In spite of premium increases that primary insurance carriers will record for 2023, the U.S. property/casualty industry as a whole won’t report an underwriting profit or a double-digit return for the year, Fitch Ratings forecasts.

James Auden, managing director for North American insurance at Fitch Ratings, revealed the rating agency’s projections of a 103 combined ratio and a 15 percent drop in net earnings for the year during a webinar late last week.

The webinar centered on the rationale for Fitch’s neutral sector outlook for the U.S. property/casualty insurance industry and improving outlook for the global reinsurance sector.

Unlike ratings outlooks, sector outlooks “consider how underlying business fundamentals will impact financial performance in the coming year relative to results in 2023,” Auden said. “Our outlooks also consider that the industry broadly maintains capital strength to support obligations and withstand significant adverse loss events.”

According to Auden, “Despite continued strong premium growth, industry earned premiums are up over 9 percent through nine months 2023, statutory underwriting results and profits will deteriorate in 2023…with deterioration largely tied to a second year of weak personal lines results.”

Within personal lines, 2023 will mark the second straight year of large underwriting losses for personal auto, and homeowners insurance will see its fifth underwriting loss in the last six years even though loss experience wasn’t dented by hurricane losses. “Substantial catastrophe losses from inland convective storms” caused the damage to homeowners results instead, Auden noted.

2023 at a Glance

  • 2023 will mark the second straight year of large underwriting losses for personal auto.
  • 2023 will mark the fifth underwriting loss in the last six years for homeowners.
  • In 2023, the reinsurance sector’s return on capital exceeded its cost of capital for the first time in a decade.

Source: Fitch Ratings

Looking ahead, Fitch expects improved results for personal auto and homeowners in 2024. But the overall U.S. P/C industry combined ratio for all lines combined still won’t drop below 100 in Fitch’s forecast. And Fitch expects the industry 2024 return-on-surplus to come in at about 5 percent—below the long-term historical average of 7.5 percent.

“A few of the more traditionally successful large auto writers are already reporting a turnaround in performance,” Auden said, noting that sharp hikes in personal auto pricing last year will promote some improvement in personal auto underwriting results in 2024. “And claims factors like used auto prices dropping and length of time to complete repairs slowing also point to loss cost moderation that should boost results going forward,” Auden said.

In homeowners, better 2024 results may come from a “hoped-for reversion to historical norms for catastrophe losses,” coupled with significant underwriting changes. “But carriers will continue to face challenges in managing catastrophe risk aggregates and properly insuring to value amid higher than average inflation,” Auden said.

Bottom line: “Despite improvement in results, a return to overall personal lines combined ratios falling below 100 is not anticipated in 2024 and will take some time to materialize,” he said.

Commercial lines continues to be a better story, generating underwriting profits in 2023, but Fitch is watching whether prices keep up with loss costs and monitoring signs of loss reserve weakening in 2024. In Auden’s words, “whether heightened loss estimation risk in the most recent accident years tied to inflation and rising litigation costs, particularly in longer-tail liability lines, leads to weakening in reserve strength” is an item to watch.

“Commercial sector underwriting gains may narrow in 2024, but pricing trends are anticipated to remain largely positive,” Auden said, noting that several years of highly favorable pricing conditions, market discipline and very strong workers comp results have buoyed underwriting results.

Reserve Development in Focus

During a separate outlook webinar in December, Michael Lagomarsino, a senior director for rating agency AM Best, reviewed factors supporting AM Best’s stable outlook on the commercial lines segment. Lagomarsino noted, however, that AM Best maintains negative outlooks on three individual commercial lines: commercial auto, general liability and professional liability.

Each of these lines have reported adverse prior-year development over time, especially on soft market accident years 2015 through 2019,” he said, stressing the impact of social inflation on these lines.

Lagomarsino explained that the stable outlook for commercial lines overall is driven by the continued strong pricing across most major commercial lines business—workers compensation, D&O and cyber being exceptions. “Although we anticipate continued divergences in pricing across different commercial lines of business, it’s our expectation that the majority of segment carriers will remain disciplined and pricing will keep pace with increasing loss costs and maintain rate adequacy in the aggregate.”

Another positive for commercial lines writers—interest rates remaining higher for longer will bolster the segment’s operating profitability. “It’s our expectation that this will not result in a broad loosening in pricing or underwriting—think of cash flow underwriting—due to the headwinds facing the segment,” he said, referring to litigation trends and reserve development.

In contrast to the neutral sector outlook that Fitch has on the U.S. P/C insurance sector, Fitch upgraded the fundamental global reinsurance sector outlook to “improving” from “neutral” in September 2023, according to Brian Schneider, Fitch Ratings global head of reinsurance, who explained why that outlook holds for 2024 during the webinar last week. “High price discipline driving a hard market environment, rising reinvestment yields and strong demand for reinsurance protection will support earnings,” he said.

Schneider said Fitch expects the group of global reinsurers it rates to see a 2023 combined ratio of roughly 92, marking the third straight year of underwriting profitability and a 5-point improvement. Noting that the improvement was driven by reduced catastrophe losses—which added about 7 points to the 2023 combined ratio, compared to 13 points in 2022—he said Fitch is forecasting that the 2024 will come in at 94—2 points higher than 2023—”as the return of more large natural events that impact reinsurers’ treaties would push the ratio up. ”

Schneider also shared these insights about the reinsurance sector:

  • In 2023, the reinsurance sector’s return on capital exceeded its cost of capital for the first time in a decade. Anticipating a replay in 2024, he said, “This favorable result reflects reinsurers returning to largely providing capital protection with earnings volatility moving back to primary insurers.”
  • Higher returns, however, have a downside. “Renewed interest from institutional investors as a result of higher expected returns may lead to more capacity from traditional and alternative sources—and could cause a gradual softening of the hard market beyond 2024,” he said.

Like Auden, he called out concerns about longer-tail liability lines. “Reinsurers have expressed pricing and reserving concerns regarding casualty lines as reported claims have started to accelerate recently. This includes U.S. liability and D&O from the 2015 to 2019 soft market accident years, driven by economic and social inflation impacts,” he said.

“As such, we remain cautious that reserve deficiencies in casualty could weaken the capital base and hence the credit profiles of reinsurers,” he said.

Demand for legacy liability solutions should remain high, Schneider added.