier asset allocations, raising the importance of underwriting profitability," S&P commented.
It added that US P&C insurers are "not rolling the dice and paying the price".
Putting the industry into a broader macroeconomic context, the agency noted the current relationship between US nominal GDP growth and P&C direct written premium (DWP) growth - which normally tends to lag behind economic growth.
It said that DWP growth outpaced GDP growth in 2013-2015 due to cumulative rate increases earned from 2011-2014 and that the pattern is expected to continue this year, albeit to a lesser degree as pricing softens.
An inflection point is expected in 2017, however, with the prospect of GDP growth outpacing DWP growth over the next several years, "particularly if softening pricing continues and the economy improves".
On pricing, S&P noted the difference between what is being seen in the personal lines sector and in commercial business.
The agency said that in commercial it expects pricing to vary from flat to down 5 percent in 2016, albeit with significant variation by line of business.
It said large accounts are under more pressure than mid-sized and small accounts, with property under most strain and directors' and officers' pricing at its lowest levels of the past decade.
But it said it was not overly concerned by the pricing declines as insurers have been focusing on raising retentions.
On personal lines business, S&P highlighted the continued upward swing in premiums as weather losses have been followed by rate increases.
Investments still biggest earnings contributor
Despite the US P&C industry's focus on underwriting profitability and historically low interest rates, investment income is still expected to be the most significant contributor to earnings in 2016, according to S&P.
In its latest sector outlook, the firm noted that underlying underwriting income turned positive in 2012, but continues to lag behind investment income as a contributor to sector earnings.
However, it added that insurers are maintaining conservative investment strategies, with their portfolios continuing to be dominated by high-credit-quality asset classes such as investment-grade bonds.
And it reported that the sector's 2015 investment yield was 3.15 percent, down from 3.59 percent in 2014 and at the lowest level in the past 20 years, compared to an average yield from 1996 to 2015 of 4.4 percent.
Commenting on asset allocations, S&P said that there were no significant year-on-year changes for carriers within the broad National Association of Insurance Commissioners categories, but there were "a few shifts on the margin".
These included a modest drop in the proportion of hedge-fund exposure to total investment assets.
The ratings agency highlighted the sensitivity of the sector's operating model to broader investment market fortunes as it suggested that for every 100 basis points drop in portfolio yield, insurers will need to improve their combined ratio by 3 percentage points "just to tread water".
According to S&P, the industry's statutory combined ratio for commercial lines was 96 percent in 2015, up from 94.8 percent in 2014.
The deterioration was driven by a worsening performance in the commercial auto and other liability lines of business.
There was a more positive picture in workers' compensation, however, with an underwriting profit for the first time since 2006 and a combined ratio of 94 percent, down from 100 percent in 2014.
"Nevertheless, we expect workers' compensation profitability to be short-lived, and related reserves are inadequate," the ratings agency warned.
Personal lines fell to an underwriting loss with a 100.1 percent combined ratio, compared to 98.3 percent in 2014, as deteriorating personal auto loss cost trends offset the beneficial impact of a lower impact from catastrophe events.
S&P said it is forecasting a combined ratio across the P&C sector of between 98 percent and 100 percent for 2016, including 4 to 5 percentage points of catastrophe losses, after factoring in the elevated weather-related losses in the US in the first four months of the year.