Dismal private and commercial auto insurance underwriting results more than offset more favorable outcomes in many other business lines, sending the U.S. property and casualty industry to an estimated combined ratio of 103.6% — the highest for a second quarter in a decade.

Not only did the private-passenger auto physical damage direct incurred loss ratio move higher during the second quarter, but the liability side of the business also experienced marked deterioration. This reinforces the urgent need for meaningful rate increases in a private auto business line where growth in loss costs continues to outpace premiums.

A downturn in results in the commercial auto business, which had been experiencing incremental improvement in recent periods amid multiple years of significant rate increases, implies that the negative effects of higher vehicle repair and replacement costs, along with a preponderance of more severe crashes, may not be limited to private auto. The highest commercial auto liability direct incurred loss ratio in nearly three years suggests social inflation may have returned with a vengeance during the quarter.

The direct incurred loss ratio across all of the auto businesses of 77.0% was nearly 16.1 percentage points above the combined result for all other P&C lines. It stands as the highest loss ratio for those lines in the more than 20 years for which S&P Global Market Intelligence has compiled quarterly data, surpassing the previous high of 76.3% in the fourth quarter of 2001.

Autos at a loss

The second quarter marked a fourth consecutive period during which the physical damage coverages exhibited upward pressure on losses due to factors such as elevated used vehicle values, higher repair costs and increased comprehensive claims from catalytic converter thefts. But the 80.1% direct incurred loss ratio across the private and commercial auto was more than 3 percentage points higher than the previous peak of less than 77.1% in the third quarter of 2021.

Private and commercial auto liability loss ratios had been comparably unremarkable in the first quarter at 68.2% and 65.0%, respectively. But they rose to 75.9% and 72.3% in the second quarter, which represented the highest levels for the private auto business since the fourth quarter of 2016 and the highest for the commercial auto business since the fourth quarter of 2019.

This trend, which was particularly apparent in the second-quarter results of State Farm Mutual Automobile Insurance Co., reflected developments that other carriers have discussed in recent earnings conference calls and rate filings, including medical inflation, increased utilization of medical treatments and higher severities of attorney-involved claims. Longer times to close claims due to automotive supply chain disruptions and labor shortages have impacted severities across coverages.

Among the top five writers, private auto liability direct incurred loss ratios topped 80% in the second quarter at State Farm, Berkshire Hathaway Inc.'s GEICO Corp., and the group led by United Services Automobile Association. They increased from the first quarter of 2022 by as little as 1.4 percentage points at The Progressive Corp. and as much as 21.8 percentage points at State Farm.

A private direct incurred loss ratio in the amounts generated by the industry in the first half and second quarter of 2022 of 75.5% and 78.4%, respectively, would suggest a combined ratio for the private auto business of more than 110%, assuming reinsurance utilization, loss adjustment expenses, other underwriting expenses and policyholder dividends in line with historical averages. Market Intelligence predicted a full-year private auto combined ratio of 106.7%, which anticipated some moderation in inflationary pressures and increasing benefits of rate increases through the balance of the calendar year.

We estimate that the private auto business added 5.9 percentage points to the P&C industry's overall second-quarter loss ratio, an amount that made the difference between an effective underwriting loss and an underwriting profit.

These results add to the momentum already behind the industry's pursuit of rate increases. Direct premiums written growth in the combination of the private and commercial auto lines of 5.8% was consistent with the levels achieved in both the fourth quarter of 2021 and the first quarter of 2022. It significantly lagged the 11.8% rate of expansion achieved by the industry in all lines of business other than private and commercial auto.

Numerous significant rate increases are due to take effect for renewal business in various states through August and September. Many policies are renewing at the higher rates that carriers previously implemented earlier in the year.

Results slip in other lines

Loss ratios for the auto businesses carried the most significance from a historical standpoint, but deterioration occurred during the quarter across several other lines. The P&C industry's direct incurred loss ratio excluding the auto lines rose to nearly 61.0% from 55.6% in the prior-year period. The 5.4-percentage-point increase in that result was the largest in five quarters.

Higher loss ratios were the result of challenging comparisons from an especially benign year-earlier period in several prominent cases. In the other and product liability lines on a combined basis, the direct incurred loss ratio increased to 59.5% from 55.7% in the second quarter of 2021. The direct incurred loss ratio in the marine business of 48.8% was 4.3 percentage points higher year over year. In commercial multiperil, the loss ratio of 58.1% was 0.5 percentage point higher.

The homeowners loss ratio, meanwhile, deteriorated to 79.1% from a relatively favorable result of 65.9% in the year-earlier period as some carriers reported a greater impact from catastrophes. The impact of inflation on the cost of labor and building materials also undoubtedly weighed on results given that the loss ratio hit its highest point in a second quarter since 2011, a period remembered for the historical frequency and severity of tornadoes.

At the other end of the spectrum, the workers' compensation business continued its remarkable run of success. Excluding state funds, the industry's direct incurred loss ratio was just 45.9% in the second quarter, down from 47.8% in the year-earlier period. It was the 11th time in the last 13 quarters that the workers' comp direct incurred loss ratio was below 50%.

Methodology

Second-quarter results in this article reflect the aggregation of data for individual P&C entities with June 30 statutory financials available as of Aug. 23, excluding state funds and residual market entities. For prior periods, results are based on the aggregation of data from all P&C entities, active and defunct, also excluding state funds and residual markets.

Due to reporting changes implemented at the start of 2022, liability results for the auto lines include the combination of other liability and no-fault business. Private and commercial auto physical damage results were previously combined into a single line for quarterly reporting purposes, so apples-to-apples comparisons for interim periods prior to 2022 are unavailable.