P&C industry persevered in Q2 through storms, catastrophic reserve charge

Rapidly improving private auto results helped the US property and casualty industry in the second quarter to significantly narrow its underwriting losses on a year-over-year basis, keeping a projected return to profitability for the full calendar year on track.

The industry's combined ratio of 101.2% in a quarter where the P&C industry amassed a net underwriting loss of $5.19 billion represented a decline of 5.4 percentage points from the year-earlier period when losses spiked to $15.48 billion. The comparison is even more favorable when excluding the impact of an extraordinary commercial auto reserving action.

Like the second quarter of 2023, P&C insurers faced elevated catastrophe losses from severe convective storms, but headwinds from the private auto business substantially dissipated, leading to marked improvement on the bottom line.

For the first half of 2024, the industry remains firmly in the black with a combined ratio of 97.6% and a net underwriting gain of $5.01 billion as compared with a combined ratio of 104.4% and net underwriting loss of $22.80 billion in the year-earlier period. S&P Global Market Intelligence has projected that the industry's two-calendar-year stretch of underwriting losses would come to an end in 2024 based on our forecast combined ratio of 99.0%.

In the combination of the private auto no-fault, other private auto liability and private auto physical damage lines, the second-quarter direct incurred loss ratio plunged to 68.3% from 78.1% in the year-earlier period. For the first half of 2024, the ratio stands at 67.5%, down from 77.1%. With private auto accounting for 34.6% of the industry's direct premiums earned in the first half of 2024, the fortunes of that business have much to say about the industry's on an overall basis. As carriers continue to generate historically high growth in premium volume, reflecting the benefits of corrective pricing actions taken during the past three years, we expect further improvements in the coming quarters.

Individual entity underwriting results show signs of private auto recovery

Two companies with large private auto businesses led the industry's year-over-year improvement.

Berkshire Hathaway Inc. companies accounted for three of the four largest net underwriting gains among individual P&C entities: National Indemnity Co., GEICO General Insurance Co.and Government Employees Insurance Co., with $1.15 billion, $559.8 million and $519.4 million, respectively. Their results both benefited from Geico Corp.'s strong second quarter as National Indemnity maintains a quota-share with Government Employees Insurance. Two other Berkshire companies, General Reinsurance Corp. and National Fire & Marine Insurance Co., also produced net underwriting gains that ranked among the 10 highest for individual P&C entities.

Three subsidiaries of The Progressive Corp. also achieved the same feat: Progressive Direct Insurance Co., Progressive Casualty Insurance Co. and United Financial Casualty Co., which generated respective net underwriting gains of $554.6 million, $334.1 million and $203.1 million, reflecting the strength of the organization's auto insurance businesses.

Factory Mutual Insurance Co., which conducts business as FM Global, and Enact Mortgage Insurance Corp. were the lone entities outside of the Berkshire and Progressive haloes to produce top-10 net underwriting gains in the second quarter.

On the other end of the spectrum, State Farm Mutual Automobile Insurance Co. and State Farm Fire and Casualty Co. posted the industry's two largest second-quarter net underwriting losses among individual entities at $2.23 billion and $1.85 billion, respectively. The State Farm group experienced significant deterioration in its homeowners and farmowners direct incurred loss ratios during the quarter, but that result was not aligned with the industry as a whole.

Homeowners and farmowners direct incurred loss ratios declined sharply relative to the second quarter of 2023, when the industry produced its largest net underwriting loss in a three-month period ended June 30 since 2011. But at 80.2% and 96.4%, respectively, they remained well above seasonal norms. The 10-year average homeowners direct incurred loss ratio for a second quarter is 71.5%, for example. The private auto direct incurred loss ratio, meanwhile, fell to its lowest point in a second quarter in three years and fell below 70% in consecutive quarters for the first time since the opening two reporting periods of 2021, when pandemic-era restrictions and guidelines continued to depress the aggregate amount of miles driven.

Direct premiums written growth rates across the private auto, homeowners and farmowners businesses continued in the second quarter, with all of the lines posting double-digit expansion. The 15.2% growth in private auto direct premiums written marked a fourth consecutive quarter of expansion in excess of 15%, which stands as a feat the industry had not accomplished a single time in at least the previous two decades.

Commercial auto writers' reserving woes inflate loss ratios

In contrast to the marked improvement in private auto results, the commercial auto lines showed material deterioration, with the liability portion of the business producing a concerningly high direct incurred loss ratio of 82.1%. That result represented an increase of nearly 6.3 percentage points from the year-earlier period and 12.9 points from the first quarter. A closer look at the underlying drivers of the deterioration finds, however, that a single carrier was accountable for most of the year-over-year change.

American Transit Insurance Co., a New York-based and focused writer of commercial auto insurance for taxis, for-hire and transportation network company vehicles, recorded an unfavorable prior-year loss and LAE reserve development of $755.8 million in the second quarter, an amount that exceeded 2,900% of its Dec. 31, 2023, surplus and 145.3% of its March 31 net total assets. It also ranks as the largest amount of adverse reserve development booked by any individual US P&C entity in a second quarter in at least the last 15 years, surpassing the $732 million in unfavorable development attributable to The Allstate Corp.'s Allstate Insurance Co. American Transit's second-quarter net underwriting loss of $743.3 million ranked third-highest in the industry. American Transit and its appointed actuary have long been at odds over the reasonableness of the company's reserve position.

The company said only in its June 30 statutory statement that it booked the amount of prior-year loss and LAE reserves suggested by its actuary.

In his 2023 statement of actuarial opinion, Huggins Actuarial Services Inc.'s Ronald Kuehn opined that American Transit's $187 million provision of unpaid losses and LAE were neither consistent with the laws of its domiciliary state nor calculated in accordance with accepted actuarial standards. Independent auditor PKF O'Connor Davies indicated in the 2023 audited financial statements that the company had "rejected" the actuary's report.

The company did not disclose in its second-quarter statutory statement why it ended up boosting its reserves at that time, but the effects of its action were material to the industry and calamitous for its balance sheet. The company reported a policyholders' deficit of $677.9 million as of June 30 as most of the underwriting loss found its way to the bottom line.

If we were to exclude American Transit from the industry's overall results, the second-quarter commercial auto liability direct incurred loss ratio would have been nearly 4.8 percentage points lower at 77.4%. The industry's net loss and LAE ratio would have been less than 75.6% instead of more than 75.9% on a total-filed basis. The combined ratio, in turn, would have rounded down to 100.8% as opposed to rounding up to 101.2%.

Aside from commercial auto, several other commercial lines produced favorable outcomes in the second quarter. In commercial multiperil, the direct incurred loss ratio plunged 12.9 percentage points year over year to 54.5%. In the fire and allied lines, the combined direct incurred loss ratio declined by 13.2 percentage points to 46.8%. The workers' compensation direct incurred loss ratio increased to 45.8% from less than 44.3% in the year-earlier period but remained at a historically favorable level.

But the other liability lines remain an area of concern as the direct incurred loss ratio rose by 4.8 percentage points to 65.8%. That result ranks as the highest non-fourth quarter direct loss ratio in the other liability lines since the third quarter of 2019. (The exclusion of fourth quarters in this context reflects carriers' propensity to make their most meaningful adjustments to prior-year reserves in the closing three months of the calendar year.) Questions about reserve adequacy in the other liability lines are likely to continue to emerge through the balance of the calendar year.

The potential for adverse reserve development in the other liability lines stands alongside the frequency and severity of natural catastrophes as the most significant variables to our forecast for a return to profitability for the P&C industry in calendar year 2024.

Methodology

The industry-level results for the second quarter of 2024 referenced in this article represent an aggregation of individual company results filed with the National Association of Insurance Commissioners and obtained by Market Intelligence as of Aug. 19; prior-period results reflect our previously published aggregations of total-filed results. As-reported June 30 statutory financials were released on the S&P Capital IQ platform on Aug. 20.

Our second-quarter 2024 calculations also may incorporate data for recently formed entities that may not immediately be available on S&P Capital IQ Pro. Quarterly results for New Jersey-domiciled entities are unavailable due to a state statute that deems those filings to be confidential and not subject to public inspection.

While the second quarter data will change to some extent as we obtain additional information in the coming weeks, we do not anticipate the movement will be material based on the number and relative magnitude of the expected filers for which we have not received results.

Important considerations for our combined ratio calculations include the following: the results include policyholder dividends unless otherwise noted, and 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.

References to projected results reflect the forecast issued in our 2024 US P&C Market Report. Our forecasts notably did not contemplate the American Transit reserving action, but we do not intend to revise them accordingly until we receive additional information as to the company's future. Companies subject to receivership proceedings often do not file annual statements subsequent to the commencement of such actions. Even prior to curing the reserve deficiency, PKF O'Connor Davies cautioned that American Transit's ability to continue as a going concern would be dependent upon any future regulatory actions.

^{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.}