US Property & Casualty outlook: premiums in race to catch up with claims costs

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%.

• 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 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. 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.   

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.

Table 1. US P&C insurance sector outlook 

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% less availability for insurance options than a year ago.⁶ More homeowners are also choosing to go without insurance: only about 88% are insured today, compared with up to 95% a few years ago.⁷  
  
The worst appears 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 is still elevated in 2023, suggesting a way to go before it turns a profit again. However, in Q2 2023, growth in direct premiums earned kept pace with loss costs for the first time in more than two years (see Figure 1). We expect this trend to continue, with rate increases expected to exceed most indicators of claims severities. For example, the July Consumer Price Index showed car insurance prices up by 19.1% y-o-y, while prices of used cars declined 6.6%, motor vehicle body work increased 7.1% and repairs were up 17.0%.  Based on CPI data, statutory rate filings and earnings call commentary, we expect earned premiums growth rates to continue to accelerate while loss costs decelerate. A potential stumbling block is the United Auto Workers strike that began on 15 September, which will disrupt supply chains and cut new vehicle production, and could cause an uptick in used car values.⁸

Figure 1. Personal auto: quarterly direct premiums earned and losses incurred yoy vs. trailing-12-months loss ratio 

Pricing: commercial lines rate trends are bifurcating. 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, the latest CIAB survey reports (see Appendix). Property rate gains remain strong but decelerated slightly, rising 20% after a 21% increase in Q1 2023. By contrast, 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, we expect rate increases through 2023 as inflation and catastrophes put upward pressure on claims and operating costs.  

Personal lines look to be the growth engine of 2023. Both personal auto and homeowners' premiums grew by double digits in H1 2023, driving strong P&C industry growth of 8.6% (see Table 2). Commercial lines' growth rates are weakening overall and reflect rate trends: fire & allied lines grew 17% but were offset by general liability (sum of other liability, medical professional liability and product liability) premiums down 1%. We revise up our estimate of total direct premiums written growth to 9.0% in 2023 and maintain it at 5.5% for 2024, driven by rate gains in personal lines and commercial property. US real GDP – a general proxy for exposures – is forecast to grow by 2.1% in 2023 and 0.9% in 2024.

Table 2. H1 2023 premium growth and loss ratios by line of business 

We continue to forecast the average investment yield at 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 25% from a year earlier. Reinvestment yields remain 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 4.35% during 2024. We forecast the 10-year Treasury yield to average 3.9% and 3.7% in 2023 and 2024, respectively.