A run of underwriting profitability without recent precedent ended in 2022 for the U.S. property and casualty industry, an S&P Global Market Intelligence analysis of newly released statutory financial results reveals.
With data received from 94.9% of expected individual U.S. P&C entities, we calculate a 2022 calendar year combined ratio of 102.4% excluding state funds and residual market entities. The same companies produced a combined ratio of 99.4% in 2021. A combined ratio below 100% generally indicates underwriting profitability.
Industry combined ratios, when including the full scope of available filers for each year, were 99.3% in 2018, 99.0% in 2019, 98.8% in 2020 and 99.7% in 2021. The 2017 combined ratio of nearly 103.9% reflected a spike in incurred losses due to hurricanes Harvey, Irma and Maria.
Although Hurricane Ian created headwinds for P&C results in 2022, sharp deterioration in private auto liability results represented the primary driver of a 15.5% increase in net incurred losses across business lines.
Auto losses accelerate
The well-documented challenges faced by the private auto business extended beyond the physical damage coverages in 2022. This led to a spike in the overall private auto net incurred loss ratio to a level far beyond anything the industry had experienced in at least the past 25 years.
With the private auto liability and physical damage loss ratios both topping 80%, mitigated only by a 45.8% loss ratio in the private auto no-fault line, the result across the private auto business hit 79.8% in 2022. On a total-filed basis, the private auto loss ratio had only exceeded 70% on three occasions entering 2022: 70.9% in 2000, 70.7% in 2001 and 70.3% in 2016. The 2021 result was 12.3 percentage points lower at 67.6%.
Adverse prior-year reserve development contributed to the markedly unfavorable comparison. A high-level analysis of Schedule P data from individual filers for the liability portion of the business found adverse development of incurred net losses and defense and cost-containment expenses of $5.02 billion, of which $3.69 billion pertained to accident-year 2021. The industry had only shown adverse private auto liability prior-year development on four previous occasions in the past 25 years with none of those results coming anywhere close to the calendar-year 2022 tally.
State Farm Mutual Automobile Insurance Co. on a stand-alone basis accounted for the majority of the adverse private auto liability prior-year development at just over $3.75 billion. The Allstate Corp.'s Allstate Insurance Co. recorded adverse development of $1.18 billion in the business line. Other entities with private auto liability adverse development in excess of $100 million were as follows: United Services Automobile Association ($272.9 million); USAA Casualty Insurance Co. ($192.2 million); The Progressive Corp.'s Progressive Direct Insurance Co. ($126.3 million); and USAA General Indemnity Co. ($123.0 million).
The top-tier USAA entity reported in its statement of actuarial opinion that it has experienced a shift in its claims mix toward more severe accidents in the pandemic era as less congestion has led to more crashes occurring at higher speeds. The document further observed greater variability and magnitude of its loss and loss-adjustment-expense reserves owing to the effects of medical and social inflation. As a result, USAA said it has augmented its standard methodology for estimating reserves.
Allstate previously disclosed having increased reserves for injury coverages in its Allstate-brand auto segment.
Strong top-line growth fuels profitability in other lines
Fallout from inflation, car crashes and natural catastrophes in the personal lines business stole the headlines throughout 2022, but the full-year results suggest considerable strength from top- and bottom-line standpoints in select commercial lines.
Workers' compensation checked both boxes, with strong employer payrolls helping to more than offset rate pressure from a premium growth perspective. The calendar-year net incurred loss ratio of 44.3% reflected material amounts of favorable prior-year reserve development.
Even commercial auto fared considerably better than private auto though the net incurred loss ratio rose on a year-over-year basis by 7.3 percentage points to 68.8%.
All told, the personal lines net incurred loss ratio for 2022 of 76.4% was 20.4 percentage points higher than the commercial lines result. That gap stands as by far the largest between the two business segments in the past 25 years, easily surpassing the 12.1-point spread in 2015 when the commercial lines were basking in the glow of a hard market and losses had begun to rise in the last private auto market cycle.
A number of business lines have personal and commercial components, but S&P Global Market Intelligence categorizes private auto, homeowners and farmowners businesses as personal lines. The commercial lines contain the remainder of the non-accident-and-health lines of business.
Large net underwriting gains and losses among individual entities reflected the bifurcated outcomes. All five of the individual entities with the five-largest net underwriting gains are included in the commercial lines with three of them in the mortgage guaranty business: Radian Group Inc.'s Radian Guaranty Inc., Factory Mutual Insurance Co. (which operates as FM Global), W. R. Berkley Corp.'s Berkley Insurance Co., Enact Holdings Inc.'s Enact Mortgage Insurance Corp., and Essent Group Ltd.'s Essent Guaranty Inc.
At the other end of the spectrum, State Farm Mutual Auto posted a $13.33 billion net underwriting loss. Five entities, all of which are primarily engaged in the personal lines, posted net underwriting losses of more than $1 billion, including the top-tier State Farm company, Allstate Insurance, American Family Mutual Insurance Co. S.I., Erie Insurance Exchange and Nationwide Mutual Insurance Co.
Policyholders' surplus remains subject to forthcoming group-level adjustment, but it is almost certain to show a year-over-year decline for the fifth time in the past 20 years. And the decline is likely to be the largest on a relative basis since the throes of the financial crisis in 2008 when P&C industry surplus plunged by 12.7%. This figure is accentuated by the inclusion of financial and mortgage guaranty companies in the P&C industry, given the outsized effects fallout from the crisis had across those businesses.
In addition to the industry's $22.57 billion underwriting loss excluding state funds, investment-related headwinds emerged in the form of a $14.45 billion decline in the aggregate amount of net realized capital gains and a dramatic swing in net unrealized capital gains and losses. The latter figure was a negative $117.84 billion for 2022 as compared with a positive $113.44 billion in 2021.
Higher interest rates ultimately bode well for the P&C industry's financial well-being, but the volatility they induced in fixed-income and equity markets in 2022 took their toll in the meantime.
The industry-level combined ratios referenced in this article represent an aggregation of individual company results filed with the National Association of Insurance Commissioners and obtained by S&P Global Market Intelligence as of March 6 unless otherwise noted. These results may change to some extent as we obtain additional information but we do not believe the outstanding filers are individually or collectively significant enough to dramatically influence particular line items. For example, the available 2022 filers accounted for 98.9% of total 2021 net premiums earned and 99.0% of net incurred losses.
S&P Global Market Intelligence tentatively expects to post industry aggregates for data points not subject to group-level adjustments on March 13.
Important considerations for our combined ratio calculations include the following: 1) the results include policyholder dividends unless otherwise noted and 2) we base expense ratios as the combination of other underwriting expenses and aggregate write-ins for underwriting deductions as a percentage of net premiums earned. In 2022, the combined ratio would still have been comfortably above 100% had we treated these items differently. This can, on occasion, cause combined ratios to be slightly above or below 100% in years when the industry's net underwriting result is positive or negative, respectively.
The exclusion of state funds had an immaterial impact on the industry's 2022 combined ratio based on the data we have obtained through March 6. Notably, however, there likely would have been more of a divergence had results for Florida's residential property insurer of last resort, Citizens Property Insurance Corp., been incorporated. Though Citizens, which was hard hit by Ian, had not posted their full-year results as of March 6, its net underwriting loss through the first nine months of 2022 was $2.25 billion.
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.