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2022 stat data: Commercial lines growth dips to 8.7% as sector loss ratio nudges upwards

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As discussed in our note on March 14, the past two weeks have dredged up buried memories from the 2008 crisis as we deal with the Silicon Valley Bank/Signature Bank collapse and the treasury/Fed fighting back potential contagion.

On March 22, the Fed will announce its next rate hike, and the latest crisis has created meaningful uncertainty around the decision.

As market watchers, we can’t help but wonder how the next announcement will affect carriers. This last pricing cycle was driven by the forces of inflation interacting with these interest rate extremes, and it is hard to say what will win in the race between loss cost inflation and premium growth.

Commercial carriers have benefitted meaningfully from a combination of these factors - where top-lines have shot up, while the impact of social and loss cost inflation hasn’t really shown in the manner it was expected to. It is worth noting that catastrophe and non-catastrophe losses continued to impact results for 2022 as they have done for the past few years.

If the Federal Reserve does change the interest rate trajectory, it could end up impacting commercial lines in a different manner than the industry had thought going into 2023. If the urgency of slowing inflation changes, we could see an unequal impact play out on the top and bottom lines. Top-line could rise, but so could loss costs.

Keeping these factors in mind, we evaluated the latest statutory data to see how the commercial cohort had performed in the past year, and whether we are looking at peak underwriting trends.

Firstly, commercial insurers benefited from both pricing uplift and exposure growth, although year-over-year growth slowed down.

Secondly, the commercial industry as well as the top commercial writers showed stable results, although individual company performance varied.

Thirdly, peeling back the sub-segment performance showed how micro cycles by class of business are playing out. Strong workers compensation results partially offset pressure from catastrophe and commercial auto losses, while loss ratios in liability lines remained stable.

Below we discuss these in detail.

Firstly, commercial lines premium growth dipped in 2022 vs 2021 

The following graph shows personal and commercial lines direct premium written (DPW) by year for the last decade, along with each year’s premium growth rate. We see that commercial premium growth for 2022 was the second highest in the last 10 years, with 2021 at 13.3% and 2022 at 8.7%, respectively. For comparison, the personal lines industry grew 5.7% and 6.6% in those years.

Commercial lines premium growth in 2022.png

Premium growth in 2021 was propelled by the extremes of the commercial pricing cycle. Although growth dipped to high single digits for 2022, overall premiums remained strong as the industry found additional legs benefiting from exposure change, a byproduct of rising inflation.

Though there was some consensus that the pricing cycle would be flattening during 2022, it’s clear from the numbers above that these expectations have not materialized to full extent. This view was supported by many carriers and brokers who said in their year-end calls that they continued to see strong pricing in most lines.

As we continue through 2023, will pricing continue to remain stable, and will rising exposure aid the top-line? Or will insurance purchasers change their buying behavior in an uncertain economic environment?

Secondly, the gap between leaders and the industry narrowed

The chart below shows the premium and loss ratio for the top 15 carriers and the commercial sector. Note that commercial auto predominance does skew the performance for Progressive and Great American below.

Beyond these two, one can see a mix of company strategy and sub-sector trends playing out. AIG continued to execute its turnaround with its loss ratio making a 5.8-pt improvement on a year-over-year basis, while the specialty-centric carriers such as Berkley have the strongest loss ratios.

As a group, the top 15 commercial writers achieved a lower loss ratio in 2022 compared with 2021, while the commercial sector overall had an increase of 1.4pts.

Top commercial lines underwriters in 2022.png

Lastly, not all lines of business are in the same phase of their cycles

Although the top commercial lines insurers are experiencing remarkable growth with relatively low loss ratios, a difference continues to exist between sub-segments.

The chart below shows the direct incurred loss ratio for the commercial lines of business and the direct written premium for each line.

Several takeaways exist in the data below:

a) The fire and allied lines segment shows the impact of continued pressure from catastrophe losses.

b) Commercial auto remains a troubled spot (we sound like a broken record!).

c) Workers’ compensation has continued to outperform and partially offset losses in commercial auto and catastrophes on an industry level. The question does remain, as we’ll see in the industry schedule P data later this month – is there more juice left in the reserve release tank?

d) Loss ratios in the “other and product liability” subsegment have remained stable

e) Medical professional liability – which looked like it was sliding off into the abyss – stabilized for 2022, suggesting the trends might be bottoming out.

Direct incurred loss ratio for commercial lines LOBs in 2022.png

In summary, 2022 saw commercial insurers benefiting from pricing and exposure as well as stable loss costs – although growth has slowed.

Based on recently concluded earnings calls for the year-end results, the majority of the players expected pricing and exposure stability vs. an increasing underlying loss cost trajectory. However, SVB’s issues and its fallout impact on the interest rate cycle does have the potential to upend that narrative.