P&C Industry Suffered Largest-Ever Drop in Surplus in the 1Q 2020

The surplus for the private U.S. property/casualty insurance industry dropped by $75.9 billion in the first quarter of 2020—its largest-ever quarterly decline—as the stock market suffered a major downturn, according to Verisk, a leading data analytics provider, and the American Property Casualty Insurance Association (APCIA). Since then, the COVID-19 pandemic has continued to affect many insurers and will likely impact underwriting results for the second quarter and the remainder of the year.

Source: Verisk | Published on July 29, 2020

The surplus fell to $771.9 billion as of March 31, 2020, from the record-high $847.8 billion at the end of 2019. This drop was mostly driven by a decline in valuations of insurers’ investments. While the decline set surplus back to mid-2018 levels, traditional leverage ratios remained below their long-term averages.

Other industry results remained steady or improved from a year earlier. Net income after taxes in first-quarter 2020 was $17.9 billion, essentially the same as in first-quarter 2019. The net underwriting gain in the first quarter was $6.3 billion, a 19.9% increase from a year earlier. Net written premiums increased to $164.4 billion in first-quarter 2020 from $154.7 billion in first-quarter 2019—a 6.2% increase.

While having no apparent effect on first-quarter underwriting results, the COVID-19 pandemic and associated economic disruptions have affected many insurers, and the impact goes beyond the investment losses reported in the first quarter. Based on what is already known about the first half of 2020 and on available forecasts, significant changes are expected in insured exposures as well as in the amount and mix of claims. Verisk research estimates that personal auto insurers have offered more than $13 billion in policyholder rebates and credits. MarketStance, a Verisk solution, estimates that at least 1 million insured businesses in the United States will fail in 2020, and direct written premiums in commercial lines will decrease 2.8%.

“The historic drop in industry surplus in the first quarter was concerning for many insurers, as it began to show the impact of COVID-19 on their results,” said Neil Spector, president of ISO. “But the impact of COVID-19 on the industry is just beginning to unfold. Will personal auto insurers see the reduction in losses matching the policyholder rebates and credits offered this spring? To what extent will commercial lines premiums be affected by the challenges facing the economy? How will insurers adapt and continue to serve their customers efficiently in our new normal?”

Verisk recently created an online resource page at verisk.com/insurance/covid-19/ to help insurers learn about new regulations, read about critical insights, and discover new products being created to address the effects of COVID-19. It also recently launched a web page that provides strategies for personal lines insurers in the new normal: verisk.com/newnormal.

“Property/casualty insurers started the year with solid net written premium growth, but that was the calm before the storm,” said Robert Gordon, senior vice president for policy, research and international at APCIA. “By the end of the first quarter, insurers experienced their largest-ever quarterly surplus decline as the stock market suffered its largest drop since 1987 and interest rates reached a record low. While the industry remains safely capitalized, many individual insurers face potentially significant unknown coronavirus liability exposures, as well as political and regulatory threats of mandated retroactive and prospective COVID-19 coverage.”

View the full report from Verisk and APCIA here.