Insights from Swiss Re’s latest sigma research suggest that 2023 will represent a transitional phase for US P&C industry profitability. The trajectory is expected to shift from a challenging 2022 to a more robust 2024, underpinned by improvements driven by higher premiums and increased interest rates.
However, the industry has not yet experienced the inflection point between premium growth rates and claims costs, according to the report. While there have been strong and accelerating rate increases in personal lines and a persistent hard market in commercial property, these have been counterbalanced by challenges such as the costliest second quarter for natural catastrophes since 2011, persistent inflation, and a slowdown in favorable reserve development.
Notably, underwriting losses reached $22 billion in H1 2023, resulting in net income of just $2 billion despite higher investment earnings. Adjustments have been made to the 2023 ROE estimate, lowered to 6.5% from 8.0%, while the premium growth estimate has been raised to 9.0% from 7.5%.
The industry has been significantly impacted by natural catastrophe losses and persistent inflation, leading to an underwriting loss of $22 billion in H1 2023. Premium growth continues to be strong, although the momentum has tilted towards personal lines. In commercial lines, robust growth in property is mitigated by weak or negative growth in liability lines.
The estimated premium growth has been adjusted to 9% from 7.5% in 2023, and an expectation of 5.5% in 2024 is maintained. However, despite the strong premium growth, net income in H1 2023 was only $2 billion, prompting a revision of the industry ROE forecast to 6.5% from 8% in 2023, while maintaining the forecast at 9.5% for 2024.
The report also noted that profitability in the industry is expected to witness a decline in the 2023 ROE due to an active H1 for catastrophes. The industry ROE for 2023 is estimated at 6.5%, down from the previous estimate of 8%, while it is maintained at 9.5% for 2024. While this year represents a significant improvement over 2022 (ROE: 2.4%), thanks to higher investment returns enhancing insurers’ profitability, elevated catastrophe activity is impacting underwriting results.
Notably, severe convective storm claims in 1H23 amounted to $34 billion, resulting in an estimated $16 billion in extra claims costs, with a higher share retained in net results. An underwriting loss of $22 billion was experienced, partially offset by a 28% year-on-year increase in net investment income. The first-half net income stood at just $2 billion.
As the industry enters the second half of 2023, traditionally the peak hurricane season, a major claims event is not anticipated, which is expected to result in stronger underwriting results. It is anticipated that H2 2023 will see improved underwriting results as the sharpest inflationary impact on loss costs recedes and gains from higher interest rates accrue. Earnings calls in Q2 2023 indicated that personal lines rate increases will be higher than initially expected.
In the realm of underwriting, the industry is witnessing an increase in the combined ratio forecast for 2023, revised to 102%. The industry net combined ratio surged to 107.3% in Q2 2023, with natural catastrophes adding 11.8 percentage points, 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. It is anticipated that loss severities will ease as average US headline CPI inflation decelerates to the forecasted 4% in 2023 and 2.5% in 2024, setting the stage for improved underwriting results as rate gains eventually outpace claims costs.
Loss costs in the property sector have surged, Swiss Re noted. In H1 2023, homeowners and commercial property claims costs increased by 36% and 30% respectively year-on-year, driven up by inflation and natural catastrophe losses, delaying the overall industry's profitability improvement. The homeowners loss ratio is up by 15ppts from 1H22, to over 82% – the highest in 1H for over a decade.
This situation has led to insurers restricting business in catastrophe-prone markets, with the availability and affordability of insurance gaining attention. In California, for example, there is an estimated 20% less availability for insurance options than a year ago. Moreover, more homeowners are choosing to go without insurance, with only about 88% insured today, compared to up to 95% a few years ago.
On the flip side, Swiss Re highlighted the fact that the worst seems to be over for personal auto. The line's 112% combined ratio in 2022 was the highest since at least 1975, and the loss ratio remains elevated in 2023, suggesting a path to profitability is yet to be achieved. However, in Q2 2023, growth in direct premiums earned kept pace with loss costs for the first time in more than two years. It is expected that this trend will continue, with rate increases expected to exceed most indicators of claims severities.
In terms of pricing, commercial lines rate trends are diverging. Average rates for commercial lines increased by 8.9% year-on-year in Q2 2023, slightly faster than the 8.3% gain in Q1 2023. Property rate gains remain strong but decelerated slightly, rising by 20% after a 21% increase in Q1 2023. On the other hand, rate gain momentum in liability lines is significantly lower, remaining generally steady in the low to high single digits, except for D&O and cyber, where price gains are slowing. Overall, it is anticipated that rate increases will continue through 2023 as inflation and catastrophes put upward pressure on claims and operating costs.
In terms of growth, personal lines are expected to drive growth in 2023. Both personal auto and homeowners' premiums grew by double digits in H1 2023, contributing to strong P&C industry growth of 8.6%. Commercial lines' growth rates are weakening overall and reflect rate trends: fire & allied lines grew by 17%, but this growth was offset by a 1% decrease in general liability premiums. The estimate for total direct premiums written growth has been revised to 9% in 2023, while it is maintained at 5.5% for 2024, driven by rate gains in personal lines and commercial property.
Regarding investment income, the average investment yield is forecasted to be 3.5% in 2023 and 3.7% in 2024. In Q2 2023, the investment yield was 3.2% (3.3% excluding a realized capital loss) as recurring income increased by 25% from a year earlier. Reinvestment yields remain above rates on maturing securities, and it is expected that the 2023 reinvestment yield will average 5.2%. The upper bound of the Fed funds target range is expected to remain at 5.25% through the end of this year before declining to 4.35% during 2024. The forecast is for the 10-year Treasury yield to an average of 3.9% and 3.7% in 2023 and 2024, respectively.
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