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Private auto recovery helps US P&C industry back to underwriting profitability

Broad-based improvement in statutory underwriting results led the U.S. property and casualty industry to post a net underwriting gain for the first time in three years during 2018.

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Most property lines of business posted lower net loss ratios relative to 2017 levels as the impact of natural catastrophes lessened somewhat, according to a review of statutory results adjusted and compiled by S&P Global Market Intelligence as of March 15. But it was the largest year-over-year reduction in the private-passenger auto liability net loss ratio in 15 years and the strongest workers' compensation results in at least the past two decades that may have made the difference between an underwriting profit and an underwriting loss.

Subject to certain adjustments outlined below, S&P Global Market Intelligence puts the U.S. P&C industry's 2018 net underwriting profit at $2.59 billion and its combined ratio at just under 99.2% as compared with net underwriting losses of $2.41 billion and $20.77 billion in 2016 and 2017. Combined ratios for those two years were 100.6% and 103.7%, respectively. We initially projected a full-year 2018 combined ratio of 99% but later revised that forecast higher to account for hurricanes Florence and Michael as well as unprecedented California wildfires during the second half of the year. Natural catastrophes undoubtedly served as a drag on 2018 underwriting results, but the pace of the private auto recovery and the heights to which workers' comp profitability have risen came as a surprise relative to our original expectations.

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Thanks in large part to the restructuring of certain affiliated reinsurance arrangements following the December 2017 passage of U.S. federal tax reform legislation, net premiums written growth of 10.8% vastly exceeded the 5.8% pickup in direct business volume. The 3.4% rise in net losses and loss-adjustment-expenses incurred was considerably slower than the 9.9% uptick in net premiums earned.

Though the industry's net loss ratio fell by 3.6 percentage points to 60.8%, the decline was not necessarily the product of those reinsurance program changes. In fact, the industry's direct incurred loss ratio across business lines declined even more, tumbling 4.3 percentage points to 61.6%.

Private auto insurers shift into high gear

The P&C industry scrambled to respond to spikes in private auto claims frequency and severity from 2015 through 2017, and their efforts paid off in 2018. The industry's private auto liability net loss ratio of 64.7% was its lowest since 2013 as it fell from 69.1% in 2017 and a 15-year high of 71.6% in 2016. The rate of growth in private auto liability net premiums written topped 7% for the third straight year, reflecting pricing actions previously taken by many carriers to address those adverse claims trends.

Historically favorable underwriting results for the group led by State Farm Mutual Automobile Insurance Co., the largest U.S. private auto insurer, were indicative of the broader top- and bottom-line trends in the line.

The business benefits from the widespread nature of six-month policy terms, which allows those pricing actions to get earned into carriers' books more quickly than traditional 12-month policies. That helps explain, at least in part, the divergence between the underwriting results for the private and commercial auto liability lines during 2018.

The commercial auto liability net loss ratio improved year over year, but only marginally. The result of 69.9% was down from the 16-year high ratio of 70.3% in 2017, but it was about 0.1 percentage point higher than 2016. Direct and net premiums written growth rates surged to new heights at 13.5% and 18.6%, respectively, reflecting the combination of aggressive actions by a number of carriers to raise rates and the impact of a strong U.S. economy on business volume.

Some improvement in the physical damage net loss ratio across the private and commercial auto businesses was not unexpected after the 2017 hurricanes — particularly Harvey — helped make for easy comparison. But the 2018 result of 61.8% not only marked a decline of 4.2 percentage points on a year-over-year basis; it was also the lowest such ratio in that line since 2010.

A commercial lines conundrum

The commercial lines net loss ratio fell to 56.2% in 2018 from 59.3% in 2017, but there were several moving parts that culminated with that improvement. In addition to the modest improvement in the commercial auto liability loss ratio to what remains an elevated level, the general liability lines showed significant deterioration while the workers' comp business produced a stunning result.

At 57.5%, the general liability net loss ratio marked an increase of 5.5 percentage points year over year. The rise in the loss ratio on a direct basis was even higher at nearly 7.1 percentage points.

Several writers of directors' and officers' liability business, which is included in the general liability category as it is defined for the purposes of this article, observed adverse trends in litigation during 2018. The direct incurred loss ratio in the monoline D&O business rose by nearly 0.3 percentage point to 62.9%. That represents the highest result in the eight years in which data from the supplementary D&O exhibit is available. In addition, the U.S. P&C units of American International Group Inc. combined to show $731.3 million in adverse prior-year development of incurred net losses and LAE in the other, product and special liability lines during 2018. The company attributed reserving actions in 2018 to lines such as D&O, other casualty and employment practices liability.

AIG posted an even larger amount of favorable development in the workers' comp business. Eaglestone Reinsurance Co., an AIG unit, was one of 12 individual P&C entities to show $100 million or more in favorable prior-year development in the business line. No entity reported adverse development in workers' comp of as much as $20 million.

The industry's net loss ratio in workers' comp fell from what had been a two-decade low of 48.9% in 2017 to 43.4% in 2018. The decline was even larger on a direct basis as the loss ratio tumbled by 6.6 percentage points to 43.9%.

Workers' comp rates and loss costs remain under significant pressure in many key markets around the country, but full employment in the United States helped mitigate the impact of lower pricing. Direct premiums written declined by less than 0.5% in 2018.

Razor-thin margin

Our analysis reflects the aggregation of results for 2,482 individual entities, which constitutes the vast majority of the U.S. P&C industry, excluding entities under coverage as state funds and/or residual markets. The aggregation, except where noted, is limited to those entities for which results for both 2017 and 2018 were available as of March 14. Those entities omitted from the analysis would, with at least two potential exceptions, appear to have minimal impact on the industry's underwriting results.

Among those entities excluded from the analysis due to the lack of 2018 annual statements is Merced Property & Casualty Co. The California property insurer was placed into liquidation after its $17.1 million surplus was wiped out by gross losses in excess of expected reinsurance recoveries of more than $56.7 million from California's Camp wildfire and, as such, is not expected to file.

Most notable among those expected filers not submitting annual statements on March 1 is Maiden Reinsurance North America Inc., whose annual statement was received by the National Association of Insurance Commissioners on March 15. The company, which Maiden Holdings Ltd. sold to Enstar Group Ltd. just prior to year-end for net consideration as reported by the acquirer of $286.4 million, reported an underwriting loss of $66.3 million in that filing. In addition, nearly all Puerto Rico-domiciled insurers are excluded from the analysis due to a later filing deadline in that jurisdiction.

The inclusion of S&P Global Market Intelligence-covered state funds and residual markets results in a $79.3 million increase in the aforementioned net underwriting gain, and the entities for which annual data is not available for each of the past two years combined to produce a $171.3 million net underwriting loss for the first nine months of 2018. S&P Global Market Intelligence does not compile comprehensive statutory financials for Florida's Citizens Property Insurance Corp., the residual market that generated a net underwriting loss of $280.7 million in 2018.