US Property & Casualty outlook: strong winds, smoother sailing

The US P&C insurance industry is on track for higher profits this year, reflecting better half-year underwriting and investment results. The 98% combined ratio for 2024 year-to-date (YTD) is a 7-percentage point (ppt) improvement on a year ago, driven by an 11 ppt lower loss ratio in personal lines, despite high severe convective storm activity pressuring results for the homeowners' line of business. Premium growth remained elevated at around 10% in 1H24, also driven by personal lines, but competition is building as more carriers reach rate adequacy. Investment income provides an additional tailwind as reinvestment yields remain higher than portfolio yields. Industry return on equity (ROE) through the first half of the year was near 10%. We maintain our forecasts for full-year ROE of 9.5% in 2024 and 10.0% in 2025. We update our premium growth forecasts to 9.5% (previously 8.0%) in 2024 and 4.0% (5.0%) in 2025.

• Our outlook for 2024 remains favorable after strong underwriting results and rising investment returns contributed to near 10% ROE in the first half.
• We continue to forecast industry ROE of 9.5% in 2024 and 10.0% in 2025.
• We update our premium growth estimate to 9.5% for 2024 and 4% for 2025 (8% and 5%, respectively, previously).
• Strong improvement in underlying results, especially for personal lines, helped offset an active period for catastrophes in 1H24.
• Higher reinvestment yields resulted in a much-improved investment result in 1H24 compared to a year ago. 

We maintain our forecast of US P&C sector ROE at 9.5% in 2024 and 10.0% in 2025, near industry cost of capital of 10-11% and up from 3.4% in 2023.¹ 1H24 results confirm that the industry is on a favorable trajectory, with ROE near 10%. Personal lines have driven the ROE improvement despite an active first half for natural catastrophes that weighed on results for the homeowners' line of business. Favorable momentum is backed by strong premium growth, easing inflation and stronger investment returns. Through 1H24, net premiums earned were up 12% from a year earlier, while net claims incurred were up just 5%. At the same time, recurring investment yields are more than 20% higher. Although the overall picture is favorable, there is variation by line. For example, commercial auto liability, which has registered just one year of underwriting profit in over a decade, continues to struggle. Lines that have seen strong improvement in recent quarters – most notably private passenger auto – are seeing a revival of competition. This will likely erode growth and profitability gains by early next year. We continue to monitor downside risks from factors such as social inflation, reserve adequacy and economic conditions.

Table 1: US P&C insurance sector outlook

We revise our forecast of P&C direct premiums written (DPW) growth in 2024 up to 9.5% from 8.0% after an 1H24 result of 10% growth y-o-y (see Tables 1 and 2), the latter driven by personal lines (DPW up 15%). At the same time, we revise down our premium growth estimate for 2025 to 4.0% from 5.0% on expectations of rising competitive pressures in the coming months, resulting in lower rate increases into next year. This follows continued deceleration in commercial lines rates (see Appendix) and evidence of rate decreases starting to be filed by personal auto carriers. Over 20% of personal auto insurance rate filings effective in 3Q24 indicate negative average rate changes (see Figure 1). Personal auto rate increases remain elevated but are past their peak. Based on approved rate filings, we estimate that by August 2024, auto insurance rates were up by nearly 11% over the past 12 months – roughly halfway between the corresponding CPI and PPI series produced by the Bureau of Labor Statistics (see Figure 2). As more insurers reach rate adequacy after two years of poor underwriting results, advertising spend is being ramped up. Consumers are reacting to higher rates and increased marketing efforts by looking for new policies. Shopping rates were up 16% y-o-y in 2Q24, according to LexisNexis Risk Solutions, with over 2 in 5 policyholders looking for a new policy in the past year. As over half of auto insurance customers own a home, homeowners rate increases can also contribute to elevated shopping and switching of auto policies.²

Figure 1: Personal auto insurance approved rate increase (high/low/negative) by effective date

Figure 2: Measures of personal auto insurance inflation

Commercial lines premiums are growing in the mid-single digits overall, but with substantial variation by line of business. This contrasts with personal lines, which are growing in the mid-teens across personal auto and homeowners (see Figure 3). Fire & Allied premium growth has remained steady at around 5% year-to-date after rapid deceleration at the beginning of the year. Premiums for other liability claims-made policies – the statutory line that includes E&O, D&O, and cyber liability – shrank for the eighth consecutive quarter in 2Q24 following outsized growth 2-3 years ago. Workers' compensation continues to shrink as well. Double-digit growth in commercial auto liability and other liability-occurrence – partly reflecting elevated claims experience due to social inflation factors³ – provide an offset. Growth is heavily influenced by the underwriting cycle (see Appendix for rate increase by line of business) but supported by exposure growth: we forecast that US real GDP, a broad exposure proxy, will grow by 2.7% in 2024 and 1.9% in 2025.

Figure 3: Quarterly direct premiums written, y-o-y

We continue to expect results to improve with a net combined ratio of 98.5% in 2024 and 2025 after 102% in 2023. The 1H24 combined ratio of 98% was a 7 ppt improvement from a year earlier as premium growth outpaced loss costs. Lower economic inflation has eased claims pressures. We forecast US CPI inflation to decline to an average of 2.9% in 2024 and 2.3% in 2025. For personal lines, easing claims severity pressures have coincided with regulatory rate increase approvals after a period of substantial underwriting losses, creating the conditions for an 11 ppt y-o-y decline in the 1H24 loss ratio (see Table 2). By 2Q24 homeowners' premiums have finally caught up with the elevated replacement cost of houses, rising 49% since 1Q20 compared to a 47% increase in replacement cost (see Figure 5 below). But with elevated catastrophe losses weighing on results, the line has further to go to achieve adequate profitability. We forecast continued deceleration in claims costs (ex-cat) as construction prices rise by an estimated 0.2% in 2024 and 2.5% in 2025. We also expect disinflation to improve personal auto margins. In the August CPI, used car prices fell 10.4% while repair costs increased by just 3.4%. We estimate that premium rates increased by 11% at the same time. In contrast to personal lines, we expect commercial lines will begin to face margin pressures after a period of relatively favorable underwriting experience, but results remain strong so far. Liability lines receive less benefit from economic disinflation given the nature of claims and are disproportionately exposed to social inflation factors.

Table 2: Premium growth and loss ratios by lies of business, YTD, 1H24

2Q24 catastrophe were significantly above average (see Figure 4). Combined with an active first quarter, natural catastrophes added over 7 ppts to the 1H24 net loss ratio. This was down from 10 ppts in 1H23 but was higher than any preceding year since 2011, an exceptionally destructive year for tornadoes.⁴ A high number of severe convective storms – including 19 events with >USD 1 billion in economic losses as of 8 August – continue to pressure claims costs.⁵ Homeowners' insurance bears the brunt of catastrophe losses: roughly two-thirds of 2Q24 industry severe weather-related losses were homeowners' claims.⁶ Even so, the line still experienced a 14 ppt decrease in the loss ratio in 1H24 compared to a year ago. The biggest remaining "known unknown" for industry profitability this year is hurricane risk, which peaks in the third quarter. As of early September, expectations for an active Atlantic hurricane season had yet to materialize. But Hurricane Ian made landfall in Florida on 28 September 2022, resulting in more than USD 50 billion of insured losses, a timely reminder that hurricane season is not over until it's over. We maintain our combined ratio estimate while the hurricane season remains ongoing.

Figure 4: Catastrophe losses as a percentage of earned premiums on a direct and net basis. Historical averages and 1H24

Figure 5: Replacement value of US housing stock and homeowner premiums earned, indexed, 1Q20 = 100

We expect yields to rise to 3.7% in 2024 as recurring investment income continues to rise. We adjust our 2025 forecast to 4.0% from 4.1%, this reflecting lower interest rate forecasts. 1H24 net investment income earned of USD 38 billion was nearly 30% higher than in 1H23, or roughly 22% higher when adjusting for USD 2.1 billion of affiliated transactions in 1Q24. Adjusted investment yields were just below 3.7% through the first half, an improvement from 3.4% last year reflecting the benefits of higher interest rates across maturities. We expect reinvestment yields to remain above average yields on maturing securities (see Chart 5 in Appendix), although yields have fallen nearly 80 bps from the end of the second quarter (as of 7 September 2024). We currently expect 150 basis points of further policy easing from the Federal Reserve before the end of 2025, leaving the upper bound of the federal funds rate at 3.5%. We forecast the 10-year Treasury yield to end 2024 at 4.0% and 2025 at 3.8%.