The property casualty insurance industry continued to face significant headwinds through the first half of 2023, according to the American Property Casualty Insurance Association’s (APCIA) report on the sector’s financial results and expected trends for the remainder of 2023.
“While the aggregate industry balance sheet is strong enough to meet its contractual commitments and obligations to consumers and businesses, the ever-increasing challenges from claims cost and expense increases, extreme weather events, legal system abuse, and ongoing regulatory resistance to rate adequacy in a few jurisdictions, continue to have significant negative financial consequences for insurers,” said Robert Gordon, senior vice president, policy, research and international for APCIA.
Key Findings from the Report:
- Mounting underwriting losses pushed property casualty insurers’ second quarter 2023 after-tax net income to the lowest level since 2011, with the industry eking out just $0.4 billion in earnings. Net income for the first half was $8.9 billion, representing a pre-tax return on revenue of just 2.3 percent and a paltry after-tax return on statutory surplus of 1.8 percent (annualized).
- Industry statutory capital and surplus grew 8.1 percent in the first half, fueled by $63.7 billion in increase in unrealized capital gains (primarily unsold equity investments), reversing a $101.8 billion net decrease in unrealized gains in the first half of 2022. Despite the surplus growth, the June 30 aggregate value of $1.04 trillion remains below the high-water mark of $1.05 trillion set at the end of 2021, meaning that there is less capital and surplus per unit of risk exposure today than there was 18 months ago.
- The first half combined ratio of 104.3 percent was 4.4 points higher than last year’s 99.9 percent. The associated net underwriting loss through June 30 of 2023 was $24.1 billion, compared with a $6.5 billion loss one year earlier.
- APCIA estimates catastrophe losses of $30.7 billion for the second quarter and $38.4 billion for the first half of the year, not including early third quarter losses from the Maui wildfire and Hurricane Idalia estimated at about $12 billion combined. A series of convective storms and a Northeast Winter storm contributed to the first half catastrophe losses, which were 18.2 percent higher than in 2022. Catastrophe losses accounted for 10.2 percentage points in the combined ratio for all lines; the impact of catastrophes on homeowners and commercial property lines was proportionately much greater.
APCIA reports that the property casualty industry has been impacted by macroeconomic events and the industry’s direct premium growth has been slowing in step with the economy over the last several quarters. Rising interest rates and persistent inflation are dampening economic growth as businesses anticipate a low-growth or recessionary period. Industry direct premiums grew 8.8 percent to $467.7 billion in the first half of 2023 compared to a year earlier.
“Other key issues impacting the industry include legal system abuse, natural catastrophe losses, and rising insurance input cost inflation,” said Gordon.
An example of one of the worst impacted areas for litigation abuse is seen in the tucking sector. A recent study by the US Chamber of Commerce’s Institute for Legal Reform (ILR) shows that the average size of verdicts against trucking firms surged 867 percent between 2010 and 2018 and that between June 2020 and April 2023, the average award in trucking lawsuits was $27.5 million, while the average settlement was $10 million.
“Litigation abuse has a negative impact on consumers and businesses across the economy and APCIA continues to seek reforms addressing abuses associated with issues such as third-party litigation financing, nuclear verdicts, and attorney advertising,” said Gordon.
The insurance industry continues to be rocked by catastrophe losses. According to Swiss Re, global insured losses in the first half of 2023 from natural catastrophes were at $50 billion — which is $2 billion above the first half of 2022– well above the ten-year average, and the second highest since 2011. Severe convective storms caused USD 35 billion (nearly 70%) in insured losses worldwide.
“In the U.S., catastrophe losses pushed what would otherwise have been a profitable quarter into underwriting loss territory,” said Gordon. “But it’s not just the weather that is impacting insurance marketplaces and consumers. Across the country, insurers are having to recapitalize after suffering from these historic losses as well as historic high economic inflation, legal system abuse, and worsening regulatory restrictions. Together these pressures have forced some insurers to rebalance their risk nationwide.”
APCIA reports that personal and commercial auto lines are particularly experiencing significant loss cost pressures. Personal auto incurred losses have risen faster than the growth in premium volume. The first half saw personal auto losses rise 12.3 percent over 2022, with property losses up 10.7 percent and liability losses up 13.4 percent. Meanwhile, direct premium growth for all commercial lines in the first half of 2023 was 6.4 percent, down significantly from a 13.4 percent rise a year earlier. On the other hand, workers compensation premiums grew at a more normalized rate of 3.1 percent following a spurt in 2022’s first half of 10.5 percent growth.
Despite rising bond yields and a stronger stock market, first half net investment income earned (interest and dividend income) and net realized capital gains both fell as compared with 2022, by 12.5 percent and 38.3 percent, respectively.