US P&C insurers swung to major Q1 loss on nat cat plus fresh reserving

The US P&C insurance industry swung to an eye-opening $8.2 billion first quarter net underwriting loss as nearly 27% growth in claims and adjustment expenses far outpaced a 14.4% gain in net earned premium, NAIC Q1 data compiled by  AM Best indicated.

“The personal lines segment, specifically the homeowners line of business, was primarily responsible for the decline in underwriting results,” authors noted.

The pure loss ratio is up 7.7 percentage points year on year to 67.2% in the first quarter, a decline which fractional improvements in loss adjustment cost ratios and expense ratios could overcome. Mark the combine ratio up 6.1 points to a loss-making 102.0%.

Q1 catastrophe losses likely accounted for 6.9 points of the Q1 loss ratio, up from an estimated 3.9 points in first-quarter 2022, AM Best added.

But a switch to massive reserve padding also did its worst. The industry as a whole padded prior period reserves to the tune of 3.0 loss ratio points versus releases at 1.6% of net earned premium in the year prior period.

Outsized reserve building of $15.6 billion at units of Berkshire Hathaway was called out for their excessive impact on the loss ratios.

Counting out Berkshire, the industry adverse reserve development would have been $3.5 billion, still a notable deterioration from $5.1 billion in favourable reserve development just one year prior. Ex-Berkshire, put the combined ratio to 10.3%, still a fractional technical loss.

Two Berkshire Hathaway companies reported adverse reserve development of $15.6 billion during the first quarter of 2023. Excluding the Berkshire Hathaway amounts, the resulting industry total $3.5 billion of adverse reserve development (compared with $5.1 billion of favourable reserve development from the prior year) puts the industry’s accident year combined ratio at 100.3.

Closer to the top line, direct written premiums rose 9.9% to $229.4 billion, led by 15.3% growth in homeowners multi-peril to $31.9 billion, 14.6% growth in personal auto physical damage and 11.5% growth in personal auto liability. Key liability lines lagged.

The underwriting loss, coupled with a nearly 30% decline in net investment income, drove pre-tax operating income down 71% to $7.5 billion. Likewise net profits, down 71% year on year.

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