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Razor-Thin Q2 Gain Has US P&C Industry Tracking To Full Year Underwriting Profit

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Razor-Thin Q2 Gain Has US P&C Industry Tracking To Full Year Underwriting Profit

History suggests it will likely take a significant natural catastrophe or another material adverse development to keep the U.S. property and casualty insurance industry from producing a statutory net underwriting gain for a second consecutive calendar year.

A first look at June 30 statutory results finds that the industry's combined ratio increased to nearly 99.9% in the second quarter from 98% a year earlier. S&P Global Market Intelligence calculates a net underwriting gain of just $302.3 million, down from $2.12 billion a year ago. The analysis covers the approximately 2,500 individual U.S. property and casualty companies for which S&P Global Market Intelligence has received data as of Aug. 22, representing 98.5% of expected filers. Data referenced in this article excludes entities classified by S&P Global Market Intelligence as state funds and/or residual markets.

But despite the slim margin between profit and loss, the industry's ability to avoid significant red ink in the second quarter has usually boded well for full year results. The period is often characterized by elevated catastrophe losses resulting from tornadoes and other severe storms.

U.S. P&C insurers have generated net underwriting gains in a second quarter only six times in the previous 18 years: in 2004, 2005, 2006, 2007, 2009 and 2018. With the exception of 2005, when hurricanes Katrina, Rita and Wilma made landfall during the third and fourth quarters, those results have foreshadowed full year underwriting profitability for the industry.

Even on the most recent three occasions on which the industry has produced second quarter net underwriting losses of less than $2 billion — in 2013, 2014 and 2015 — companies were still able to generate positive full-year underwriting results. The last time second quarter underwriting losses of a similar magnitude did not serve as a harbinger of full-year underwriting profitability was 2003, when several P&C companies engaged in material strengthening of reserves for prior accident years in response to adverse claims trends for asbestos and certain other perils. Also, unlike in the 2013 through 2015 period, underwriting results for the first half of 2003 were negative.

For the first half of 2019, the industry's net underwriting gain fell to $6.01 billion from $6.75 billion year over year. Its combined ratio rose to 97.9% from 96.4%.

Net premiums written and earned increased by 1.9% and 4.1%, respectively, on a year-over-year basis in the second quarter, well short of the 6.6% rise in net losses and loss adjustment expenses incurred. As such, the loss and LAE ratio climbed by 1.7 percentage points to 71.8%. A considerably slower rate of increase in other underwriting expenses led to a 0.1 percentage point rise in the expense ratio, which emerged as a key factor in keeping the combined ratio below break-even.

Berkshire Hathaway Inc.'s National Indemnity Co. generated the industry's largest underwriting gain among individual entities during the second quarter at $279.3 million, but that marked a decline from a profit of $575.3 million in the year-earlier period. Another Berkshire company, Government Employees Insurance Co., was among the 12 individual entities with second quarter net underwriting gains of $100 million or more. That list also included United Services Automobile Association and an affiliate.

As to be expected with such a modest underwriting profit, results were not positive across the board. There were 12 individual entities with underwriting losses of $100 million or more, including two State Farm Mutual Automobile Insurance Co. affiliates. The top-tier State Farm entity swung to an underwriting loss of $22.9 million in the second quarter from a year-ago gain of $610.4 million.

The largest year-over-year increases in underwriting profitability among individual entities were recorded by Everest Re Group Ltd.'s Everest Reinsurance Co., the top-tier USAA company and Factory Mutual Insurance Co. with positive changes of $565.9 million, $211.1 million, and $175.1 million, respectively. The USAA group swung to a net underwriting profit of $455.7 million from a loss of $31.5 million in the year-earlier period.

Comparatively better auto results

Positive personal and commercial auto profitability trends played a significant role in minimizing the magnitude of the deterioration in overall results.

Following a negative year-over-year comparison in the direct incurred loss ratio in the first quarter, the second quarter result of 65.4% marked a decline from 67% in the year-earlier period.

In the private-passenger auto liability line, the quarterly direct loss ratio of 66.6% was nearly 3 percentage points lower than the result for the year-earlier period. In commercial auto liability, losses remained elevated as demonstrated by a ratio of 70.5%, but that was 2.5 percentage points better than the result for the second quarter of 2018. It was the sixth time in the last eight quarters that the commercial auto liability direct loss ratio exceeded 70%. The auto physical damage line, including both personal and commercial auto business, had a 0.4-percentage-point increase in the direct loss ratio to 62.3%.

Direct premiums written trends in the personal auto business showed more evidence of increasing competition, however. The year-over-year rate of growth in the combination of the auto physical damage and private auto liability lines fell to 2.9%, which ranks as the most sluggish pace of expansion in recent memory. Growth rates were about 8% in those lines for six consecutive reporting periods through the second quarter of 2018 before they began to tail off.

In commercial auto liability, the year-over-year written premiums growth rate also compared unfavorably to recent quarters but remained well in excess of other auto lines at 9.8%. It was the first time since the third quarter of 2017 that the growth rate was not in the double digits.

Pressure on ex-auto liability profits

Workers' compensation was the lone major line of business aside from auto liability that showed year-over-year improvement in the direct loss ratio. The second quarter result of 48.7% represented a decline of 0.7 percentage point from the year-ago period. It was the sixth time in the last seven quarters that the workers' comp direct loss ratio fell below 50%.

With multiple states effecting declines in workers' comp rates and/or loss costs following an extended period of calendar-year profitability, the direct premiums written growth rate in the business line was negative for the fifth consecutive quarter, though it was surprisingly resilient at a decline of just 0.1%. High rates of employment have helped mitigate the impact of lower rates over the last several years.

The downward movement in workers' comp and commercial auto liability direct loss ratios were especially noteworthy given that certain other casualty lines experienced material deterioration in the second quarter.

In the combination of the other and product liability lines, the second quarter direct loss ratio rose by 2.9 percentage points to 58.2%. The medical professional liability line's direct loss ratio spiked to 60.2% from 51.1%. It was the second straight quarter in which the medical professional liability direct loss ratio exceeded 60%, a threshold the business had rarely approached in any of the previous eight quarters.

Written premium trends varied widely between the two businesses: They fell by 0.7% in medical professional liability, while rising by 8.8% in the other and product liability lines, evidence of the upward rate movement that a number of P&C industry executives referenced during second quarter earnings conference calls.

All told, commercial lines direct premiums written rose by just under 6% in the second quarter, up from growth rates in the low 5% range in each of the previous four quarters. The personal lines growth rate of 3.7% marked a decline from the pace of expansion of 4.1% in the first quarter and 7.1% in the second quarter of 2018 in a development that demonstrates the impact of slower increases in private auto premiums.

S&P Global Market Intelligence has projected full year 2019 direct premiums written growth rates in the commercial and personal lines of 4.7% and 3.9%, respectively.

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