In a report published in early December, Fitch Ratings said a modestly improving earnings picture in coming months points to a “neutral” sector outlook for U.S. property/casualty insurers—and over $50 billion of net income in 2023.
“Following weaker profits and a decline in surplus, U.S. P/C insurer operating profits are anticipated to stabilize and modestly improve in 2023 due to premium rate increases in most commercial and personal lines and higher investment yields,” said Fitch Managing Director James Auden.
Fitch projects that the 2022 industry combined ratio will rise to 101.7 for the year, nearly 2 points higher than the 99.6 which the rating agency calculated for the full-year 2021, but improved from 102.3 through the first nine months of 2022. The above-100 combined ratio projection for the full year follows four consecutive years of reported combined ratios ranging between 99 and 100.
Statutory net income for 2022 is projected to decline by 25 percent from last year to $46 billion, and policyholders surplus will fall by an estimated 6 percent from prior record levels over $1 trillion posted at year-end 2021.
The resulting return on surplus will sink to 4.8 percent, Fitch projects, noting that the 10-year average return is up around 7.6 percent.
Forecasting slowly improving personal auto results together with strong but slightly lower underwriting profits in commercial lines, and also factoring in an expectation that natural catastrophe losses will move back closer to historical levels, Fitch estimates a 100.7 combined ratio for all lines combined in 2023.
A narrower underwriting loss and higher investment income will push 2023 statutory net earnings up 20 percent to a projected $55 billion, the rating agency forecast says, adding that the figure will translate into a return on surplus of roughly 5.5 percent.
The report, U.S. Property/Casualty Insurance Outlook 2023, notes that premium rate increases gained momentum across nearly all business lines during 2022 in response to weaker results and assumed effects of inflation on loss costs. While below the 9 percent jump achieved in 2021, net written premiums across all lines are expected to grow 7 percent in 2022.
Ongoing favorable pricing activity in most commercial lines segments led to continued strong growth of 11 percent year-over-year growth in commercial lines direct written premiums through the first nine months of 2022, while personal lines premiums increased by 5 percent. Overall, direct written premiums grew by about 8 percent, Fitch reported.
Highlighting the troubled personal auto segment, Fitch said that while incurred loss experience is anticipated to stabilize in the line as personal lines carriers take corrective pricing and underwriting actions, “improvement toward break-even results may not materialize until 2024.” According to the report, the nine-month 2022 statutory direct loss ratio was 75, 11 points higher than the direct loss ratio for the same period in 2021—and the 2022 direct loss ratio for personal auto physical damage was 80.
On the commercial lines side, Fitch anticipates that pricing trends will stay positive through 2023.
“Still, improvement in operating performance and maintaining a neutral future sector outlook largely hinges on pricing keeping pace with claims costs,” the report notes, adding that while inflation levels are expected to slow down, the effects of inflation on loss cost factors—including litigation costs and medical costs—remain highly variable.
“Variability in loss costs tied to inflation in commercial P/C lines could have an adverse effect on 2023 underwriting results from projected levels,” the report says.
“Signs that underwriting performance is adversely affected by pricing that is not keeping pace with inflation, or reserve adequacy is materially compromised from previous pricing could promote a shift to a deteriorating sector outlook,” Fitch warns.
On the loss reserving front, the report notes that the U.S. P/C industry as a whole is likely to report its 17th consecutive year of favorable calendar-year loss reserve development in 2022, even though auto liability and physical damage segments will be affected by adverse development.
“Potential for pricing errors that are manifest through inadequate initial loss estimates and upward development of accident-year loss ratios over time are heightened in an extended period of higher inflation,” the report says in a textbox titled, “Inflation Effects May Diminish Reserve Adequacy.”
“The effects of factors, including higher medical and social inflation on ultimate reserve adequacy in longer tail segments, such as workers compensation and other liability, will take several years to fully assess,” the textbox says.
The report also details capital strength and downward capital movements (largely attributable to unrealized losses on equity investments), as well as the expectation that new capital won’t be coming into the P/C insurance market “in a material fashion” in 2023.