Swiss Re still expects US P&C sector ROE improvement despite challenging Q1

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Analysis from Swiss Re after the first six months of the year reveals that the global reinsurer still expects the impacts of higher underwriting and investment income to drive an improved return on equity (ROE) for the US property and casualty (P&C) sector in both 2023 and 2024.

Swiss Re has maintained its full-year 2023 premium growth and profitability forecasts for the US P&C industry for the current year, despite loss costs in the first quarter outpacing premium growth in the period, which were 8.4% up on the prior year Q1.

As a result of “persistent inflation and an unusually active first quarter for natural catastrophes,” the firm pegged the net combined ratio for Q1 2023 at 103%, the worst Q1 underwriting result for the segment in more than a decade.

In contrast, interest rates provided an uplift and investment yields contributed 33% more to net income than in Q1 2022.

But despite a “difficult first quarter”, the reinsurer still expects “improvement in US P&C industry ROE this year and next, on higher underwriting and investment income.”

The company has maintained its ROE forecast of 8% in 2023 and 9.5% in 2024, a significant rise from the 2.5% recorded in 2022.

“That said, the 1Q23 ROE outcome of 3.6% highlights the downside risks to our forecast. A 20% jump in loss costs in the quarter outweighed strong premium growth, making for a net underwriting loss of USD 7.5 billion,” says the firm.

Looking at underwriting specifically, and Swiss Re expects the US P&C sector to produce a combined ratio of 100% in 2023 and 98.5% in 2024, reflecting an improvement from the 102.6% recorded in Q1 2023 on the back of the elevated nat experience and inflationary impacts.

“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,” explains Swiss Re.

In its US P&C sector outlook, the carrier notes the retreat from cat-prone markets by some large primary insurers in 2023. The report highlights the fact that homeowners’ premiums have not kept pace with exposures.

Additionally, the firm states that personal auto is approaching an inflection point, noting 2022’s combined ratio of more than 112%, the worst since at least 1975.

In commercial lines, the analysis notes that rate trends are bifurcating with property rates on the rise while liability lines saw some moderation.

“Overall, we still expect rate increases through 2023 with inflation, natural catastrophes and geopolitical uncertainties exerting upward pressure on claims and operating costs,” says Swiss Re.

All in all, Swiss Re anticipates personal lines “taking over as the engine of growth”, highlighting the expansion in both personal auto and homeowners’ premiums during Q1 2023.

On the asset side of the balance sheet, Swiss Re continues to forecast the average investment yield at 3.5% in 2023 and 3.7% in 2024.

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