However, Fitch cautioned that these findings might not reflect Q1 2024 levels due to uncertainty surrounding natural disaster exposures and loss reserve experience. The sector still faces clear challenges regarding the sustainability of commercial line pricing to meet ongoing loss-cost inflation and heightened litigation-related risk in several segments.
The gains in performance for this year will continue to be driven by personal lines results, with recent pricing actions and a moderation of unusually high loss severity trends. There were sharp price increases, 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 Q1, and workers’ compensation growth turned negative throughout the period. Furthermore, segments with greater claims challenges, including auto and other liability, reported higher year-on-year premium growth.
Fitch also found that favourable pricing conditions in Q1 2024 are assisted by ongoing strong net written and earned premium growth of 10% and 11%. The industry underwriting combined ratio improved by over 8% on the year to 94% in Q1 2024, resulting in the best underwriting result since 2007.
At the same time, operating income has increased by 300% year on year, with an annualised operating return on surplus (ROS) over four times higher at 10.2% versus 2.4% in Q1 2023. Higher yields also contributed to a 32% year-on-year increase in investment income, but this figure was distorted by a one-off $2.1 billion dividend from affiliates for Liberty Mutual.
Overall, commercial lines underwriting results are set to remain profitable with modest loss ratio deterioration. Consistent weakness in commercial auto and other liability-occurrence businesses has been reduced by continued favourable workers’ compensation results. At the same time, the Q1 2024 direct loss ratio in private passenger automobiles dropped by almost 16% with the most significant improvement in physical damage coverage, while homeowners’ loss ratio fell by 13%.
Net income expanded to $40 billion from $9 billion in the year-earlier period. However, this figure was impacted by unusual realised 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 industry outlook for US personal lines insurance recently moved to “Improving”, whilst 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 favourable calendar-year loss reserve development in 2024.”
Source: Reinsurance News
