Challenges in the private-passenger auto business appear to be abating for the group led by State Farm Mutual Automobile Insurance Co.
Higher premiums and lower losses in the private-passenger auto liability and auto physical damage lines contributed to the State Farm property and casualty group's largest underwriting profit in a first quarter since 2006, based on S&P Global Market Intelligence's preliminary review of data disclosed in quarterly statutory statements. At $778.4 million, the group's net underwriting gain represented an increase of $1.69 billion from the year-earlier period's net underwriting loss of $912.6 million.
It was also the first quarter in three years that the State Farm P&C group generated a net underwriting profit of any magnitude. The period further represented the largest net underwriting gain for the group in any quarter since the third quarter of 2006, a quarter in which the industry delivered its second-lowest quarterly combined ratio this century. The top-tier State Farm entity broke a streak of 10 consecutive first-quarter underwriting losses with its $231.8 million underwriting profit to begin 2018.
By business line, the group's auto physical damage direct incurred loss ratio of 60.4% represented an improvement of 8.5 percentage points from the year-ago period, and it was the group's lowest such result in a first quarter since 2010. Earned premiums in that line increased by 5.1% at the same time incurred losses plunged by 7.9%. While auto physical damage disclosures on quarterly statement blanks include both personal and commercial business, the latter has been a de minimis contributor to the State Farm group's results in that line.
In private-passenger auto liability, the State Farm group produced a direct incurred loss ratio of 63.8%, down 6.2 percentage points from the first quarter of 2017. Prior to the most recently completed quarter, it had been 2007 since the group had generated a private auto liability direct incurred loss ratio of 65.8% or lower in a first quarter. Much like the auto physical damage line, the group's private auto liability direct premiums earned climbed by 5.5%, while direct incurred losses fell by 3.9%.
When combining the private auto liability and auto physical damage lines, the State Farm group's direct incurred loss ratio totaled 62.4% in the first quarter, down 7.1 percentage points from the year-earlier period. It was the group's lowest such result in a first quarter since 2006.
The homeowners line saw only a marginal year-over-year increase in earned premiums, but direct incurred losses plunged for the State Farm group by 29.2%. As a result, the group's homeowners direct incurred loss ratio tumbled by 18.1 percentage points to 43.8%. State Farm's 2017 first-quarter loss ratio in that line had been its highest in eight years.
First-quarter loss ratios in the homeowners line tend to be volatile on a year-over-year basis for State Farm and among peer carriers in the same period given the nature of the catastrophe losses that tend to occur in winter and early spring. The quarterly result also included a large negative entry on the incurred loss line for State Farm General Insurance Co., and the group's direct homeowners loss ratio would have totaled 53.9% on a pro forma basis when excluding that California-focused company.
One quarter does not a trend make, but the results for the nation's largest private auto insurer offer another data point to suggest that the profitability improvements many industry participants expected are beginning to materialize.
S&P Global Market Intelligence calculates that the P&C industry's direct loss ratio across the private auto lines improved to 68.8% in 2017 from 71.9% in 2016. But it was still the industry's second-highest such result in a calendar year since 2001. Direct private auto loss ratios were lower in 2017 than in 2016 for seven of the top 10 private auto writers, including for State Farm, Progressive Corp., Allstate Corp., USAA Insurance Group, Liberty Mutual Holding Co. Inc., Farmers Insurance Group of Cos. and Nationwide Mutual Group.
The reduction shown by State Farm in 2017 was especially notable as its direct private auto loss ratio fell by 8.2 percentage points to 68.8%. After its 2016 result was more than 5 percentage points above the industry's, the 2017 figure was essentially in line.
Though 2018 is not yet halfway done, first-quarter data suggests there could be more favorable comparisons to come.
