U.S. property/casualty (P/C) insurers have posted a significant improvement in underwriting profitability for personal auto and homeowners' insurance, and S&P Global Ratings expects this trend to continue. In addition, commercial lines continue to deliver strong underwriting results. Capital adequacy for some of our rated insurers has also improved, in our view, due to a rebound in GAAP (generally accepted accounting principles) shareholders' equity and changes in our criteria for assessing capital adequacy. As a result, our sector view for U.S. P/C insurers has turned stable, from negative previously.

Elevated Rating Activity So Far This Year

Rating activity has been relatively brisk for the P/C sector so far in 2024. There have been two upgrades and one downgrade. The rating outlook changes so far this year have been more numerous and skewed to the upside. Outlook changes in a positive direction total eight (revisions to stable from negative or revisions to positive from stable), and outlook changes in a negative direction total just two (both to negative from stable).

As a result of these actions, the current distribution of rating outlooks--an indicator of potential future rating actions--has a positive bias (see chart 2). However, the majority of our rating outlooks remain stable, so any rating changes should be limited.

Chart 1

Chart 2

Rate Increases And Underwriting Actions Support Improvement In Personal Lines

The divergence between personal and commercial lines insurers' underwriting performance has eased in the past few year, with the gap in combined ratios narrowing in 2023 to 11 points (see chart 3). We expect the gap to narrow significantly this year and the industry to return to underwriting profitability due to improved results in personal lines. We expect private auto to return to underwriting profitability this year, while we think homeowners will improve but will report an underwriting loss due to elevated catastrophe losses.

The major divergence in underwriting results between the personal and commercial lines sectors was one of the main reasons we changed our sector view for U.S. P/C insurers to negative in October 2022. The personal lines sector deteriorated sharply because of higher inflation and supply chain disruption, as well as regulatory constraints on rate increases, while the commercial lines sector improved. The 15-point difference between the combined ratios of the two sectors in 2022 was by far the largest going back to at least 2005.

Chart 3

The accident-year loss ratio for personal lines insurers has improved (see chart 4), and we expect it will continue to as the rate increases implemented in the past year continue to take effect, along with lower claims inflation. Looking at the aggregate reported GAAP earnings for select personal lines insurers that we rate, the underlying accident-year loss ratio, excluding catastrophe losses, for the first nine months of 2024 improved to about 65% from 72% in the same period the prior year. This metric is now back to the pre-pandemic level of 2019.

Chart 4

Natural catastrophe losses remain elevated in 2024--again owing to a rise in severe convective storm losses. The industry's catastrophe loss ratio has been 8% or higher in each of the past four years (2020-2023), and this year looks to be similar. This has strained underwriting results, particularly in homeowners' insurance, but results are improving due to rate increases and underwriting actions to limit exposure.

Natural catastrophe losses for private U.S. P/C insurers for the first half of 2024 were nearly $48 billion, almost unchanged from the same period in 2023, per the Insurance Services Office. Hurricane activity in the second half--notably hurricanes Helene and Milton--will add to this total, but we expect losses to remain within catastrophe loss budgets for most insurers.

Insurers' Capital Cushions Have Improved

Shareholders' equity has almost fully recovered the steep drop it experienced in 2022 (see chart 5), primarily owing to strong net income boosting retained earnings and lower unrealized losses on bond holdings (captured within accumulated other comprehensive income). As a result, capital adequacy has improved for many P/C insurers, in our assessment.

In 2022, higher interest rates hurt shareholders' equity for the insurers that we review on a GAAP basis--one of the reasons we changed our sector view to negative at that time. Total shareholders' equity for the group fell about 24% that year, from $314 billion to $240 billion at year-end. Shareholders' equity rebounded 18% in 2023, with some recovery in the capital markets and lower share repurchases, but was still about 10% lower than at year-end 2021.

Chart 5

Another reason for our improved view of capital adequacy is the impact that our new capital model criteria has had on the capital and earnings scores for the primary insurers we rate. Only about 10% of the scores changed, but this understates the impact of the criteria change. In some cases, capital redundancy strengthened materially without triggering a score change but resulted in a positive outlook change.

94% of rated U.S. P/C insurers have capital and earnings scores of strong or better, with aggregate capital adequacy for the group redundant by about 10% at the 99.99% stress level as of year-end 2023 (see charts 6-7). We anticipate that most P/C insurers' capital adequacy at year-end 2024 will be similar to year-end 2023 as higher shareholders' equity offsets an increase in required capital for net premium and reserve growth and higher invested assets.

Chart 6

Chart 7

Ratings Stability Expected

While positive outlooks now outnumber negative outlooks for U.S. P/C insurers--indicating that upgrades could surpass downgrades--most rating outlooks are stable. As a result, we expect largely rating stability for the sector over the next 12 months, assuming personal lines underwriting performance continues to recover. We will also be monitoring the performance of certain casualty lines that are vulnerable to social inflation risk.