The U.S. property/casualty industry’s operating performance deteriorated sharply in 2011, according to a new report from A.M. Best, as catastrophe-related losses led to the industry’s largest underwriting loss since 2002.

Insurers were impacted by an unprecedented number of natural catastrophe events in the United States and abroad throughout the year, resulting in catastrophe-related losses more than doubling the total reported in 2010. As a result, A.M. Best expects all three segments—personal lines, commercial lines and U.S. reinsurers—to report relatively large underwriting losses, the industry’s policyholders’ surplus is anticipated to decline modestly and return measures are expected to be in the low single digits.

A.M. Best estimates total statutory pretax accident-year catastrophe-related losses were approximately $44.1 billion in 2011, up from an estimated $19.6 billion paid in 2010.

A.M. Best also estimates an increase in net premiums written of 3.5 percent to $442.0 billion in 2011, as improved underwriting and pricing discipline—reinforced by extensive weather-related losses, diminishing reserve releases, relatively low investment yields and a weak macroeconomic environment—generated favorable pricing trends.

Driven primarily by high catastrophe-related losses along with elevated losses in select non-catastrophe-exposed lines, less favorable loss-reserve development and weak macroeconomic conditions, the industry’s combined ratio is expected to deteriorate 6.5 points to 107.5 for 2011 from 101.0 in 2010.

While the majority of rating actions in 2011 resulted in affirmations, downgrades outnumbered upgrades for the first time since 2005.

A.M. Best has maintained a stable outlook for the personal lines and U.S. reinsurance segments in 2012. The outlook for the commercial lines segment remains negative due to the incremental impact that rate increases will have over the next year; inadequate rates in select lines of business; decreasing reserve adequacy levels; and the sluggish economic recovery.

Looking ahead, while pricing discipline seems to be taking hold, A.M. Best believes a hard market is likely at least a year or two away. While the industry’s operating performance is expected to improve in 2012, insurers still face a challenging environment, with relatively weak underwriting results and lackluster investment returns expected to influence operating results over the next year.

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