P&C industry Q1 underwriting loss hits 12-year high, analysis finds

Mother Nature, ballooning inflation, and rising auto losses ganged up on the nation’s property and casualty business this year producing its largest first quarter underwriting loss in 12 years.

An S&P Global Market Intelligence analysis of newly released statutory financial statements found P&C insurers generated a combined ratio of 102.2% on a net underwriting loss of $7.34 billion in the first quarter of 2023. This compares with a combined ratio of 96.1% and a net underwriting profit of $4.27 billion in the same period the previous year. The largest net underwriting loss in a first quarter unadjusted for inflation, had been $5.63 billion in the first quarter of 2001, although there have been combined ratio losses higher or as high as 2023’s in 2002, 2009, and 2011.

Natural catastrophes cited in P&C losses

S&P Global blamed this year’s losses on an unusually active period for natural catastrophes in combination with ongoing inflation-related challenges in the private auto business.

“In the 88 previous quarters for which data is available, including all periods of the calendar year, the personal lines direct incurred loss ratio had only exceeded 74.8% on seven occasions,” the analysis said. “Three of them were in the past seven quarters, reflecting similar underlying business dynamics that led to the outsized result for the first quarter of 2023.”

Natural disaster statistics show that such calamities are occurring more frequently and with greater intensity. In the last five years, the country has seen an average of eighteen billion-dollar climate disasters each year. Last year marked the eighth consecutive year in which ten or more billion-dollar disaster events impacted the country, causing a total of $175.2 billion in damage, along with 474 fatalities. In 2022, the U.S. experienced 1,331 tornadoes. The most expensive 2022 natural disasters were Hurricane Ian ($112.9 billion) and the Western and Central U.S. drought/heat wave ($22.1 billion), according to the National Oceanic and Atmospheric Administration.

And then there were wildfires. As of February 2023, roughly 3,500 wildfires have burned 28,700 acres this year, according to the Congressional Research Service. Natural disaster facts show that in 2022 the U.S. experienced 68,988 wildfires that burned 7,577,183 acres of land.

The standard homeowner’s policy doesn’t cover major flooding, however, the average flood insurance claim payout from the National Flood Insurance Program was $52,000 last year.

But Mother Nature wasn’t entirely to blame for the insurance industry’s losses. Direct incurred loss ratios in the homeowners and private auto lines rose to 71.9% and 76.1% in the first quarter from 53.9% and 72.4% in the year-earlier period. Personal lines carriers were responsible for most of the industry's red ink from an underwriting profitability standpoint. The private auto loss ratio showed sequential improvement from the last three quarters of 2022. The homeowners result, meanwhile, was 33 basis points above the industry's previous worst result for a first quarter from 2001 through 2022 of 71.6% in 2021, S&P Global analysis said.

State Farm posts largest net underwriting loss

State Farm Mutual Automobile Insurance Co., the No. 1 U.S. personal lines insurer, posted the largest net underwriting loss for an individual property and casualty company at $2.87 billion. Other personal lines carriers also posted large net underwriting losses, including the primary The Allstate Corp. subsidiary along with Erie Insurance Exchange, Nationwide Mutual Insurance Co., American Family Mutual Insurance Co. SI, State Farm General Insurance Co., Liberty Mutual Insurance Co., United Services Automobile Association's USAA Casualty Insurance Co., Farmers Insurance Exchange and Kentucky Farm Bureau Mutual Insurance Co. Inc. The latter entity sustained its largest net underwriting loss in any quarter since at least the start of 2001 after a series of severe storms, straight-line winds, tornadoes, flooding, landslides and mudslides hit Kentucky in early March, the report said.

“Across all lines, net incurred losses continued to increase at a rate well in excess of earned premiums,” S&P Global said. “They rose nearly 22.1% in the first quarter while net earned premiums climbed 9.3%. Other underwriting expenses increased 6.9%, several percentage points below the rate of increase in written premiums.”

Investments suffer sharp decline

The investment side of the house didn’t fare much better. First-quarter statutory results will show a sharp decline in net investment gains for the property and casualty industry, the analysis showed, with net investment income earned and net realized capital gains tumbling 33.8% and 49.5%, respectively.

However, the declines reflect the non-recurrence of a series of extraordinary transactions involving certain P&C subsidiaries of Berkshire Hathaway Inc. in the first quarter of 2022. Excluding those subsidiaries, National Indemnity Co. and Columbia Insurance Co. net investment income earned would have increased on a year-over-year basis by 30.8% while the reduction in realized gains would have been only 21.5%.

Commercial lines and mortgage insurers and reinsurers fared best among individual property and casualty companies, with five companies posting net underwriting gains of more than $150 million each: Factory Mutual Insurance Co., Transatlantic Reinsurance Co., Enact Mortgage Insurance Corp., Radian Group Inc.'s Radian Guaranty Inc., and W. R. Berkley Corp.'s Berkley Insurance Co. Direct incurred loss ratios improved in the other liability and marine lines on a year-over-year basis but increased in the commercial auto and workers' compensation lines.

There were some other positive signs, too, as first quarter data show a partial reversal of the massively negative net change in unrealized capital gains and losses that the industry sustained in 2022 as rising interest rates put downward pressure on bond prices.

“Among the individual entities for which first-quarter data is available, the cumulative net change in unrealized capital gains and losses was a positive $37.46 billion as compared with negative values of $24.18 billion in the first quarter of 2022 and $118.93 billion in the full calendar year,” S&P Global found.

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

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