P&C industry posts best Q3 combined ratio in 9 years on personal lines strength

A strong recovery in personal lines led the US property and casualty industry to generate its first statutory net underwriting profit in a third quarter since 2019 and its largest in a third quarter since 2015.

The US property and casualty (P&C) industry swung to a net underwriting gain of $1.73 billion and a combined ratio of 98.1% in the third quarter from an underwriting loss of $7.33 billion and a combined ratio of 101.7% in the year-ago period, according to an S&P Global Market Intelligence analysis of newly released statutory financials. Its cumulative third-quarter net underwriting losses from 2020 through 2023 approached $37.23 billion, reflecting the impact of hurricanes and loss-cost inflation in the private-passenger auto and homeowners insurance business lines.

A turnaround in the private auto business helped put the industry back into the black from an underwriting standpoint. We calculate a direct incurred loss ratio of 64.5% in private auto, down from 74.8% in the year-earlier period and the lowest such result in any quarter since the first quarter of 2021. The homeowners business produced a direct incurred loss ratio of 66.8%, down from 81.0% in the third quarter of 2023, despite the landfall of Hurricane Helene at the end of September.

But not every comparison was favorable as top-line growth slowed for the industry as a whole amid noise from a sizeable M&A transaction and underwriting results in select commercial lines showed evidence of deterioration.

Personal lines profit pops

The third quarter marked the fourth consecutive reporting period in which the private auto direct incurred loss ratio tumbled by more than 9.4 percentage points in a development that reflects carriers' success in implementing broad-based rate increases and taking other non-rate-related underwriting actions to produce more favorable results. The largest private auto insurers, including the group led by State Farm Mutual Automobile Insurance Co., The Progressive Corp., Berkshire Hathaway Inc.'s Geico Corp. and The Allstate Corp., all produced private auto results in the third quarter that represented significant improvement from the year-earlier period. Direct premiums earned spiked by 14.2% in the third quarter while direct losses incurred fell by 1.5%.

Among individual P&C entities, two GEICO entities and two Progressive companies produced the industry's four largest net underwriting gains. GEICO General Insurance Co. led the industry with a net underwriting profit of $663.3 million. And while the top-tier State Farm mutual company generated a net underwriting loss of $65.2 million, it represented a year-over-year improvement of $3.35 billion. The personal lines-focused American Family Mutual Insurance Co. SI, Allstate Insurance Co., Nationwide Mutual Insurance Co. and Farmers Insurance Exchange each delivered year-over-year improvements in underwriting results of more than $500 million.

At the other end of the spectrum, personal lines-focused carriers impacted by Hurricane Helene produced some of the industry's larger third-quarter underwriting losses. North Carolina Farm Bureau Mutual Insurance Co. generated the industry's third-largest net underwriting loss among individual entities, though at $95.7 million it marked an improvement from the company's $112.5 million loss in the year-earlier period. State Farm Florida Insurance Co. and Tower Hill Insurance Exchange, which write exclusively in Florida, produced net underwriting losses that ranked among the 20-largest in the industry among individual entities.

Mixed commercial lines trends

Argonaut Insurance Co. generated the largest net underwriting loss among individual entities. At $134.5 million, it was the lone net underwriting loss of $100 million or more.

An analysis of disclosures on Note 26 of the Brookfield Wealth Solutions Ltd. subsidiary's quarterly statements finds that it had $90.6 million in unfavorable net loss and loss adjustment expense, or LAE, reserve development in the third quarter, with $52.8 million attributable to the general liability business.

All told, we calculate that the industry's direct incurred loss ratio in the other liability lines, which would typically include general liability, widened to 69.5% in the third quarter from 62.1% in the year-earlier period. That result would rank as the highest other liability loss ratio for the industry in any reporting period aside from the fourth quarter, when carriers often make their most significant adjustments to prior-year reserves, since the third quarter of 2003. Deterioration in other liability-occurrence results accounted for the increase, with State Farm Fire and Casualty Co., which writes personal and commercial excess and umbrella coverage, along with James River Group Holdings Ltd.'s James River Insurance Co. each showed increases of more than $200 million on a year-over-year basis in other liability-occurrence direct incurred losses. Those results do not incorporate the effects of James River's adverse development cover contract with Markel Group Inc.'s State National Insurance Co. Inc.

The commercial auto liability line remained challenging with the pace of recovery lagging the private auto liability business. At 76.2% the commercial auto liability direct incurred loss ratio improved by 1.9 percentage points year over year while the private auto liability loss ratio of 69.7% was 5.8 percentage points better. Florida-focused commercial auto insurer Prime Property & Casualty Insurance Inc. posted what we calculate to be $47.8 million in unfavorable reserve development in the third quarter as the company reported an across-the-board strengthening in commercial auto liability reserves from accident year 2020 onward, citing the effects of post-pandemic economic and social inflation.

Workers' compensation, which has been a particular area of strength for the industry in recent years, showed some signs of weakening from historically favorable levels. The direct incurred loss ratio of 50.7% marked an increase from 46.4% in the year-earlier quarter, and it ranked as the fifth-highest result in the business line in the last 28 quarters.

M&A deal impacts comparisons

The accounting treatment for a transaction where Arch Capital Group Ltd. acquired the US middle-market and entertainment P&C business of Allianz SE's Fireman's Fund Insurance Co. significantly depressed the industry's top and bottom lines during the third quarter.

Under the terms of a master transaction agreement that closed Aug. 1, Arch paid $450 million to acquire the middle-market and entertainment businesses from Fireman's Fund parent Allianz Global Risks US Insurance Co., generally including policies issued, renewed or assumed from Jan. 1, 2016, onward. The Bermuda-domiciled Arch Reinsurance Ltd. assumed liabilities pertaining to accident years 2016 through 2023 under a loss portfolio transfer, with Arch Insurance Co. reinsuring policies issued, renewed or assumed in 2024.

Allianz Global Risks US posted net incurred losses and LAE totaling a negative $1.56 billion in the third quarter, including the impact of the $1.60 billion ceded under the loss portfolio transfer, which as a Bermuda-domiciled entity is outside the scope of US statutory reporting. Its net premiums earned totaled a negative $1.64 billion for the quarter. So while the deal essentially amounted to a wash from the standpoint of net underwriting income and the combined ratio for the third quarter, it had a more significant effect on year-over-year growth in net premium volumes and on the trajectory of loss and LAE reserve development for prior accident years. We calculate growth in net premiums written of 7.0% on a total-filed basis or 8.0% when excluding the effects of the Fireman's Fund transaction. (These figures also incorporate the restatement of third-quarter 2023 written premiums by Assurant Inc.'s American Bankers Insurance Co. of Florida.

Further, the deal mechanics dramatically affected prior-year reserve development statistics. On a total-filed basis, we calculate that aggregate prior-year loss and LAE reserve development for the industry is favorable by $1.31 billion. When excluding Allianz Global Risks US altogether, including its ongoing business, that figure swings to an unfavorable $193.2 million. For accident years 2021 and prior, adverse development more than doubles with this adjustment, to $1.21 billion from $505.8 million on a total-filed basis. Note that the comparisons would be slightly more dramatic were we to include Allianz Global Risks US's ongoing business, which we calculate to have generated adverse development of roughly $98.7 million in the third quarter.

Methodology

The industry-level results for the third quarter of 2024 referenced in this article represent an aggregation of individual company results filed with the National Association of Insurance Commissioners and obtained by Market Intelligence as of Nov. 19; prior-period results reflect our previously published aggregations of total-filed results.

Our third-quarter 2024 calculations also may incorporate data for recently formed entities that may not immediately be available on S&P Capital IQ Pro. Quarterly results for New Jersey-domiciled entities are unavailable due to a state statute that deems those filings to be confidential and not subject to public inspection.

While the third quarter data will change to some extent as we obtain additional information in the coming weeks, we do not anticipate the movement will be material based on the number and relative magnitude of the expected filers for which we have not received results.

Important considerations for our combined ratio calculations include the following: the results include policyholder dividends unless otherwise noted, and we base expense ratios as the combination of other underwriting expenses and aggregate write-ins for underwriting deductions as a percentage of net premiums written.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.