US P&C faces risks on reserves, but can muster profit gain: Swiss Re

The US property and casualty segment should improve profitability in 2023 and beyond on better underwriting and continued top line growth sufficient to overcome creeping weakness in reserve adequacy, analysts at the  Swiss Re Institute have said.

“We expect US P&C industry profitability to improve this year and next after a weak 2022,” analysts wrote.

Profits were down in 2022 in an “active natural catastrophe year” and inflation has not only hit severity on current claims, but undermined the outlook for reserve releases going forward.

Reserve adequacy is “coming into question” and “poses a key downside risk if inflation causes losses to develop more than expected.”

“Overall, however, the outlook is brighter,” analysts said, citing underwriting that better accounts for inflation, the abating of headline inflation readings and the hopes to earn-out mark-to-market bond losses.

Premium growth may slow to a “still-strong” rate of 7.5% in 2023 and 5.5% in 2024 after an 8.4% gain in 2022.

Rate gains may slow in commercial liability, but likely be partly offset by acceleration in property and personal lines, analysts wrote.

“We continue to expect rate increases through 2023 with inflation, natural catastrophes and geopolitical uncertainties continuing to put upward pressure on claims and operating costs,” Swiss Re Institute analysts wrote.

The distressed personal auto segment should benefit disproportionately after suffering in 2022. “We expect rapid improvement in motor profitability for 2023 as approved rate increases outpace severity indicators,” authors wrote.

Loss ratios should normalize and close a gap between commercial and personal lines, a gap that came to nearly 20 points in 2022.

By the bottom line, ROE will benefit from those underwriting gains plus higher investment income. Swiss Re Institute forecasts ROE growing to 8.0% in 2023 and 9.5% in 2024 from 2.5% in 2022.

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