US Property-Casualty Insurance Set for Profit Recovery in 2024

The US property-casualty (P&C) insurance market is on track for a return to underwriting profitability and significant return on capital improvements in 2024. This positive outlook follows a strong first-quarter (Q1) performance driven by lower winter storm losses and a recovery in personal auto results, according to Fitch Ratings.

US P&C insurers reported a substantial year-over-year statutory underwriting profit in Q1 of 2024. The industry's underwriting combined ratio (CR) improved by over eight points to 94 percent, marking the best first-quarter result since 2007. Favorable prior-period reserve development contributed 3.3 percent of earned premiums compared to 1.9 percent in the previous year. However, sustaining commercial lines pricing to counter loss-cost inflation and increased litigation risks remains a challenge, according to Fitch.

Favorable pricing conditions in Q1 of 2024 led to strong net written and earned premium growth of 10 percent and 11 percent, respectively. Personal auto direct written premiums (DWP) grew by 16 percent, and homeowners' DWP increased by 13 percent relative to Q1 of 2023. In contrast, commercial lines DWP growth slowed to 4 percent, with workers compensation experiencing a negative growth rate. Despite these challenges, Fitch's sector outlook for US personal lines insurance has improved, while the outlook for US commercial lines insurance remains neutral.

Operating income surged 300 percent year-over-year in Q1 of 2024, with an annualized operating return on surplus reaching 10.2 percent, up from 2.4 percent in Q1 of 2023. Higher yields and a one-time $2.1 billion dividend from affiliates at Liberty Mutual contributed to a 32 percent increase in investment income. Net income rose to $40 billion from $9 billion in the previous year, influenced by realized gains of $14 billion from National Indemnity Company's sale of Apple Inc. stock.

Personal lines are expected to drive overall performance improvement in 2024, supported by substantial pricing actions and moderating loss severity trends. Commercial lines are anticipated to remain profitable despite modest loss ratio deterioration, with workers compensation results mitigating ongoing weaknesses in commercial auto and other liability-occurrence businesses. The Q1 2024 direct loss ratio for private passenger automobiles improved significantly, with a nearly 16-point drop, and the homeowners' loss ratio decreased by 13 points.

Persistent high inflation and slowing economic growth could adversely affect loss reserve adequacy, particularly in commercial auto and other liability product lines. The accuracy of insurers' loss projections for claims severity, influenced by inflation and litigation risks, will be critical in determining if the P&C industry can maintain its 19-year streak of favorable calendar-year loss reserve development in 2024.