US P&C sector to return to profitability: Fitch Ratings

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The US property and casualty (P&C) market is well on its way to returning to underwriting profitability along with a significant return on capital improvement for the full year, driven by lower winter storm losses and a recovery in personal auto results, according to Fitch Ratings.

However, the ratings company has warned that these results may not match first-quarter 2024 levels due to uncertainty regarding natural catastrophe exposures and loss reserve experience. The market still faces considerable challenges regarding the sustainability of commercial line pricing to meet ongoing loss-cost inflation and heightened litigation-related risk in several segments, Fitch explained .

The improvement in performance for 2024 will continue to be driven by personal lines results, with its recent substantial pricing actions and moderation of unusually high loss severity trends. Sharp price increases were seen, as reflected in direct written premiums (DWP) growth of 16% in personal auto and 13% in homeowners relative to Q1 2023.

Commercial lines DWP growth slowed to 4% for the quarter and workers’ compensation growth turned negative in the period. Additionally, segments with greater claims challenges, including commercial auto and other liability, reported higher year-over-year premium growth.

Fitch notes that favourable pricing conditions in Q1 2024 are supported by ongoing strong net written and earned premium growth of 10% and 11%, respectively. The industry underwriting combined ratio improved by over eight points year over year to 94% in the first quarter of 2024, making it the best underwriting result since 2007.

At the same time, operating income has increased by 300% year over year in Q1 24, with an annualized operating return on surplus (ROS) over four times higher at 10.2% versus 2.4% in Q1 2023. Higher yields contributed to a 32% year-on-year increase in investment income, but this figure was also affected by a one-time $2.1 billion dividend from affiliates for Liberty Mutual.

Overall commercial lines underwriting results are forecasted to remain profitable with modest loss ratio deterioration. Ongoing weakness in commercial auto and other liability-occurrence businesses has been mitigated by continued highly favourable workers’ compensation results. Meanwhile, the Q1 2024 direct loss ratio in private passenger automobiles dropped by nearly 16 points with the most substantial improvement in physical damage coverage, while the homeowners’ loss ratio fell by 13 points.

Net income expanded to $40 billion from $9 billion in the year-earlier period. However, this figure was influenced by unusual realized gains of $14 billion reported by National Indemnity Company from the sale of Apple Inc. stock. Favourable prior period reserve development was higher in Q1 2024 contributing to 3.3% of earned premiums versus 1.9% in the previous year’s quarter.

Fitch’s sector outlook for US personal lines insurance recently moved to ‘Improving’, meanwhile, the sector outlook for commercial lines insurance remains ‘Neutral’.

Fitch concluded, “Persistently high inflation and slowing economic growth raise the potential for an unfavourable shift in loss reserve adequacy that clouds the earnings picture, led by commercial auto and other liability product lines.

“The accuracy of insurers’ loss projections for claims severity tied to inflation and litigation risks in commercial auto and other liability business will determine if the p/c industry will reach its 19 consecutive year streak of favorable calendar-year loss reserve development in 2024.”

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