Positive Turnaround for US Property and Casualty Insurance Industry in Q1 2024

The US property and casualty (P&C) insurance industry has made a significant recovery in the first quarter of 2024 after experiencing losses in the same period last year. This information comes from AM Best’s analysis of financial results for the P&C insurers, released by May 29, 2024.

Key Findings from AM Best Report

AM Best’s report, titled “First Look: Three-Month 2024 US Property/Casualty Financial Results,” reveals that the industry recorded a net underwriting gain of $9.3 billion in the first quarter of 2024. This is a remarkable turnaround from the $8.5 billion loss reported in the first quarter of 2023. The analysis included data from companies representing approximately 98% of the total P&C industry’s net premiums written.

Improvement in Combined Ratio

One of the highlights of the report is the improvement in the combined ratio, which is a measure of profitability in the insurance industry. The combined ratio dropped to 94.2 in the first quarter of 2024, down from 102.5 in the same period last year. A lower combined ratio indicates better performance, as it means that the company is spending less on claims and expenses relative to its premiums earned. The improvement was partly due to a decrease in catastrophe losses, which contributed 5.1 points to the combined ratio in the first quarter of 2024, compared to 7.6 points in the previous year. Last year, the industry faced severe convective storm losses that significantly impacted its financials.

Increase in Pre-Tax Operating Income

The underwriting gain, along with a 33.3% increase in earned net investment income, led to a substantial rise in pre-tax operating income, which soared by 332.9% to reach $30 billion in the first quarter of 2024. This impressive growth highlights the industry's strong recovery and improved financial health.

Surge in Net Income

AM Best also noted a significant shift in net realized capital gains at National Indemnity Company, which contributed to the industry's net income more than quadrupling to $39.9 billion. This dramatic increase underscores the positive financial momentum the industry has gained in the first quarter of 2024.

Growth in Industry Surplus

The report further indicated that the industry surplus increased to $1.1 trillion by the end of the first quarter of 2024. This growth was driven by a combination of $44.2 billion in net income, changes in unrealized gains, and contributed capital. However, this was slightly offset by $2.3 billion in other surplus losses and $5.1 billion in stockholder dividends.

Detailed Breakdown of the Recovery

Underwriting Gain Analysis

The net underwriting gain of $9.3 billion in Q1 2024 represents a major recovery from the $8.5 billion loss in Q1 2023. This gain was achieved through effective risk management and a reduction in the frequency and severity of catastrophic events compared to the previous year. The industry's ability to manage claims expenses better and improve operational efficiency played a crucial role in achieving this positive outcome.

Combined Ratio Improvement

The combined ratio, a key performance indicator in the insurance industry, improved significantly to 94.2 in Q1 2024 from 102.5 in Q1 2023. This ratio is calculated by adding the loss ratio (claims expenses as a percentage of premiums) and the expense ratio (operating expenses as a percentage of premiums). A ratio below 100% indicates profitability, while a ratio above 100% indicates a loss. The reduction in the combined ratio was primarily due to lower catastrophe losses and better cost management by insurers.

Impact of Catastrophe Losses

Catastrophe losses had a smaller impact on the combined ratio in Q1 2024, contributing 5.1 points compared to 7.6 points in Q1 2023. The previous year's severe convective storms had caused significant losses, but the industry faced fewer and less severe catastrophic events in the first quarter of 2024. This reduction in catastrophe losses was a major factor in the improved financial performance of the industry.

Increase in Earned Net Investment Income

Earned net investment income saw a substantial increase of 33.3% in Q1 2024. This growth was driven by higher returns on investment portfolios and favorable market conditions. Insurers invest the premiums they collect in various financial instruments, and the income generated from these investments contributes to their overall profitability. The increase in investment income provided a significant boost to the industry's pre-tax operating income, which rose by 332.9% to $30 billion.

Surge in Net Realized Capital Gains

National Indemnity Company reported a $10.2 billion shift in net realized capital gains, which played a crucial role in the industry's net income more than quadrupling to $39.9 billion in Q1 2024. Realized capital gains occur when an insurer sells its investments for a profit. This substantial increase in capital gains highlights the positive impact of strategic investment decisions and favorable market conditions on the industry's financial performance.

Growth in Industry Surplus

The industry surplus, which represents the excess of assets over liabilities, grew to $1.1 trillion by the end of Q1 2024. This growth was driven by strong net income, changes in unrealized gains (which reflect the increase in value of investments that have not yet been sold), and contributed capital from shareholders. However, the surplus growth was partially offset by $2.3 billion in other surplus losses and $5.1 billion in stockholder dividends. Despite these offsets, the overall increase in surplus indicates a healthy and financially stable industry.

The first quarter of 2024 has been a period of significant recovery and growth for the US property and casualty insurance industry. The turnaround from a net underwriting loss in Q1 2023 to a substantial gain in Q1 2024, along with improvements in the combined ratio, pre-tax operating income, net income, and industry surplus, demonstrates the industry's resilience and effective risk management. The positive financial performance highlights the industry's ability to navigate challenges and capitalize on favorable market conditions. As the year progresses, the industry is well-positioned to continue its upward trajectory and achieve further growth and profitability.

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