US Property and Casualty Insurance Sector to Return to Profitability: Fitch Ratings

The U.S. property and casualty insurance market is on track to return to underwriting profitability and significantly improve full-year return on capital, helped by lower losses from winter storms and improved performance in the personal auto insurance segment, according to ratings agency Fitch.

However, the ratings firm cautioned that these results may not be consistent with first-quarter 2024 levels due to uncertainties surrounding catastrophe exposure and loss reserve experience. The market continues to face significant challenges in terms of commercial lines pricing stability to address ongoing loss cost inflation and increased litigation risks in several segments, Fitch explained.

The improvement in 2024 will continue to be driven by the performance of Personal Insurance, with its recent significant pricing action and moderation of unusually high loss trends. There were sharp price increases, reflected in an increase in Direct Written Premiums (DWP) of 16% for Personal Insurance and 13% for Home Insurance compared to Q1 2023.

Commercial lines DWP growth slowed to 4% in the quarter, while workers’ compensation growth turned negative during the period. Additionally, segments with more challenging claims, including commercial auto and other liability lines, saw higher year-over-year premium growth.

Fitch notes that favorable pricing conditions in Q1 2024 are supported by continued strong growth in net written and earned premiums of 10% and 11%, respectively. The industry combined underwriting ratio improved by more than eight points year-over-year to 94% in Q1 2024, making it the best underwriting performance since 2007.

At the same time, operating income increased 300% year-over-year in the first quarter of 2024, and the annual rate of return on operating surplus (ROS) was more than four times higher at 10.2%, compared to 2.4% in the first quarter of 2023. Higher yields contributed to a 32% year-over-year increase in investment income, but this result was also impacted by a one-time dividend of $2.1 billion from Liberty Mutual subsidiaries.

Overall commercial lines insurance results are expected to remain profitable with a moderate deterioration in the loss ratio. Ongoing weakness in commercial auto and other liability businesses was mitigated by continued strong performance in workers’ compensation. Meanwhile, the passenger auto direct loss ratio in Q1 2024 decreased by almost 16 points, with the most significant improvement in property coverage, while the homeowners loss ratio decreased by 13 points.

Net income rose to $40 billion from $9 billion in the prior-year period. However, this figure was impacted by an unusual $14 billion in realized gains reported by National Indemnity Company on the sale of Apple Inc. shares. Favorable reserve development in the prior-year period was higher in Q1 2024, contributing 3.3% to earned premiums compared to 1.9% in the prior-year quarter.

Fitch recently assessed the outlook for the U.S. personal insurance sector at “Improving,” while the outlook for the commercial insurance sector remains at “Neutral.”

Fitch concluded: “Persistently high inflation and slowing economic growth increase the risk of an adverse change in the adequacy of loss reserves, which could worsen financial conditions, particularly for motor and other liability insurance products.

“The accuracy of insurers’ forecasts of claims losses related to inflation and litigation risk in the commercial vehicle and other liability businesses will determine whether the property and casualty insurance industry achieves its 19th consecutive streak of favorable calendar-year loss reserve growth in 2024.”