Caught in financial storm, P&C insurers turn to reorg, layoffs

Some of the costliest periods of natural catastrophes, rising accident claims and persistent inflation, have conspired to inflict turmoil for P&C insurers, leading to huge underwriting losses, reorganizations, and layoffs.

Through the first half of 2023, total underwriting losses reached $22 billion, resulting in net income of just $2 billion despite higher investment earnings.

GEICO, Liberty Mutual, State Farm, and Farmers, among others, all reported huge underwriting losses in 2022 with some continuing in the current year. They mostly blamed the same causes but are dealing somewhat differently with the tumult.

• GEICO said it was reducing its workforce by about 2,000 employees, or 6% of its total. “This will allow us to become more dynamic, agile, and streamline our processes while still serving our customers,” Todd Combs, chairman, president and CEO told employees in a recent internal memo. This comes after the company reported “record underwriting losses in 2022 due to “rapidly increasing claims severity and significant additions to prior accident year incurred claims.” The loss was $13.4 billion. GEICO has returned to profitability in the last two quarters after six straight quarters in the red. A sharp decline in its advertising budget largely contributed to the comeback. The company slashed its ad budget by 38%, spending $800 million less than in 2021. It previously bought more ad space than any other insurer, including $2.16 billion in 2020. GEICO joined an industry trend in cutting ad spending, with Allstate, Progressive, and State Farm all reducing their marketing budgets last year, after years of big spending “We have seen significant changes to our company over the past few years, and we have evolved our business practices to help address a very difficult period across the industry,” Combs said in his memo. “Levels of inflation that we haven’t seen in decades, delays in parts or labor shortages extending time to repair, rising medical costs, and other factors have caused our loss costs and combined ratio to increase, alongside the entire industry.”
• Farmers Insurance said it is laying off 11% of its workforce — or 2,400 employees — in an attempt to restructure itself for long-term growth. The jobs being cut are from across all areas of the company, according to a statement on its website.“Given the existing conditions of the insurance industry and the impact they are having on our business, we need to take decisive actions today to better position Farmers for future success,” said Raul Vargas, president and CEO of Farmers Group, Inc.
• State Farm said it would “take actions to improve our operating performance” after reporting a record $13.2 billion in underwriting losses in 2022 – blaming costlier auto insurance claims driven by inflation. The $13.2 billion in underwriting losses was the highest ever – almost three times higher than its 2021 results. (-$4.7 billion). Its operating loss to fell to $8.3 billion for its property-casualty companies in 2022 – after losing $313 million in 2021.
• Liberty Mutual, which reported net losses of $585 million and $660 million for the three and six months ended June 30, announced in July the creation of a new business unit – U.S. Retail Markets – that it said would deepen the company’s focus on personal and small commercial insurance lines in the US. As a result, about 370 positions U.S.-wide (less than 1% of its global employees) were eliminated across all functions, effective by the end of September. More recently, Liberty Mutual CEO Tim Sweeney told staff in a company-wide town hall that the insurer is planning broad-based expense cuts and hinted a possible headcount reduction is in the works.

And the beat goes on.

2023 a 'transition year' for P&C profitability

“We expect 2023 to be a transition year for U.S. P&C industry profitability, from a difficult 2022 to a stronger 2024 as higher premiums and interest rates improve industry results,” said a recent report by Swiss Re Institute. “The P&C industry has not yet reached the inflection point between premium growth rates and claims costs.”

Swiss Re raised its premium growth estimate to 9% from 7.5% in 2023 but still expects 5.5% growth in 2024.

“The worst appears to be over for personal auto,” Swiss Re said. “The line’s 112% combined ratio in 2022 was the highest since at least 1975 and the loss ratio is still elevated in 2023, suggesting a way to go before it turns a profit again.”

However, the research institute noted that the second quarter this year, growth in direct premiums earned kept pace with loss costs for the first time in more than two years.

“We expect this trend to continue, with rate increases expected to exceed most indicators of claims severities,” it said.

Industry observes agree.

Layoffs, structural changes 'necessary'

“Given the myriad challenges, many insurers find themselves at crossroads, leading to reorganizations and strategic shifts,” said Gregg Barrett, CEO of WaterStreet Company, a group of property and casualty insurance industry experts based in Montana. “Layoffs and structural changes become necessary evils to streamline operations and, in the longer run, aim for profitability.”

Barrett ticked off a sprawling inventory of what ails the P&C market including high auto insurance costs (“We're seeing more vehicles on the roads today than ever before. Add to this the rise of advanced vehicle technology that has made repairs considerably more expensive); unpredictable natural catastrophes (“When claims skyrocket beyond anticipated models, it creates a financial strain that's hard to counterbalance with premiums alone.”); and even increased competition (“The market is bustling, with companies sometimes vying for market share by offering competitive prices. While this strategy might lead to short-term growth, it can also backfire if the premiums don't adequately cover the eventual surge in claims, thus leading to underwriting losses.”).

“Some insurers are now taking a step back and not issuing new policies, or binders, in areas frequently hit by natural disasters,” Barrett said. “On the surface, this might seem like a cautious move to limit exposure to new claims. However, there's a flip side – it also means the loss of potential premium revenue from these high-risk areas.

The economy plays a role, too, he added.

The prolonged low-interest-rate environment has its own set of challenges,” he said. “Insurers typically invest the premiums they collect, hoping to generate returns that can then offset claim and operational costs. But with interest rates being low, their potential investment income has dipped, squeezing their financial performance.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].