After equity market volatility in March fueled the largest sequential decline in U.S. property and casualty industry policyholders' surplus in recent memory, June 30 quarterly statements may prove similarly historic, but in reverse.
The 20% plunge in the S&P 500 Index during the first quarter, its largest drop since the fourth quarter of 2008, gave way to a gain of nearly the same percentage in the second quarter, marking the largest increase for the index in any quarter since 1998.
An unprecedented $118.15 billion unrealized valuation decline in the P&C industry's stock and bond holdings during the first quarter led to an after-tax net change in unrealized capital gains and losses across asset classes of $85.12 billion. That, in turn, caused surplus to plunge by 9.8% from Dec. 31, 2019, through March 31, 2020, a level that far surpassed the magnitude of the individual sequential declines experienced during the global financial crisis in the second half of 2008 and first quarter of 2009.
Aggregate net admitted common stock held by U.S. P&C insurers tumbled to $385.56 billion as of March 31 from $483.78 billion three months earlier. That was the industry's lowest total at a quarter-end since Sept. 30, 2017.
S&P Global Market Intelligence does not maintain quarterly statutory data going back to 1998, but the equity market rally that extended through the second and third quarters of 2009 as stocks emerged from the depths of the financial crisis may provide some sense of what we can expect in forthcoming quarterly statements.
With S&P 500 gains of 15.2% and 15% in those two periods, respectively, serving as a backdrop, U.S. P&C industry surplus rose sequentially by 6.3% and 5.8%. Those increases ranked among the five largest sequential gains in industry surplus during the past 17 years. Industry surplus increased by an average of 4.9% sequentially during the 10 quarters in the past 17 years in which the S&P 500 rose by a double-digit percentage.
Net admitted common stock held by U.S. P&C companies rose sequentially by 11.6% and 9.1% during the second and third quarters of 2009, respectively. It was not until the first quarter of 2012 that the industry's net admitted common stock returned to the levels attained at year-end 2007. The largest sequential increase in net admitted common stock during the past 18 years occurred in the fourth quarter of 2011, a period during which the S&P 500 increased by nearly 11.2%.
The P&C units of Berkshire Hathaway Inc., which hold by far the largest amount of common stock in the industry on an absolute basis, on their own accounted for $73.44 billion of the first quarter's unrealized valuation decrease in stock and bond investments. The group led by State Farm Mutual Automobile Insurance Co. ranked a distant second in both categories, with an unrealized valuation decrease in its stock and bond portfolio of $14.34 billion. The two groups, on a combined basis, accounted for $72.03 billion of the $98.21 billion industrywide decrease in net admitted common stock.
The resulting negative net changes in unrealized capital gains led to sequential declines in surplus of 20.8% at Berkshire's U.S. P&C companies and 8.2% at the State Farm group. Among the 57 P&C groups and stand-alone entities that had negative net changes in unrealized capital gains in excess of $100 million, surplus changes ranged from a decline of 28.2% at the U.S. P&C units of IAT Insurance Group Inc. to an increase of 4.4% at Progressive Corp.
The rising equity market tide during the second quarter did not lift all boats, however, suggesting that the S&P 500's recovery may not represent a direct proxy for unrealized valuation increases across the industry. Among some of the publicly traded common stocks that are most widely held by P&C companies, shares of Apple Inc. surged by 43.5%, but Wells Fargo & Co. lost 10.8%.
Changes in unrealized capital gains represent only one variable in determining increases or decreases in statutory capitalization. Net income provided a significant offset to the unrealized valuation changes in the first quarter. At $18.35 billion, net income increased to the highest total in a single quarter in five years. Progressive's $1.31 billion in net income easily offset its negative $613 million net change in unrealized capital gains, for example.
It has been since 2009 that industry net income in a second quarter has been higher than in the preceding first quarter, largely in a reflection of the nature of seasonal weather patterns. News that Chubb Ltd. will record $1.16 billion in after-tax losses associated with COVID-19 in the second quarter suggests that the industry may face additional headwinds in that regard this year.
Yet it remains improbable that net income would create a material drag on positive changes in net unrealized capital gains given their likely magnitude. And it has been since the second quarter of 2011, a period characterized by historically high tornado-related losses, that the industry produced a net loss of any size in that period.