Underwriting results for personal lines-focused US insurers worsened during the second quarter of 2023 as natural catastrophes and inflationary pressures weighed on results. US life insurers’ aggregate interest maintenance reserves fell in the second quarter of 2023 to the lowest level since 2011, but recent regulatory changes signal that some relief is on the way.

According to S&P Global Market Intelligence, an aggregation of results for insurance subsidiaries that write at least 70% of their direct premiums within personal lines — personal auto insurance, homeowners and farmowners — showed a net combined ratio growing to 114.9% in the second quarter of 2023 compared to 112.4% in the prior year period, according to a review of quarterly regulatory statements.

Given these pressures, innovative use of technology and data analytics to strengthen underwriting, claims handling and ratemaking remain key to reaching profitability targets.

Carriers that are slow to address the challenges ahead or do not have the means, expertise, or technological capabilities to keep pace with changes in the segment likely will face ratings pressure.

Combined ratio for personal insurance lines

Combined ratio for personal insurance lines

The quarterly combined ratio for personal lines-focused companies remains elevated when compared to prominently commercial business lines-focused subsidiaries.

The net combined ratio for commercial lines-focused insurers was 100.6% during the most recent quarter — about 14 percentage points lower than personal lines insurers.

Among the largest US personal lines-focused insurers, The Allstate Corp. recorded the largest year-over-year deterioration. The Illinois-based insurer’s quarterly net combined ratio jumped to 118.5% during the quarter, an increase of 10.1 percentage points from the second quarter of 2022.

The net combined ratio for Farmers Insurance Group of Cos. rose to 117.4% in the second quarter, up 9.8 percentage points from the prior-year quarter.

The insurer’s net combined ratio has surpassed 100% for nine of the past 10 quarters, with the 99.8% figure during the last quarter of 2021 being the only quarter under the break-even metric of 100% since the start of 2021.

Insurance profitability would be reducing

Insurance profitability would be reducing

In an effort to help return the insurer to profitability, Farmers announced on Aug. 28 that it would be reducing its workforce by about 11%, or 2,400 employees.

Farmers CEO Raul Vargas said the industry is facing macroeconomic challenges and the insurer “must carefully manage risk and prudently align our costs with our strategic plans for sustainable profitability.”

Farmers’ annual combined statement shows it paid $2.62 billion in total salaries during 2022, the most recent available breakout, or about 15% of the insurer’s net premiums during the year.

The California-based insurer’s expense ratio of 28.9% during the second quarter of 2023 was the highest among the six personal lines insurers in the analysis.

State Farm’s net combined ratio was 116.7% during the second quarter, including the second-highest expense ratio among the companies in the analysis at 21.7%. The insurer’s total salary expense was $5.02 billion in 2022, which equates to 6.8% of its $74.34 in net premiums earned.

Geico Corp.’s expense ratio of 10.3% was the lowest among the companies in this analysis during the quarter. The insurer has aggressively cut its ad spend and it has been reported that the insurer did another round of cuts to its workforce in August 2023. The third-largest US personal auto insurer had a 12% decrease year over year in its net losses incurred, while its net premiums earned were essentially flat.

Geico reported that a combination of higher average premiums per policy, a smaller number of policies in force, favorable prior-years reserve development and lower claims frequencies, which was partially offset by increases in its claims severity, pushed its net combined ratio to 95.8% in the second quarter 2023. This was an improvement of 11.5 percentage points from the prior-year period.

The Progressive Corp. reported a sizable jump in net losses incurred in the most recent quarter, pushing its net combined ratio to 101.3% from 96.3% in the second quarter of 2022. The deterioration was primarily due to unfavorable prior-years reserve development and higher catastrophe losses.

Negative Outlook on U.S. Personal lines insurance market

Negative Outlook on U.S. Personal lines insurance market

Analytics is maintaining its negative market segment outlook on the U.S. personal lines insurance segment for 2023, primarily due to significant deterioration in reported results for the personal auto lines of business.

The personal lines outlook, which was recently revised to negative in September, indicates that market trends to have a negative impact on companies operating in the segment, but it does not mean that all companies operating in the segment have a negative outlook.

In Report, “Market Segment Outlook: U.S. Personal Lines,” analytics notes that the personal auto liability and physical damage lines of business represent approximately two-thirds of the segment’s results.

Overall results for the personal lines segment, and in particular, personal auto insurers, have been significantly impacted negatively by rising loss cost severity driven by inflationary pressures, as well as difficulties in maintaining rate adequacy amid a restrictive regulatory environment.

US life insurers’ interest maintenance reserve falls

US life insurers' interest maintenance reserve falls

Realized capital gains and losses on bonds due to changes in market interest rates are deferred to IMR under statutory accounting rules and are not immediately recognized in income or surplus.

To the extent those deferred losses reach such a level that the IMR balance turns negative, it is then recognized as a non-admitted asset and negatively impacts capitalization.

The total interest maintenance reserves (IMR) liability for life sector general accounts fell to $12.9 billion as of June 30, down from $19.18 billion at year-end 2022.

In some cases, US insurers have been willing to sell lower-yielding bonds that declined in value in order to take advantage of significantly higher rates, but while that seems beneficial to their long-term financial footing, the IMR accounting rules prior to the recent changes would have caused a negative near-term impact to capitalization.

Changes to negative interest maintenance reserves

During the National Association of Insurance Commissioners (NAIC) summer national meeting, regulators met and made changes to how insurers are able to treat negative IMR, offering some potential relief to insurers.

The NAIC Statutory Accounting Principles Working Group adopted Interpretation 23-01, its Net Negative (Disallowed) Interest Maintenance Reserve, which provides optional, limited-time guidance allowing the admittance of a net negative interest maintenance reserve up to 10% of adjusted capital and surplus.

In a Sept. 6 KBW conference presentation, Unum Group CFO Steve Zabel called the new NAIC-approved proposal “helpful” since it allows insurers to admit negative IMR generated from taking losses and selling out of its portfolio up to a limit that is set based on the amount of surplus that the legal entity has.

The interpretation will be effective until Dec. 31, 2025, and automatically nullified Jan. 1, 2026, although the effective date could be subject to change.

Largest interest maintenance reserves

As of June 30, The Northwestern Mutual Life Insurance Co. held the largest negative IMR among US life insurers, with its reserves sitting at negative $1.73 billion. The insurer entered the negative IMR as a contra liability.

The Wisconsin Insurance Commissioner had granted Northwestern Mutual a permitted accounting practice effective Dec. 31, 2022, that allows for the admissibility of a net negative IMR balance.

The proportion of US life insurers with negative interest maintenance reserve balances more than doubled during 2022 as interest rates rose.

Northwestern Mutual deferred $1.95 billion of net realized capital losses to the IMR during the first half of 2023 on a pretax basis.

Prudential Financial Inc.’s subsidiary The Prudential Insurance Company of America had the second-largest negative calculated IMR among life insurers’ general accounts at negative $1.05 billion as of June 30. The life insurer reported its IMR as a non-admitted asset.


AUTHOR: Jason Woleben – S&P Global Market Intelligence contributor

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