A relatively quiet year for catastrophes helped the U.S. property/casualty industry achieve an underwriting profit for the first time in four years, according to A.M. Best.

The industry managed its way to a nearly 60 percent increase in net income to $63.2 billion, which helped drive an estimated record year-end surplus of $666.3 billion. The surplus level is “particularly noteworthy given the headwinds that are anticipated in 2014,” A.M. Best said.

In a special report, the ratings agency said underwriting results reached their best level since 2007 and the industry’s combined ratio for the year is expected to come in at 97.6.

The estimated underwriting profit of $8.5 billion for 2013 ranks as the third best in the past decade— next to $28.9 billion in 2006 and $23.0 billion in 2007. In 2012, the industry suffered a $12.5 billion underwriting loss.

The drop in catastrophe losses shaved 4.3 points off the industry’s expected combined ratio in 2013. While cat losses represented 7.5 points on the 2012 combined ratio, they dropped to 3.2 points in 2013. Unlike Superstorm Sandy in 2012, no major storm made landfall in the U.S. last year.

However, A.M. Best Co. said it is estimating a “more normal level of catastrophe losses” in the coming year.

Profitability for 2013 was further bolstered by considerable investment gains achieved in strengthened U.S. equity markets, the report said. Net income is projected to be $52.9 billion, a 7.9 percent increase over last year.

Additional highlights from last year’s performance include a 4.8 percent increase in net premiums written. Workers compensation was again the fastest-growing line with a 9.7 percent increase.

Looking ahead to 2014, A.M. Best said it expects premiums to continue growing through price increases, but the pace of these rate changes should slow and temper growth in premium.

Although core accident-year underwriting results should improve slightly on the rate level achieved in recent years, A.M. Best said it anticipates less favorable development of prior years’ loss reserves.

In addition, the report says the P/C industry will continue to be challenged by the relatively low investment yields that are expected to persist through 2014, and the slow recovery from the recession of 2007-2009.

A.M. Best has assigned stable outlooks to both personal lines and reinsurance. For commercial lines, however, Best maintains a negative outlook.

During an interview at the Property/Casualty Insurance Joint Industry Forum in January, Matt Mosher, senior vice president of rating operations, explained the negative view.

Discipline has been very good for the commercial segment so far, he said. “But what we are concerned about is the one-off type of reserve charges,” Mosher said. “We saw some in 2013. We do know and expect that there will be a few again in 2014,” he said.

Best’s special report notes that the positive overall results for the segment are heavily influenced by a small number of groups, with the five largest contributing half the industry’s commercial lines net written premiums.

The top 20 groups account for more than 70 percent of commercial lines premiums, the report says, adding that Best expects the remainder of the groups “to feel most strongly the effects of the ongoing competitive environment, still low but improving investment yields and the potential for adverse development of loss reserves.”

While the negative outlook means that the majority of rating actions in the next 12-18 months will be affirmations, downgrades will outnumber upgrades for the more than 400 commercial lines rating units, the report says.

Mosher said that commercial lines loss reserves remain adequate overall in Best’s view. “The issue is that those reserves, they’re not spread across the industry equally,” he said. Some commercial lines carriers have also “pushed the edges in terms of growth and perhaps are not getting the price exactly where it needs to be. Some of those things will come to fruition in 2014 and 2015,” he said.

Source: A.M. Best, Special Report, “U.S. Property/Casualty Review & Preview:. P/C Segment’s Net Income Estimated to Be Up Nearly 60% in 2013”