Autos, AIG Sent U.S. P&C Industry To First Underwriting Loss In Four Years

The U.S. property and casualty industry in 2016 generated a combined ratio in excess of 100% for the first time since 2012, thanks in large measure to the combination of material unfavorable reserve development at American International Group Inc. and the worst auto insurance results in a calendar year since the early 2000s.

S&P Global Market Intelligence preliminarily calculates a 2016 industry net underwriting loss of $2.47 billion and a combined ratio of more than 100.7% based on statutory data available as of March 8, which includes results for more than 95% of expected individual filers. The same collection of individual entities produced a net underwriting profit of $11.18 billion and a combined ratio of 97.9% in 2015. Results are subject to change as additional information is received. Historical data referenced in this article is limited to those entities for which 2016 results are available.

P&C industry underwriting profitablity

AIG's U.S. P&C units combined to generate a net underwriting loss of nearly $5.10 billion in 2016, down from a loss of $4.05 billion in 2015. Results for AIG Insurance Co. - Puerto Rico, which generated a modest profit in 2015, are not currently available for 2016. The group's combined amount of unfavorable reserve development for prior accident years was $4.36 billion, up from $3.41 billion in 2015. The other liability-occurrence and claims made lines accounted for $2.44 billion of AIG's adverse development across all prior accident years. The group also recorded unfavorable development of $963.4 million in workers' compensation and $491 million in commercial auto liability. By accident year, 2015 accounted for just over $1 billion of the group's unfavorable development.

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The recency of the adverse development was said to have contributed to investor concerns about the leadership of AIG President and CEO Peter Hancock, who announced March 9 that he would resign two months after the company entered an adverse development cover with Berkshire Hathaway Inc.'s National Indemnity Co. The outgoing executive described that deal, which provides up to $20 billion of coverage on certain long-tail U.S. commercial lines risks, as a "redefining" transaction for a company that has suffered in recent years from reserve volatility.

The transaction will continue to impact P&C industry results in 2017 as National Indemnity reported that it expects its accounting for the agreement will have the effect of reducing its surplus by approximately $4 billion in the first quarter.

The industry's struggles to address loss trends in the auto business will also remain a theme in 2017. The P&C industry's private-passenger auto direct incurred loss and defense and cost containment expense, or DCCE, ratio widened to 74.4% in 2016 from 70.9% in 2015, a level that had ranked as its highest result in a calendar year since 2011. Loss ratios were materially higher in the auto liability lines than in physical damage at 78.2% and 68.7%, respectively, but they both compared unfavorably to 2015 results. The liability loss ratio was the industry's highest since 2001, while the physical damage loss ratio had not been higher since 1996.

Commercial auto trends were similar from a directional perspective. Overall, the direct incurred loss ratio rose to a 15-year high of 75.4% from 72.3%, with the liability and physical damage loss ratios climbing on a year-over-year basis to 78.6% and 65.3%, respectively, from 75.6% and 62%.

Auto direct loss and DCCE ratios (%)

Six of the more than 2,500 individual P&C entities for which data is available generated underwriting losses in excess of $1 billion in 2016. Three are AIG units: National Union Fire Insurance Co. of Pittsburgh Pa., Lexington Insurance Co., and American Home Assurance Co. 

But their losses, both individually and collectively, paled in comparison to the largest underwriting loss posted by an individual P&C entity in 2016 and, for that matter, any single year in at least the past two decades. State Farm Mutual Automobile Insurance Co., on a stand-alone basis, reported a net underwriting loss of nearly $7.20 billion. The State Farm group produced a net underwriting loss of $5.54 billion as State Farm Fire & Casualty Co. provided a partial offset to the top-tier company's result, and in so doing joined Chubb Ltd.'s Federal Insurance Co. as the lone individual P&C entities to have produced net underwriting gains in excess of $1 billion during 2016.

State Farm's group-level underwriting loss was its largest since 2008, and it was more than double the $2.14 billion underwriting loss it produced in 2015. Its challenges highlight the divergence in results relative to historical levels present both internally and externally in its two primary areas of focus: private-passenger auto and homeowners insurance.

At the group level, State Farm's private-passenger auto direct incurred loss and DCCE ratio increased to a 14-year high of 79.6% in 2016 from 72.9% in 2015. The group's homeowners direct incurred loss and DCCE ratio also increased on a year-over-year basis, but at 55.6% it remained at a level that compared favorably to the average annual ratio of 61.3% for a 10-year period ended in 2015.

For a more complete discussion of the methodology employed and the limitations associated with it, please see the 2016 U.S. P&C Insurance Market Report.

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