According to a new report from Fitch Ratings, North American Property & Casualty (P&C) re/insurers’ strong premium revenue growth led to improving GAAP operating performance for the nine months in 2021.
The revenue growth came from rising commercial rates, reduced incurred losses tied to the coronavirus pandemic and large investment gains on alternative assets and equity investments.
The report notes that the P&C industry is set to further its underwriting profits next year, with uncertainty tied to loss cost inflation, stabilisation of personal auto results and natural catastrophe experience, but net earnings growth will be measured as recent market gains in equity and alternative asset classes may not recur.
According to Fitch, net earned premiums for a group of 45 P&C insurers increased by approximately 10% Year on Year for 9M21, reflecting growth and exposure to the economic recovery, reversal of premium returns and discounts on personal auto business relative to the height of the pandemic and substantial rate increases in multiple commercial property and liability product segments.
While price increases are decelerating, earned premium growth will support loss ratio improvement in commercial lines through 2022.
The group’s underwriting expense ratio moved 1.5 points lower for the period due largely to premium expansion. However, the calendar year incurred loss ratio moved nearly 1 point higher.
Large losses accumulating from Hurricane Ida, first-quarter winter storms and California wildfires in particular, boosted natural catastrophe losses to represent 7.3 loss ratio points versus 6.0 in the prior year. Pandemic-induced losses trailed off sharply in 9M21, representing a very modest portion of 2021 incurred losses versus 2.3 percent of the group’s 9M20 earned premiums.
Underwriting results also benefited from approximately 1 percentage point (pp) greater YoY favourable prior-year reserve development. Reserve development patterns will likely benefit in the near term from recognition of 2020 accident year redundancies as carriers recognise loss experience from pandemic-influenced claims frequency declining in multiple segments.
The report showed that operating earnings for the group, excluding conglomerate Berkshire Hathaway, expanded by 64% for the period versus 9M20. Operating return on average equity (ROAE) moved to 9.2% for the period versus 6.0% a year earlier. Large, potentially non-recurring realised gains on equity securities and investment income growth from alternative investments boosted net income ROAE to 12.6%.
GAAP 9M21 results for 45 P/C insurers reveals the aggregate combined ratio declined slightly to 96.4% at 9M21, a 0.5-pp decline from the prior-year period.
Most commercial and specialty re/insurers posted significant YTD underwriting performance improvement due largely to pricing gains, with several carriers moving to below 90% combined ratios for the period, including American Financial Group, Arch Capital Group, Cincinnati Financial and RLI Corp.
Personal lines writers reported deterioration in performance from catastrophes and weaker auto results from claims frequency moving toward more normal levels and severity issues tied to pandemic-influenced inflation.
Large auto writers Allstate and Progressive continue to report underwriting profits but had 6 pp and 8 pp increases in the 9M21 GAAP combined ratios YoY, respectively.
Most publicly held Florida homeowners’ specialists continue to report underwriting losses tied to prior-year loss development and an unfavourable litigation environment.
Underwriting profits may improve in 2022 as recent pricing gains flow through earned premiums and commercial primary and reinsurance rate changes remain positive in most segments, notwithstanding uncertainty from catastrophe loss experience.
Near-term performance improvement will continue to be offset by personal auto writers’ challenge in garnering price increases to meet rising loss trends.
Achieving target ROE in most segments in the current interest rate environment that remains historically low will require strong near-term underwriting income. Effects of higher inflation on some segments bear watching, particularly in key cost factors including construction materials, contract labor, auto parts and medical costs.