In 2024, despite the continued challenge of high catastrophe losses, US insurers in the property and casualty (P&C), life and annuity (L&A), and health sectors successfully exceeded their cost of capital, according to a recent report by credit rating agency, AM Best.
This was achieved through strong investment returns and effective risk management, showcasing the resilience of the insurance industry.
The US P&C insurance sector, which faced significant natural disasters, including two major hurricanes, severe convective storms, and winter weather, managed to record an underwriting gain of approximately $22.9 billion.
This marked a substantial improvement from a $21.3 billion underwriting loss in 2023.
This recovery was attributed to a stronger performance in personal lines, particularly private passenger automobile insurance, as well as a notable increase in investment income.
“P&C insurers have been able to reinvest bonds at higher interest rates, and their diversified equity portfolios also boosted investment income materially,” added Helen Andersen, Industry Analyst, AM Best. “This segment is estimated to have increased investment income by 15% in 2024.”
Despite experiencing catastrophe losses, P&C insurers showed strong financial performance, with their return on capital employed (ROCE) surpassing the median weighted average cost of capital (WACC) for four out of the past five years, reaching a new high of 13.2% in 2024. Their return on equity (ROE) also increased to 14.9%, the highest in over a decade, driven by the robust performance of the equity markets.
Health insurers have consistently outperformed their cost of capital for the past 15 years, though their median return on capital employed (ROCE) has seen a slight decline over the last four years.
Rising medical and pharmaceutical expenses, along with higher claims, have exerted pressure on profitability. Nevertheless, health insurers were still able to exceed their cost of capital by around 2.5 percentage points in 2024.
AM Best highlighted that, although health insurers encountered difficulties in the government sector due to increased healthcare usage and lower-than-expected reimbursements for Medicare Advantage, their commercial segment performed more favourably, with rate hikes keeping pace with rising costs.
The health sector also benefited from strong net investment income, with portfolios largely composed of high-quality fixed-income securities. In 2024, there was a slight shift from bonds to equities, which further boosted returns. The median return on equity (ROE) for health insurers stood at 13.7%, comfortably surpassing the median cost of equity by 6.3 percentage points.
For life and annuity (L&A) insurers, 2024 marked a period of strong outperformance relative to their cost of capital, with return on capital employed (ROCE) exceeding the cost of capital by approximately 8 percentage points.
This performance was primarily driven by improved returns on annuity products, which became more appealing to consumers due to rising interest rates. L&A insurers also benefited from reinvesting cash flows into higher-yielding assets, which significantly boosted investment income.
In 2024, L&A insurers slightly exceeded their cost of capital, with return on equity (ROE) surpassing the cost of equity by nearly 800 basis points, the strongest outperformance in the past 15 years.
Although the cost of equity for L&A insurers decreased, their reliance on debt financing meant that the impact of this shift was less pronounced.
Rising interest rates strengthened capital positions, lowering the perceived risk of default and reducing the cost of debt. Life and annuity (L&A) insurers’ performance was supported by a surge in annuity product sales, benefiting from the higher interest rates since 2022. This trend helped boost premiums and offered more favourable crediting rates.
Although each sector faced distinct challenges – with elevated catastrophe losses in the property and casualty (P&C) sector, rising medical costs in health insurance, and interest rate sensitivity in L&A lines – all three sectors successfully exceeded their cost of capital in 2024.
AM Best’s report underscores the resilience of the US insurance industry and its ability to generate strong investment returns despite a challenging operating environment.
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