US Property & Casualty outlook: strong momentum into 2024, led by personal lines

The US P&C insurance industry enters 2024 with strong momentum. Profitability was below insurers' cost of capital last year, but strong premium increases, easing claims cost inflation and higher investment returns began to boost industry results by 2H23. We expect these trends to continue in 2024, supporting profitability improvement. The loss ratio on personal lines was 21 percentage points higher than on commercial lines in 9M23, but we expect this gap to narrow in 2024. Personal lines premiums are growing faster and easing economic inflation primarily benefits personal lines claims costs, while social inflation mostly impacts commercial lines. We forecast industry return on equity (ROE) at 9.5% in 2024 and 10.0% in 2025, supported by premium growth of 7.0% and 4.5% respectively in these years.

• Our forecast for 2024 is decidedly more favorable than 2023, with expected strong premium growth and easing inflation pressures.
• We raise our premium growth estimate to 7.0% for 2024 (from 5.5%) and forecast 4.5% growth in 2025.
• We forecast industry ROE of 9.5% in 2024 and 10.0% in 2025.
• Personal lines are the anticipated key driver of growth this year; commercial lines are bifurcated, with strong property growth offset by weak liability growth.
• Natural catastrophe losses and persistent inflation weighed on results in 2023, with an industry underwriting loss of USD 33 billion through 9M23

We see higher industry ROE in 2024 as personal lines margins improve. We forecast industry ROE at 9.5% in 2024 and 10.0% in 2025, up from an estimated 5.0% in 2023. The 2023 result was below our expectations, weighed down by the impact of persistent inflation and elevated insured losses from severe convective storms throughout the year, despite a relatively benign hurricane season. Underwriting losses of USD 33bn¹ in 9M23 were significantly higher than the USD 19bn losses in the prior year period, and more than offset the benefit of USD 10bn higher net investment income in 9M23. However, industry profitability has favorable momentum: in the third quarter, net premiums earned increased 9% while net claims incurred rose by only 6%. We expect this differential to persist into 2024. We see a risk that social inflation could negatively impact industry ROE by weakening favorable reserves development. Reserve releases in 9M23 contributed only 0.7 percentage points (ppt) of combined ratio benefit on estimated full-year premiums earned, the weakest since 2004.

Table 1: US P&C insurance sector outlook

We expect improvement in the combined ratio, led by personal auto. We forecast the industry net combined ratio at 98.5% in both 2024 and 2025, a sharp improvement from an estimated 103% in 2023. Personal lines will be the key positive driver – its loss ratio was 21ppt above commercial lines at 9M23, but it gained momentum in 2H23. Commercial lines will likely begin to face margin pressures after a period of relatively favorable underwriting experience on a calendar year basis, but results remain strong so far. Improvement is already evident in the statutory data: as of 3Q23 the industry net combined ratio decreased to 102.5%, despite natural catastrophes adding 10.4ppts,² well above the 10-year average of 7.0ppts. We expect loss severities to ease as average US headline CPI inflation declines to our forecast 2.7% in 2024 and 2.4% in 2025. This sets the stage for improved underwriting results, as rate gains outpace claims costs.

Table 2: Year-to-date premium growth and loss ratios by line of business, 3Q23 

Personal lines set to drive growth again in 2024; commercial lines growth to be led by property. We forecast total direct premiums written (DPW) growth of 7.0% in 2024 – an upward revision from 5.5%, driven by momentum in personal auto – and 4.5% in 2025 after nearly 10% growth in 2022 and 2023. Both personal auto and homeowners' premiums grew in excess of 13% through 3Q23, driving strong P&C industry growth of 9.9% (see Table 2). Personal auto rate increases exceeded 9% in each of the six months through November 2023.³ In contrast, commercial lines' growth rates are weakening, below 7% through 3Q23 as rate increases decelerate. While fire & allied premiums grew strongly at 16%, liability premiums were flat (see Figure 1),⁴ largely in response to strong underwriting results. We forecast US real GDP, an exposure proxy, to grow by 1.1% in 2024 and 1.9% in 2025.

Commercial property and liability are at different points in the cycle. In 2024, we expect commercial property growth rates in the high single digits, and liability rate growth in the low single digits, on average. Commercial lines average rates increased by 8.1% year-on-year in 3Q23, slower than the 8.9% gain in 2Q23, according to the CIAB. Within this, property rate gains are strong but decelerating, rising 18% after a 20% increase in 2Q23 (see Chart 1, Appendix in pdf). In contrast, most liability lines rates are declining, or growing only by low single digits. D&O and cyber rate increases have decelerated rapidly following surges between 2020 and 2022. Umbrella and commercial auto are exceptions, both rising in the high single digits (see table in Appendix in pdf).

Figure 1: Direct premiums written growth rates, year-on-year

Likely to decelerate in line with disinflation, varying by line of business. The lines with the strongest premium growth – property and personal auto – are expected to benefit the most from disinflation. We forecast a deceleration in property lines claims costs (ex-cat) as construction prices increase by just 1.5% in 2024 and 3.0% in 2025, after surging by 7.0% in 2023 and 17.5% in 2022. We also expect disinflation to improve personal auto margins. In the November US CPI data, used car prices declined 3.8% while repair costs increased 12.7%, down from 23.1% in January 2023. In 3Q23, personal auto loss costs increased just 2% y-o-y, compared to 13% for earned premiums. We expect this favorable divergence to continue through 2024.⁵ Liability, in contrast, will likely receive least benefit from economic disinflation, given the nature of claims. Additionally, lower favorable reserve development and social inflation disproportionately impact liability lines.

We expect investment yields to rise to 3.7% in 2024 and 4.1% in 2025, from 3.5% in 2023. Most of the increase will be driven by recurring income: YTD through 3Q23, recurring investment income of USD 45bn was 30% higher than the prior year period, benefiting from higher yields across all maturities. Despite the recent decline in long-term interest rates, we expect reinvestment yields to remain above average yields on maturing securities. In 2025, higher realized capital gains should be an additional tailwind for investment results. We forecast the upper bound of the Fed funds rate target range to decrease in three steps during 2024, from 5.5% to 4.75%, before declining to 3.5% by the end of 2025. We forecast the 10-year Treasury yield to end 2024 and 2025.