The U.S. P&C insurance industry registered its best first-quarter underwriting result in 2024 in over 15 years. After consistently weak sector results for near two years, the dog days are over. Strong premium gains and easing claims cost inflation contributed to a combined ratio of 94%. Higher investment yields provided an additional boost. Industry return on equity (ROE) was 14%, and we maintain our forecasts for full-year ROE of 9.5% in 2024 and 10.0% in 2025, with premium growth of 8.0% and 5.0% respectively. And we see risks to the upside. Personal lines remain the driver of growth and profitability improvements, and competition is returning to personal auto. Growth in commercial lines, including property, meanwhile, is slowing.
- Our outlook for 2024 remains favorable after strong underwriting results and rising investment returns contributed to 14% ROE in the first quarter.
- Still, we continue to forecast industry ROE of 9.5% in 2024 and 10.0% in 2025.
- We maintain our premium growth estimate at 8% for 2024 and 5% for 2025, but with upside risk after 10% growth in 1Q24.
- Personal lines remain the growth driver this year; commercial lines are slowing, with property lines seeing a notable deceleration in 1Q24.
- Higher reinvestment yields resulted in a much-improved investment result in 1Q24 compared to a year ago.
Profitability
We expect higher industry ROE as personal lines’ margins improve. We continue to forecast 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. 1Q24 results confirmed that the industry is on a favorable trajectory, with ROE near 14%. Momentum is backed by strong premium growth and easing inflation, and stronger investment returns. In 1Q24, net premiums earned were up 12% from a year earlier, while net claims incurred were flat. We expect this favorable differential between premiums and claims to persist through 2024. At the same time, 1Q24 recurring investment yields were roughly one-third higher year-on-year. It’s an optimistic picture, but risks lurk. For example, social inflation could further weaken favorable reserve development, an economic downturn could impact premium growth, and persistent economic inflation could put further pressure on claims costs, each negatively impacting industry ROE.
Growth
Personal lines to drive growth again, as commercial lines slow. We forecast P&C direct premiums written (DPW) growth of 8.0% in 2024 and 5.0% in 2025, after a close-to 10% annual gain between 2021 and 2023. Industry growth remained at 10% in 1Q24, with personal lines premiums up 15% and commercial lines up just 5%. After 1Q24 results, we see upside risk to our growth forecast. Personal auto rate increases exceeded 6% in each of the 18 months through May 2024. In contrast, commercial lines growth has weakened as rate increases subside. Fire & Allied premium growth slowed rapidly to just 4% yoy in 1Q24 after 14% growth in 4Q23 – the slowest growth rate in over five years. Premiums for Other Liability Claims-Made policies – a statutory line that includes E&O, D&O, and Cyber Liability – shrank for the 7th consecutive quarter. Strong Commercial Auto Liability growth and a rebound in Other Liability-Occurrence premiums provided an offset. Growth is heavily influenced by the underwriting cycle but supported by exposure growth: we forecast that US real GDP, a broad exposure proxy, will grow by 2.2% in 2024 and 1.9% in 2025.
Underwriting
We maintain our industry combined ratio forecast, expecting rapid improvement from 2023. We forecast an industry net combined ratio of 98.5% in 2024 and 2025, much improved from 102% in 2023. The 1Q24 combined ratio of 94% was an 8 ppt improvement on a year earlier, driven by strong underlying results and aided by a lighter catastrophe loss burden. Natural catastrophes added 5.1 ppts to the 1Q24 loss ratio (down from 7.2 ppts in the prior year). Despite the strong 1Q24 performance – equivalent to a combined ratio of roughly 96% when normalized for an annual average catastrophe load – we maintain our combined ratio estimate because we are still in the early stages of what is forecast to be an active Atlantic hurricane season. The second and third quarters typically generate most catastrophe losses on a direct and net basis, and preliminary reports suggest that 2Q24 was well above the previous 10-year average. A high number of severe convective storms – including 11 events with >USD 1 billion in economic losses – and 1 000 tornadoes in the year through early June, continue to pressure claims costs.
On an underlying (non-catastrophe) basis, we expect underwriting results to continue to improve through 2024 as average US headline CPI inflation declines to our forecast 3.1% in 2024, and on to 2.5% in 2025. Combined with ongoing rate increases, this creates the conditions for ongoing improvement in underwriting results, with premium gains outpacing claims costs. Personal lines are the key positive driver: the loss ratio was 17 ppt above commercial lines in 2023, but the gap started to narrow in the second half of the year and was only 12 ppt higher in 1Q24. Homeowners’ insurance experienced a 15 ppt loss ratio improvement in 1Q24 compared to a year ago. Premiums are beginning to catch up with the much higher replacement cost of houses, driven by the surge in construction costs since 2020. We forecast continued deceleration in property lines claims costs (ex-cat) as construction prices rise by an estimated 0.2% in 2024 and 2.5% in 2025, having risen by roughly one-third during 2021-23. We also expect disinflation to improve personal auto margins. In the May US CPI data, used car prices fell 9.3% while repair costs increased by 9.5%, back in line with pre-pandemic levels. This divergence is part of the reason why insurers are deciding to total (ie, pay the consumer the replacement value rather than repair) a greater share of vehicles. All liability lines receive less benefit from economic disinflation given the nature of claims and are disproportionately exposed to social inflation factors. Commercial lines will likely begin to face margin pressures after a period of relatively favorable underwriting experience on a calendar-year basis, but results remain strong so far.
Personal auto rushes back to competition. Price gains in personal auto insurance have started to decelerate as more carriers reach rate adequacy and competition for new business picks up. The motor vehicle insurance CPI measure quoted in headlines was up 20.3% y-o-y in May after peaking at 22.6% in April. We believe this figure remains an over-estimate but expect deceleration to continue. Based on data from the largest public P&C comparative raters,1 insurers are pursuing growth. Between 4Q23 and 1Q24 auto insurance ad spend more than doubled, and by one estimate is projected to increase another 60-70% sequentially in 2Q24 despite 2Q historically being a seasonally down quarter. This is a rapid bounce back after P&C insurers cut online ad spending by more than half from 2021 to 2023. The return to growth is reflected in the market capitalization of comparative raters, which has more than doubled since October 2023 after falling by nearly two-thirds since 2021.
Investment income
We continue to expect investment yields to rise to 3.7% in 2024 and 4.1% in 2025. Most of the increase will be driven by recurring investment income. 1Q24 net investment income earned of USD 19 billion was 36% higher than in 1Q23, or roughly 20% higher when adjusting for USD 2 billion of affiliated transactions. Headline yields of 4.0% – or 3.5% adjusted – reflect the benefits of higher interest rates across maturities. We expect reinvestment yields to remain above average yields on maturing securities. In 2025, higher realized capital gains should be an additional tailwind for investment results. We currently forecast the upper bound of the Fed funds rate target range to decrease in two steps during 2024, from 5.5% to 5.0%, before declining to 4.0% by the end of 2025. This is our baseline, but we see potential for fewer cuts. We forecast the 10-year Treasury yield to end 2024 at 4.4% and 2025 at 4.2%.