The US Open tennis finals took place at the weekend. In both the men’s and the women’s game, trends vs optimism collided. On the women’s side, Aryna Sabalenka prevailed over Jessica Pegula’s Cinderella story. In the men’s final, Jannik Sinner outplayed Taylor Fritz convincingly.
Looking at the trend lines for Sabalenka and Sinner, these results should come as no surprise.
A similar scenario is playing out in the commercial insurance landscape. One can hope that the expected loss trends when booking reserves play out, but the reality has been and continues to be different.
In our note last week, we highlighted that H1 reserve releases for the industry were at their highest level for 15 years. This comes against the backdrop of questions about the adequacy of recent accident years and the soft market years. In that analysis, we showed that workers’ compensation releases were offsetting a lot of bad news on the other liability side for the first six months of 2024.
We also delved deeper and looked at the loss ratios of several commercial sub-segments for the first six months. Indeed, the first six months show an uptick in other liability loss ratios for the industry. Whether these shifts will be sufficient remains a point of concern.
The other important question is how growth in various commercial segments correlates with the yearly loss ratio shift. The increase in loss ratios would be a good sign, reflecting additional conservatism apart from the new business penalty baked into the loss picks. We have added an exhibit that shows growth in these segments by company vs loss ratios over time. This exhibit does show loss picks moving up in challenged lines for several carriers.
Our note concludes with a by-line summary by companies over time.
We discuss these points in detail below.
The industry loss ratio for commercial lines dips YoY, but OL and commercial auto reach highest in 11 years
The chart below shows the direct incurred loss ratio for the first six months of 2024 and compares this to a similar period over the past 11 years.
For the first six months, overall loss ratios declined to 54.8%, mainly due to the decline in fire & allied lines and commercial multi-peril, both of which are property/short-tail heavy. Recall that the first half of 2023 included a greater concentration of these losses than in 2024.
On a by-line basis, other liability climbed to 63.8% for the first six months of 2024 vs 58.0% for 2023. Commercial auto liability also jumped to an all-time high of 75.8%. In contrast, workers’ compensation stayed relatively unchanged at 48.1%, along with medmal also staying at a similar level.
These loss picks could prove to be optimistic. Our prior piece on litigation trends showed that medmal trends remain under pressure. Similarly, with employment trends continuing to soften, it might only be a matter of time before the workers' compensation cycle also bottoms out.
For the top commercial carriers, other liability trends show caution
The chart below shows DWP growth for various subsegments and looks at the change in the top writers' loss ratios.
Simply put, if a company is writing more business in a long-tail line with an uncertain loss climate, loss ratios should go up to account for this uncertainty.
Taking a step back, the list above shows a few companies whose loss ratios have decreased even when growing their book, and warrant further examination.
By-company and by-segment analysis
The charts below show the top-line growth and loss ratio shifts between H1 2023 and H1 2024 for the top 30 commercial lines (ex-commercial auto), other liability, and workers’ compensation writers.
A total of 23 of the 30 commercial lines writers we observed saw year-over-year top-line growth at the H1 mark, with State Farm, Starr, Auto Owners, and Old Republic experiencing double-digit growth.
A majority of the top 30 other liability writers also experienced year-over-year top-line growth, with a number of carriers achieving double-digit increases. Additionally, many of the carriers that had top-line growth also experienced a rise in their direct incurred loss ratios.
Again, we would expect insurers that are writing more business in a long-tail line with a challenging loss environment – especially lines such as other liability, which are exposed to social inflation – to raise their loss ratios to account for the uncertainty.
Turning to workers’ compensation, we see that fewer insurers experienced top-line growth in this segment compared to other liability and commercial lines overall. Additionally, many of those whose exposure has reduced year-over-year also experienced increases in their loss ratios. This follows the continuing struggle to raise rates in this line.
As we noted in our H1 stat reserve analysis, recent economic data has shown a moderate uptick in unemployment in recent months. Historically, rising unemployment has correlated with a worsening workers’ compensation loss cost environment.
In summary, we remain cautious on the commercial lines group based on these loss ratio trends. Although other liability loss ratios have ticked up sequentially and are at one of the highest levels in 11 years, we are not convinced that the shift fully factors in a shift in the loss trends and social inflation climate.
Appendix:
The chart below shows the largest 30 commercial lines writers (including commercial auto), ranked by DPW growth in H1 on a year-over-year basis.