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Narrow overall growth rate obscures wide swings in US commercial lines premiums

A relatively middling year-over-year change in second-quarter commercial lines direct premiums written by U.S. property and casualty insurers belies the level of churn that occurred within business lines and, potentially, individual accounts.

Statutory data compiled by S&P Global Market Intelligence showed evidence of both strong pricing momentum and the severe macroeconomic downturn. Total commercial lines direct premiums written increased by 0.7% compared to the second quarter of 2019, or just under 1% when excluding state funds and residual market entities. However, the rates of change within individual lines ranged from a drop of 51% in the international P&C business to an increase of 21.2% in financial guaranty.

It was only the second time since 2010 that commercial lines direct premiums written failed to increase by at least 1%. The other occasion was a 0.3% decline in the third quarter of 2016.

Among the largest business lines, workers' compensation direct premiums written fell by 14.1% excluding state funds and residual markets, as the combination of shrinking employer payrolls, changing employee classifications and falling premium rates created a stiff headwind. Premium volume in the business line last declined at a more rapid rate in the second quarter of 2009 as the industry felt the effects of the global financial crisis.

Among the top 10 U.S. P&C groups based on 2019 workers' comp direct premiums written and excluding state funds, only the group led by Zurich American Insurance Co. reported growth in total commercial lines direct premiums written during the second quarter.

The other liability and product liability lines, meanwhile, benefited from rapidly rising rates. Direct premiums written growth of 6.9% marked a ninth consecutive quarter of at least 5% expansion, though it compared unfavorably to double-digit increases recorded in the fourth quarter of 2019 and the first quarter of 2020.

Upward pricing momentum in the directors' and officers' liability line, which is included in the other and product liability category, undoubtedly contributed to the second quarter's expansion. Monoline D&O direct premiums written surged by 36.4% in the second quarter, the fastest rate of growth in the eight years for which year-over-year comparisons are available.

Property-related business lines also saw strong growth, with commercial multiperil, fire and allied lines premiums rising during the second quarter by 4.8%, 14.6% and 13.8%, respectively.

Premium volume in the inland marine, warranty, surety and commercial auto liability lines experienced history-making declines during the second quarter. The 5.9% retreat in commercial auto liability business was the line's first decline of any magnitude since the first quarter of 2011. Auto physical damage premiums are not broken out by their personal and commercial components in quarterly data.

Inland marine and surety premiums slumped by 6.6% and 4.5%, respectively, in their largest declines since 2009. Warranty premiums tumbled by 15.4%, their most rapid retreat since the third quarter of 2013.

A majority of the 59 U.S. P&C groups and top-tier entities that generated at least $1 billion in commercial lines premium volume in 2019, excluding state funds, generated some amount of commercial lines premium growth in the second quarter, though outcomes varied from double-digit declines to double-digit increases.

The U.S. subsidiaries of Sompo Holdings Inc. led the pack with commercial lines direct premiums written growth of 30.4% in the quarter, driven by strong growth in the allied lines business of crop insurer American Agri-Business Insurance Co. Sompo is positioned for further expansion with the recent announcement of its agreement to acquire the managing general agency currently affiliated with CGB Insurance Co. The deal would make Sompo it the second-largest U.S. multiperil crop insurer at the group level, assuming it takes on the business being written by CGB, behind only Chubb Ltd.

At the other end of the spectrum, James River Group Holdings Ltd.'s U.S. P&C subsidiaries posted a decline in commercial lines direct premiums written of 21%. They faced a difficult comparison owing to the timing of the early cancellation of policies issued to an Uber Technologies Inc. affiliate.

The push-pull between rising premium rates and lower exposure units resulting from macroeconomic pressures is likely to continue in the near term. The most recent pricing survey by the Council of Insurance Agents and Brokers found hardening across all sizes of commercial accounts, with an overall average rise of 10.8% in the second quarter. The level of increase was highest in the umbrella and commercial property lines.

Anecdotal commentary from several P&C companies seemed to be in line with those findings. American Financial Group Inc. Co-President and Co-CEO Carl Lindner III said during an August conference call that his company saw "exceptionally strong" momentum in renewal pricing, with average increases on a year-to-date basis hitting their highest level in more than 15 years.