US PROPERTY & CASUALTY OUTLOOK Premiums in Race to Catch Up With Claims Costs By Thomas Holzheu & James Finucane We expect 2023 to be a transition year for US P&C industry profitability, from a difficult 2022 to a stronger 2024 as higher premiums and interest rates improve industry results. The P&C industry has not yet reached the inflection point between premium growth rates and claims costs. Instead, strong and accelerating rate increases in personal lines, an ongoing hard market in commercial property and high reinvestment yields were offset by the costliest second quarter for natural catastrophes since 2011, persistent inflation, and slowing favorable reserve development. Through H1 2023 underwriting losses reached USD 22 billion, resulting in net income of just USD 2 billion despite higher investment earnings. We lower our 2023 ROE estimate to 6.5% from 8.0% and raise our premium growth estimate to 9.0% from 7.5%.
A 14% jump in total loss costs outweighed 6% net earned premium growth, resulting in an underwriting loss of USD 22 billion.3This was partially offset by net investment income increasing 28% year-on-year. First half net income was just USD 2 billion. Halfway through peak hurricane season without a major claims event, we expect stronger underwriting results in H2 2023 as the sharpest inflationary impact on loss costs recedes, and gains from higher interest rates accrue. On Q2 2023 earnings calls insurers have also indicated that personal lines rate increases will be higher than initially expected.
Underwriting
• Natural catastrophe losses and persistent inflation weighed on results, with an industry underwriting loss of USD 22 billion in H1 2023. • Premium growth remains strong, while momentum has shifted to personal lines. • In commercial lines, strong property growth is offset by weak or negative growth in liability lines. • We raise our premium growth estimate to 9.0% from 7.5% in 2023 and still expect 5.5% in 2024. • With just USD 2 billion net income in H1 2023, we lower our industry ROE forecast to 6.5% from 8.0% in 2023 but maintain our forecast at 9.5% in 2024.
We revise our 2023 combined ratio forecast up to 102.0%. The industry net combined ratio jumped to 107.3% in Q2 2023, with natural catastrophes adding 11.8 percentage points4 (ppts), well above the 10-year average of 6.3%. Inflation continues to raise claims severities across property lines. Year-to-date, the personal lines loss ratio was nearly 23ppts higher than commercial lines as catastrophes affected homeowners more than commercial policies. We expect loss severities to ease as average US headline CPI inflation decelerates to our forecast 4.0% in 2023 and 2.5% in 2024, setting the stage for improved underwriting results as rate gains eventually outpace claims costs. (See Table 1, below)
Profitability
Property loss costs surge. In the first half of 2023, homeowners and commercial property claims costs increased by 36% and 30% respectively y-o-y, driven up by inflation and natural catastrophe losses and delaying overall industry profitability improvement. The homeowners loss ratio is up by 15ppts from 1H22, to over 82% - the highest 1H in over a decade. Partly as a result, insurers are restricting business in catastrophe-prone markets, and the availability and affordability of insurance has now gained the attention of Congress.5 In California, for example – where insurers have announced pullbacks this year – there is an estimated 20%
We anticipate lower 2023 ROE after an active H1 for catastrophes. We estimate 2023 industry ROE at 6.5%, down from 8.0% previously, and maintain it at 9.5% for 2024. Though this year is a huge improvement on 2022 (ROE: 2.4%) as higher investment returns have boosted insurers’ profitability, elevated catastrophe activity is weighing on underwriting results. USD 34 billion of severe convective storm claims in 1H231 drove an estimated USD 16 billion in extra claims costs,2 with a higher share retained in net results.
Table 1. US P&C Insurance Sector Outlook US P&C Insurers
Q2 2022
Q3 2022
Q4 2022
Q1 2023
Q2 2023
2022
2023 E
2023 E
2024 F
2024 F
%
Quarterly data
Quarterly data
Quarterly data
Quarterly data
Quarterly data
Annual
Projected
Prior
Projected
Prior
DPW, YOY change
9.7
7.9
8.9
8.4
8.1
9.8
9.0
7.5
5.5
5.5
Combined ratio
104.0
106.4
104.2
102.6
107.3
102.7
102.0
100.0
98.5
98.5
Underwriting result
-5.6
-8.0
-2.5
-4.8
-0.9
-3.2
-2.0
0.0
1.5
1.5
Investment yield
2.6
2.6
2.9
3.5
3.2
2.7
3.5
3.5
3.7
3.7
Return on equity
0.5
-2.1
4.0
3.6
-1.9
2.4
6.5
8.0
9.5
9.5
For source information, visit www.swissre.com/institute/research/sigma-Vresearch/Insurance-Monitoring/us-property-casualty-outlook-september-2023.html.
12
Insight
January 2024
