US property & casualty outlook: growth momentum shifts toward personal lines

One half of the year gone, our full-year premium growth and profitability forecasts for US P&C remain unchanged. 1Q23 direct premiums written were 8.4% higher than in 1Q22, an acceleration driven by strong rate gains in personal lines and commercial property. However, loss costs grew even faster than premiums, up 20% on a direct basis due to persistent inflation and an unusually active first quarter for natural catastrophes. The resulting net combined ratio of nearly 103% was the worst first-quarter underwriting result in over a decade. Interest rates, on the other hand, provided an uplift: investment yields contributed 33% more to net income than they did a year ago.

• Natural catastrophe losses and persistent inflation weighed on underwriting results in 1Q23.
• 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 maintain our ROE estimates at 8.0% in 2023 and 9.5% in 2024 on higher premium rates and investment yields, and as claims severity eases.
• We maintain our premium growth estimates at 7.5% in 2023 and 5.5% in 2024.

Profitability: despite a difficult first quarter, we still expect improvement in US P&C industry ROE this year and next, on higher underwriting and investment income. We maintain our ROE forecast of 8.0% in 2023 and 9.5% in 2024, up from 2.5% in 2022. That said, the 1Q23 ROE outcome of 3.6% highlights the downside risks to our forecast.¹A 20% jump in loss costs in the quarter outweighed strong premium growth, making for a net underwriting loss of USD 7.5 billion. Net investment income increased and contributed USD 16 billion (including USD 2 billion of realized capital gains) to earnings, and we expect other factors to support continuation of positive momentum: the peak impact of inflation on property and auto claims costs is likely past, rate increases are supporting premium growth and investment gains from higher interest rates are accruing. Downside risks to our forecast include a prospect of more severe than expected recession in the second half of this year, financial stresses causing credit downgrades and higher capital requirements, unexpected natural catastrophe activity and a slow return to target inflation.

Table 1: US P&C insurance sector outlook

Underwriting: we forecast the combined ratio at 100% in 2023 and 98.5% in 2024. The industry net combined ratio reached 102.6% in 1Q23, as natural catastrophes added 6.9 percentage points²(ppt) to the combined ratio (compared to a 10-year 1Q average of 4.2%) and inflation continued to raise claims severities across property lines. The loss ratio for personal lines was more than 20 ppt higher than commercial lines, driven by a sharp rise in the homeowners' loss ratio. Partly as a result, the first half of 2023 has seen high-profile exits of insurers from catastrophe-prone areas. We expect loss severities to ease as average US headline CPI inflation decelerates to our forecast 4.0% in 2023 and 2.8% in 2024, setting the stage for improved underwriting results as rate gains outpace claims costs.

Property loss costs surge on inflation and natural catastrophes. Insurers made headlines in 1H23 with retrenchment from catastrophe-prone markets such as California, Florida and Louisiana. Steps include halts to new business and non-renewals in certain lines. Homeowners' insurance has been a focus, but underwriting actions have extended to commercial property and personal auto too. Insurers cite the economic environment, natural catastrophes, inflation and in some instances reinsurance costs as factors that have caused a surge in expenses resulting in underwriting losses. In June the House of Representatives' Financial Services Committee requested that the Federal Insurance Office provide a report to Congress analyzing the insurance availability and affordability issues that might result.³ A fundamental issue is that homeowners' premiums have not kept pace with exposures. The replacement cost of residential structures increased 42%⁴ from the end of 2019 to 2022, contributing to a 51% increase in direct incurred claims, while earned premiums have only risen by 24%.

Personal auto approaches an inflection point. In 2022 the personal auto combined ratio exceeded 112%, the worst result since at least 1975. The line has a long way to go before it returns to profitability, but the worst might be over. The personal auto 1Q23 loss ratio of 76% was the highest first-quarter loss ratio in at least 20 years but still represented an improvement from last year's overall result (80%), and rate increases are exceeding most indicators of claims severities. In the May CPI, car insurance prices were up 17.1% from a year earlier, while prices for used cars declined 4.2%, motor vehicle body work increased 7.2% and repairs were up 19.7%. Based on these indicators and statutory rate filings, we expect growth rates for earned premiums to surpass loss costs during the second or third quarters (see Figure 1).

Figure 1: Personal auto rate change and earned premiums growth vs. claims cost increases^[5]

Rate trends in commercial lines are bifurcating. The latest CIAB survey reports that average rates for commercial lines increased by 8.3% year-on-year in 1Q23, slightly faster than the 8% gain in 4Q22 (see Appendix). Property rates rose 21% after rising by nearly 17% in 4Q22. Conversely, rate gain momentum in liability lines was generally steady in the low to high single-digits, except for D&O and cyber, where price gains continue to slow. Overall, we still expect rate increases through 2023 with inflation, natural catastrophes and geopolitical uncertainties exerting upward pressure on claims and operating costs.

Table 2: 1Q23 premium growth and loss ratios by line of business

Growth: Personal lines taking over as the engine of growth. Personal auto and homeowners' premiums each grew by double digits in 1Q23, driving strong P&C industry growth of 8.4% (see Table 2). Commercial lines' first-quarter growth rates reflect rate trends: fire & allied lines increased 17% year-on-year, while general liability (sum of other liability, medical professional liability and product liability) premiums were flat. We continue to expect that total nominal premiums will grow by 7.5% in 2023 and 5.5% in 2024, driven by rate gains in personal lines and commercial property. US real GDP – a general proxy for exposures – is forecast to grow by 0.9% in 2023 and 0.8% in 2024. 
 
Investment income: we continue to forecast the average investment yield at 3.5% in 2023 and 3.7% in 2024. In 1Q23 the investment yield reached 3.5% (3.1% excluding realized capital gains) as recurring income increased 33% from a year earlier and capital gains were positive for the first time since 1Q22. Despite two consecutive quarters of declining market yields to start the year, reinvestment yields remain comfortably above rates on maturing securities, and we still see the 2023 reinvestment yield averaging 5.2%. We expect the upper bound of the Fed funds target range to remain at 5.25% through the end of this year before declining to 3.75% during 2024. We forecast the 10-year Treasury yield to average 3.6% and 3.2% in 2023 and 2024, respectively.