The U.S. property casualty (P/C) market is positioned for a return to underwriting profitability and significant return on capital improvements for the full year, though results may not match first quarter levels due to uncertainty regarding natural catastrophe exposures and loss reserve experience, Fitch Ratings says. U.S. P/C insurers shifted to a strong statutory underwriting profit YoY at 1Q24 driven by lower winter storm losses and a recovery in personal auto results.
The market faces considerable challenges regarding sustainability of commercial lines pricing to meet ongoing loss-cost inflation and heightened litigation related risk in several segments. Favorable pricing conditions in 1Q24 supported ongoing strong net written and earned premium growth of 10% and 11%, respectively. The industry underwriting combined ratio (CR) improved by over eight points YoY to 94% in 1Q24, representing the best first quarter underwriting result since 2007. Favorable prior period reserve development was higher in 1Q24, representing 3.3% of earned premiums versus 1.9% in the prior year quarter. Fitch’s sector outlook for U.S. personal lines insurance recently moved to Improving. The sector outlook for U.S. commercial lines insurance remains Neutral.
Sharp price increases will continue to support personal lines underwriting improvement through 2024, as reflected in direct written premiums (DWP) growth of 16% in personal auto and 13% in homeowners relative to 1Q23. Commercial lines DWP growth slowed to 4% for the quarter. Workers’ compensation growth turned negative in the quarter, and segments with greater claims challenges, including commercial auto and other liability, reported higher YoY premium growth.
Operating income was up 300% YoY in 1Q24, with an annualized operating return on surplus (ROS) over 4x higher at 10.2% versus 2.4% in 1Q23. Higher yields contributed to a 32% YoY increase in investment income, but this figure was also affected by a one-time $2.1 billion dividend from affiliates for Liberty Mutual. 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.
Improvement in performance for 2024 will continue to be driven by personal lines results, attributable to recent substantial pricing actions and a moderation of unusually high loss severity trends. Overall commercial lines underwriting results are anticipated to remain profitable with modest loss ratio deterioration. Ongoing weakness in commercial auto and other liability-occurrence business has been mitigated by continued highly favorable workers compensation results. The 1Q24 direct loss ratio in private passenger automobile dropped by nearly 16 points with the most substantial improvement in physical damage coverage, while the homeowners’ loss ratio fell by 13 points.
Persistently high inflation and slowing economic growth raises potential for an unfavorable 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.