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Top-line sluggishness evident in Q1 US P&C insurance statutory financials

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Top-line sluggishness evident in Q1 US P&C insurance statutory financials

Recent upbeat commentary about pricing trends in certain lines of business did not translate into comparatively favorable premium growth in the first quarter for the U.S. property and casualty industry.

The year-over-year rate of growth in direct premiums written of 4.4% represents the industry's slowest pace of expansion in 10 quarters, according to a first look at statutory financials for the period. Historically sluggish expansion in the private-passenger auto liability line following sharp improvement in underwriting results in combination with mounting weakness in workers' compensation premiums more than offset any signs of increased pricing momentum in other lines.

Despite top-line headwinds, S&P Global Market Intelligence calculates that the industry produced a net underwriting profit for an eighth consecutive first quarter. The combined ratio increased by about 1.1 percentage points from the year-earlier period to 95.8%.

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Data for all periods referenced in this article reflect aggregations for the 2,418 individual P&C entities for which data was available as of May 20 for the last two first quarters, excluding those classified by S&P Global Market Intelligence as state funds or residual markets. Results are unavailable for entities that together accounted for less than 0.6% of industry net premiums written in the first quarter of 2018.

Given that the industry produced underwriting losses in two of the past three years even after opening in the black, the first quarter's bottom line is not necessarily indicative of results for the forthcoming catastrophe-prone reporting periods. The slowing rates of increase in premium growth, however, bear watching. A notable drop in the rate of increase in private-passenger auto direct premiums written in combination with accelerating declines in the workers' compensation line may continue to offset the momentum evident in the property business and certain commercial casualty lines.

The private auto liability business accounts for between 21% and 23% of the industry's direct premiums written from quarter to quarter, so a continued deceleration in pricing will make it difficult for the industry to match its overall growth of well over 5% in 2018, even if rates continue to harden elsewhere.

Private auto premium growth plummets

Downward trending private auto rates for leading writers such as State Farm Mutual Automobile Insurance Co. and GEICO Corp. follow a stretch of several years in which the industry broadly pushed for higher pricing to address increases in the frequency and severity of claims. It remains to be seen whether those rate actions represent one-time rollbacks of a portion of the earlier hikes or the harbinger of a more lasting acceleration in competition.

Growth in private auto liability direct premiums written of 2.9% in the first quarter marked the industry's slowest rate of expansion since the second quarter of 2012. It was nearly 2 percentage points below the industry's growth rate in the fourth quarter of 2018. Private auto liability direct premiums written increased by 8.7% in the first quarter of 2018.

Direct premiums written in the private auto liability line declined for a third consecutive quarter for the State Farm group. The first quarter's 4.6% retreat marked the group's largest decline since the fourth quarter of 2004. The Berkshire Hathaway Inc. group, which includes GEICO, grew private auto liability direct premiums written by 5.5% for the period, but that represented its slowest rate of expansion since the second quarter of 2010.

Auto physical damage direct premiums written, which largely consists of private auto business, rose by 4.8% in the first quarter, down sequentially from a 5.7% rate in the fourth quarter of 2018 and well short of the 7.8% expansion posted in the year-earlier period. It had been since the third quarter of 2012 that auto physical damage direct premiums written increased at a slower pace.

But at the same time growth in premium volume is trending lower, underwriting results seem to have stabilized at levels well below those that were commonplace from 2015 through 2017.

The trailing-12-month direct incurred loss ratio for the private auto liability line was virtually unchanged from the fourth quarter of 2018 at less than 66.5%. It peaked in the fourth quarter of 2016 at 74.2%. In auto physical damage, the trailing-12-month loss ratio of 61.8% was up from 61.4% in the fourth quarter of 2018, but more than six percentage points below its 2016 peak.

A tale of two commercial lines

The long-awaited turn in commercial auto liability profitability may have taken place in the first quarter, and high rates of premium growth in that line bode well for further improvements.

The commercial auto liability direct incurred loss ratio declined to a three-year low of 63.9% in the first quarter from 67.4% in the year-earlier period. On a trailing-12-month basis, the commercial auto liability loss ratio fell by nearly a percentage point to 70.6%, which marks its lowest point since the third quarter of 2016. The trailing-12-month loss ratio peaked in the second quarter of 2018 at 72.8%.

Direct premiums written surged by 13.2% in the first quarter. It was the sixth consecutive reporting period with a double-digit increase in premium volume. A number of leading carriers have pledged to remain vigilant in their pursuit of profitability improvements in the commercial auto liability line following the dismal results of the past several years.

But just as commercial auto served as an outlier from a pricing standpoint to the high end, workers' compensation has taken a similar position to the low end.

Growing employer payrolls have helped slow the drag from reductions in filed rates and loss costs in recent years. Sharply lower direct premiums written in the first quarter cast doubt upon the sustainability of that situation, however.

The decline of 5.8% in workers' comp direct premiums written was the most significant recorded by the industry since the first quarter of 2010 against a very different macroeconomic backdrop. The national unemployment rate was 4% in January 2019; it was 9.8% at the start of 2010.

Underwriting results have been historically favorable — and most likely unsustainable — in the workers' comp business on a calendar-year basis. The first-quarter direct incurred loss ratio of less than 50.6%, even though it compared favorably to most other major lines of business, was the highest such result for the industry since the third quarter of 2017. The loss ratio increased on a year-over-year basis for the first time since the second quarter of 2017.

When excluding both commercial auto liability and workers' comp from the industry's commercial lines results, the rate of growth in direct premiums written of 6.1% in the first quarter marked increases both sequentially and from the year-earlier period. Year-over-year premium growth on that basis has exceeded 5% in each of the past six quarters. Highlights of the first quarter included growth rates for direct premiums written of 8.1% in the other- and product-liability lines and 4.2% in commercial multiperil.

The commercial lines direct incurred loss ratio for the quarter widened by approximately 2.2 percentage points year over year to 51.9%. For the trailing-12-month period ended March 31, it increased nearly 0.5 percentage point from the comparable period ended Dec. 31, 2018, to 56.3%.

Noise in the numbers

Growth in incurred losses and loss adjustment expenses of 5.8% in the first quarter outpaced the industry's 4.6% increase in net premiums earned. The first-quarter effectiveness of certain key intercompany reinsurance agreements contributed to a spike in written and earned premiums on a net basis in 2018 that was not repeated in the first three months of 2019.

The year-over-year comparisons in net premiums written were even more dramatic as they swung to a decline of 1.4% in the first quarter of 2019 from 14.9% in the year-earlier period. Three companies, two of them U.S. subsidiaries of Swiss Re AG, reported large negative amounts of net premiums written as their cessions vastly exceeded their assumptions during the period.

S&P Global Market Intelligence calculates a net loss and LAE ratio of 68.1%, up from 67.3% in the year-earlier period. The expense ratio of 27.1% marked an increase of approximately 0.3 percentage point year over year. Though the industry's combined ratio moved higher, so did its net underwriting profit, which rose to $5.89 billion from $4.83 billion.

A total of 16 individual entities produced net underwriting gains in excess of $100 million, led by State Farm Fire and Casualty Co.'s $638.9 million. Of the five entities with underwriting losses of more than $100 million, three were subsidiaries of American International Group Inc. They reported in excess of $60 million, apiece, in adverse prior-year loss and LAE reserve development.