In spite of continued actions to raise prices of coverage, auto loss costs continue to climb and profits will continue to elude personal auto insurers—probably until 2024, analysts at Standard & Poor’s said this week.

John Iten, senior analyst and P/C sector lead for S&P Global Ratings and Tim Zawacki, principal research analyst, S&P Global Market Intelligence both made the prediction during the webinar titled, “IN/sights: Outlook and Trends for U.S. Insurers 2023,” which also covered property/casualty reinsurance and life insurance trends.

After Iten noted inflationary spikes in labor and vehicle repair parts costs that “took off at unexpected levels” to impact personal auto insurers’ profit margins last year, he described what currently continues to be a losing battle for insurers that “started putting through rate increases frequently and in as many states as they could.”

“They should be able to catch up,” but they have not so far, he reported. “We’re not saying that they won’t because we think that there certainly is a lag in terms of when you get approval for a rate increase and that actually flows through your net premiums earned. It will take a while.”

“In the meantime, the loss costs deterioration hasn’t abated at all, and we’re starting to see that come through in first-quarter results,” Iten said, referring to a 4.5 point deterioration in Progressive’s combined ratio to a still profitable level of 99 (across all lines), and Travelers more significant slide of more than six points to 101.5 for personal auto.

“We think they’ll catch up. Probably in 2024 is when you’ll see companies return to profitability. A lot of companies are, I think, optimistic that they can get to a combined ratio below 100 this year.”

“We’ll see,” he said. “These things do take time. But eventually.…

“We do see margins improving this year relative to last year so they’re moving in the right direction,” he reported.

Zawacki noted that while a combined ratio under 100 is the goal, S&P GMI’s preliminary estimate of the private passenger auto combined ratio for the industry last year was over 112. That includes a wide range of companies, including smaller private companies in addition to the publicly traded brand names, he noted. Still, that means “there’s a long way to go to get to profitability,” agreeing with Iten that a 2024 profit is much more likely than 2023.

Zawacki went on to talk about changes in driving patterns that have unexpectedly persisted post-pandemic. “There was a sense that there would be either a new normal or return to pre-pandemic conditions. [But now] it seems like a number of companies are throwing in the towel on the idea that things will get back to 2019 from a claims standpoint at any point in the foreseeable future,” he said.

Changing commuting patterns now seems like permanent changes. “The amount of accidents that have occurred at high speed—[and] the more tragic results that come from those kinds of accidents and the higher levels of attorney involvement that come from related claims, [do] not seem to be abating in ways that we would have expected back in 2020,” he said.

“The industry is adjusting to what will be a new normal. And it won’t really look like the old normal. That’s an important point. It may not look like the old normal in the absence of things like legislative improvements and improvements in vehicle safety—things that take many years to formulate,” he said.

Earlier in the session, during his opening remarks, Iten reviewed S&P’s outlook for the U.S. P/C sector, which the ratings agency arm of Standard & Poor’s changed to negative from stable last October for the first time in 10 years. A shifting distribution of rating outlooks, he said, signaled the need for an overall change in the sector view. At the beginning of 2022, 90 percent of the outlooks had been stable but as the year progressed, 17 percent of the outlooks were moved to negative or credit watch negative.

In spite of the sector outlook change in the third quarter, S&P didn’t change too many individual group ratings late last year. The action started to pick up in the first quarter of this year, Iten said, highlighting a downgrade for Kemper, and an outlook change to negative for Farmers—both related to a significant deterioration in personal auto business—among two downgrades and five outlook changes. The Farmers action also reflected concerns about the company’s ability to rebuild a capital position that had deteriorated.

“There’s only one credit in our [P/C] portfolio that actually has a positive outlook at this point,” he said.

Without identifying the company, Iten said the second first-quarter downgrade was an action taken for a smaller carrier facing increased catastrophe exposure. “That touches on the challenges that companies are facing in renewing their reinsurance programs for their catastrophe protection,” he said.

Iten noted that the higher level of catastrophe losses impacting the P/C sector over the past few years have surpassed prior five- and 10-year averages—”and the first quarter [of 2023] doesn’t look too promising,” he said.

Expanding on the reinsurance situation, Iten spoke about the challenges of increasing reinsurance costs facing carriers, with 25-50 percent increases on loss-free property-cat programs at Jan. 1, 50-100 percent on loss-impacted and average 30 percent hikes for total programs all expected to continue through midyear. Still, Iten said S&P doesn’t expect the reinsurance cost increases to impact ceding company underwriting profits or financial strength ratings because the rating agency expects carriers to be able to pass those costs on to their clients.

“Where it does affect them though is when it becomes cost prohibitive to get the same level of property-cat protection [because] one of the key inputs into [S&P’s] analysis for capital adequacy is the their exposure to 1-in-250 net aggregate PML. To the extent that that number goes up significantly that could put pressure on their capital adequacy overall, and potentially their ratings.”

“It’s something that we’re watching, but certainly for most companies, it is something that they can handle,” he asserted.

Zawacki agreed with the assessment and the idea that carriers can pass the higher reinsurance costs on to customers for the most part. Still, when asked specifically about the potential for M&A activity among small companies, Zawacki said rising reinsurance costs could be a factor. “The reinsurance pressures for smaller carriers that are focused on the property side are real, and their ability to keep an expense structure that’s more streamlined is challenging—always has been relative to its larger peers. So, I wouldn’t say a tidal wave by any means but certainly a continued consolidation push at the smaller end of the [P/C] space,” he said, noting that some may deals take the form of mutual company affiliations or mergers.

On a positive note, Iten said the S&P expects profit margins in commercial lines, which have been offsetting underwriting losses for many multiline companies, to be maintained in 2023. He added, however, that the rating agency does not anticipate that commercial lines profits will improve any further.