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Private auto improvement lifts US P&C industry statutory results in Q1

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Private auto improvement lifts US P&C industry statutory results in Q1

The U.S. property and casualty industry achieved its largest net underwriting gain in a first quarter in five years, a preliminary review of statutory data compiled by S&P Global Market Intelligence reveals.

Strong growth in private and commercial auto premiums, at a time in which the rate of increase in incurred losses has slowed, contributed to an increase in the industry's net underwriting profit to $4.79 billion from $107.9 million a year earlier. The combined ratio of 94.7% represented an improvement of 4.6 percentage points from the year-earlier period. A 3.3 percentage point reduction in the net loss ratio helped drive the better result.

A $1.69 billion year-over-year improvement in the net underwriting profitability of the P&C group led by State Farm Mutual Automobile Insurance Co. in no small way contributed to the favorable comparisons at the industry level. In the absence of that group, the industry's net underwriting profit would have increased to $4.01 billion from $1.02 billion year over year.

Certain drivers of State Farm's success, namely higher premiums and lower losses in the private-passenger auto liability and auto physical damage lines, also emerged among the themes of the quarter for the rest of the industry. And while several carriers reported year-over-year increases in catastrophe losses due to March windstorms in the mid-Atlantic and Northeast regions along with mudslides in California, State Farm saw sharp improvement in its homeowners direct incurred loss ratio. This led to a slightly better result for the industry as a whole in that line relative to the first quarter of 2017.

Certain net results at the industry level also may be affected by actions taken by another of the industry's leading players: American International Group Inc. Various AIG units commuted reinsurance agreements involving various legacy run-off exposures with Eaglestone Reinsurance Co. in February, then ceded substantially all of the related business to DSA Reinsurance Co. Ltd. Whereas Eaglestone is a Pennsylvania-domiciled company, DSA Re is a new Bermuda-domiciled reinsurer whose financial results are outside of the scope of the statutory data.

Eaglestone's loss and loss adjustment expense reserves declined to $1.84 billion as of March 31 from $5.55 billion three months prior. It had negative net premiums written of $293.1 million in the first quarter. The cessions of asbestos liabilities to Eaglestone from AIG's other U.S. P&C units were unaffected as a 2011 retroactive reinsurance agreement with Berkshire Hathaway Inc.'s National Indemnity Co. remains in place.

Auto profitability shifts into high gear

The direct incurred loss ratio for the three auto insurance lines broken out on quarterly statement blanks improved to 63% in the first quarter from 66.4% in the year-earlier period. Improvement did not occur across the board, however.

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The private-passenger auto liability line's direct incurred loss ratio of 65.5% represented a year-over-year decline of 3.1 percentage points. It not only represented the third consecutive favorable quarterly comparison in that measure of profitability, it also was the lowest result achieved by the industry in that line since the second quarter of 2014.

The industry last achieved five straight year-over-year declines in the private auto liability direct incurred loss ratio from the fourth quarter of 2005 through the fourth quarter of 2006. The loss ratio had exceeded 70% in nine of the previous 10 quarters. On a trailing-12-month basis, the loss ratio fell below 70% for the first time since the period ended June 30, 2015, at 69.8%.

The rate of year-over-year growth in direct incurred losses, which totaled in the double digits in all four quarters of 2016, has tailed off into the low-single digits in recent quarters, including 3.6% in the first quarter. At the same time, premium rate increases enacted by many of the industry's leading players have driven high-single-digit growth in written and earned premiums. The first quarter's direct premiums written and earned growth totaled 8.5%, apiece, in the private auto liability line.

Results in the auto physical damage line, which as disclosed on quarterly statement blanks include both personal and commercial business, also carried historical significance. The first quarter direct incurred loss ratio of 58.5% represented a decline of nearly 5.3 percentage points from the year-earlier period. Not since the third quarter of 2012 had the industry posted a sub-60% direct loss ratio in that line. The improvement has been even more dramatic from a sequential perspective as hurricane activity in the third quarter of 2017 helped produce a direct loss ratio of 71.6% for that period.

The divergence between rates of change in losses and premiums was even more magnified in the auto physical damage line. While direct incurred losses fell by 1.2% during the first quarter, direct written and earned premiums rose by 7.6% and 7.7%, respectively.

Additional work needs to be done to restore the commercial auto liability line to profitability. At 67.1%, the commercial auto liability direct incurred loss ratio increased by 2.1 percentage points from the year-earlier period. While the loss ratio was lower on a sequential basis from the industry's results for the previous three quarters, it has been since 2002 that the commercial auto liability loss ratio was higher in a first quarter.

The predominance of 12-month policy terms in commercial auto relative to the six-month terms that are more common in personal auto may help explain why loss ratios in the former continue to rise while, in the latter, they have begun to fall. Carriers remain vigilant in pushing for commercial auto rate increases, and those efforts continue to show in the quarterly results: direct premiums written soared by 13.5% in the first quarter, well ahead of the 7.7% rate of increase achieved in the year-earlier period.

Other commercial lines a source of strength

Premium growth rates in the workers' compensation line remain well below those associated with the auto business, but for good reason. The quarterly and trailing-12-month direct incurred loss ratios remained at historically favorable levels at 48.3% and 49%, respectively, excluding state funds, which oftentimes generate materially higher results.

With rate decreases prevalent across the country, the growth of 1.4% in direct premiums written likely reflects the impact of increasing payrolls against a generally strong macroeconomic backdrop.

Direct incurred loss ratios in the marine lines, fire and allied lines, other liability-claims made, and other commercial lines remained between 40% and 50% in the first quarter. The commercial multiperil direct incurred loss ratio fell by 1 percentage point to 51.6%, and the other liability-occurrence loss ratio dipped by nearly 0.4 percentage point to 59.2%.

All told, the commercial lines direct incurred loss ratio of 49.7% represented a decrease from 51% in the first quarter of 2017. The result when excluding commercial auto liability was even better at 47.9%, an improvement of 1.7 percentage points year over year. Premium growth rates for the commercial lines were lower when excluding commercial auto liability, given the magnitude of the pricing actions ongoing in that line.

The combination of the first-quarter improvement in commercial lines results from already favorable levels, an acceleration of progress in the private auto liability and auto physical damage lines, and the relatively easy comparison to be afforded by 2017's active hurricane season bodes well for the P&C industry's ability to not only bounce back from 2017's worst-in-six-years underwriting result, but also to make a return to underwriting profitability.