March dislocation in the financial markets took a significant toll on the capitalization of certain U.S. property and casualty insurers that invest heavily in common stocks, a review of a selection of newly released first-quarter statutory filings reveals.
Several companies posted historically large negative net changes in unrealized capital gains and losses for the period as equities plummeted amid the initial fallout of COVID-19. Though material portions of those negative changes may have been reversed as the market recovered after the quarter's end, the timing of the market declines led surpluses to erode relative to year-end 2019 levels.
Berkshire Hathaway Inc.'s National Indemnity Co. posted the largest negative net change in unrealized capital gains and losses by any U.S. P&C insurer in any quarter since the start of 2008. At negative $37.83 billion, it was more than 2x the industry's previous quarterly high during that stretch of $18.44 billion, which it recorded in the fourth quarter of 2018. As it pertains specifically to stocks and bonds reported on Schedule D, National Indemnity experienced a gross unrealized valuation decrease of $44 billion.
"...[T]he outbreak of COVID-19 has adversely affected ... the Company's operations, including the portfolio of equity securities," National Indemnity said in its quarterly statement. Though the company posted net income of $2.20 billion for the first quarter, the negative net change in unrealized gains and losses led to a 21% drop in its surplus from year-end 2019.
Common stocks accounted for 83.7% of National Indemnity's unaffiliated investments as of year-end 2019, as compared with 23.4% for the U.S. P&C industry as a whole. Only three other U.S. P&C companies with at least $1 billion in net admitted cash and invested assets on that date that are not affiliated with Berkshire had a relative allocation in excess of 50%: Franklin Mutual Insurance Co., Merrimack Mutual Fire Insurance Co. and State Farm Mutual Automobile Insurance Co.
The top-tier State Farm company, on a stand-alone basis, reported a net change in unrealized capital gains and losses of negative $10.34 billion for the period, which represented its largest such amount in any quarter since at least the start of 2001. The negative value fully offset the positive impact of $745.7 million in net income in leading the company to post its largest percentage decline in policyholders' surplus on a sequential since the fourth quarter of 2008 at 8.2%.
While Franklin Mutual's quarterly statements are not available by New Jersey statute, Merrimack experienced its largest negative net change in unrealized gains and losses in any quarter since at least the start of 2001 at $200.4 million. It also triggered a decline in surplus of nearly 16% in the first three months of 2020. According to the management's discussion and analysis section of its 2019 annual statement, Merrimack's stock portfolio experienced "volatility" due to COVID-19.
Factory Mutual Insurance Co., which had 42.2% of its unaffiliated investments in common stocks at year-end 2019, experienced a net change in unrealized capital gains and losses of negative $1.56 billion in the first quarter. When combined with a net loss of $109 million and a negative entry of $407.3 million associated with amortization and actuarial losses under two statements of statutory accounting principles that address pension obligations and post-retirement benefits, the company's surplus tumbled by 13.8%. That marked the company's largest sequential drop in surplus since the third quarter of 2001, when its underwriting results and investments portfolio were hit by the Sept. 11 terrorist attacks.
The net loss for the first quarter incorporated a net underwriting loss of $438.7 million. Direct incurred loss ratios exceeded 100% in all four of Factory Mutual's primary business lines, fire, allied lines, inland marine and boiler and machinery, leading to a consolidated result of 132.5%.
Future statutory statements may provide more specifics as to the direct effects of COVID-19 from premium refunds, rate reductions and/or policyholder dividends. The NAIC's Statutory Accounting Principles Working Group has recommended that companies aggregate and report those values on Note 21A of those statements. The initial set of first-quarter filings reveal limited disclosures of such actions on notes 21A and 22 as subsequent events, such as Nationwide Mutual Insurance Co.'s notice of its premium refunds for personal auto policyholders.
Additionally, it may take several weeks before the full scope of the pandemic's effect on first-quarter statutory financials is fully revealed. Several states issued guidance that extends by 30 days the May 15 deadline for first-quarter statutory statements. Others indicated a willingness to grant extensions under certain specified circumstances.