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US property/casualty insurers face falling investment values and weaker underwriting results, S&P Global (New York Stock Exchange:SPGI), the rating agency said, prompting it to revise its opinion on the sector to negative from stable.
Weaker credit trends expected to continue this year, the rating company saying. The change in position reflects the negative impact of the increase in interest rates on capital and the consequent decrease in the market value of fixed income portfolios in AOCI (accumulated other comprehensive income), and the negative impact on statutory capital and gains from the lower value of capital investments.
It also reflects the steady increase in capital required for business growth, higher levels of capital returned to shareholders and weaker underwriting results due to higher natural catastrophe losses and claims costs.
Underwriting performance worsened in the first nine months of 2022 to a combined ratio of 102.3% (incurred losses divided by earned premium) from 99.6% in the prior-year period, according to S&P Market Intelligence. S&P Ratings expects a combined ratio of 101%-102% by 2022, affected by the deterioration of personal lines.
The ratings firm expects personal auto insurers to continue to seek mid- to high-single-digit rate increases to catch up with higher claims costs.
Those rate increases, which have been gradually slowing over the past two years, will likely stabilize at 5%-7% for standard commercial lines and remain at or above cost-of-loss trends, he said.
“These expectations should lead to a modest improvement in the legal industry combined ratio to 99-101%, assuming catastrophic losses contribute about 8 percentage points to the loss ratio,” analyst John Iten said.
The guidance assumes that the US economy will not worsen beyond S&P’s expectation of a modest 0.1% deterioration in GDP in 2023, when the country enters a shallow recession. Expect a rebound to 1.4% growth in 2024.
“While growth in direct written property/casualty premiums has generally paralleled nominal GDP growth, the two are likely to diverge in 2023 as property exposed lines gain 2022 rate increases and exposure bases increase due to inflation,” Iten said. Inflation probably peaked in the third quarter of 2022, she said, but is expected to stay high until the end of 2024.
Prices for commercial lines will also remain supportive, further supporting the divergence in GDP and direct premiums written. S&P projected a rebound in unemployment to 4.9% in 2023 and 5.3% in 2024, which will depress workers’ compensation premiums and partially offset growth in direct written premiums.
Last year, SPDR S&P Insurance ETF (KIE) rose 11%, outperforming the 5.2% decline in the SPDR Select Sector Financial ETF (XLF) and the 6.2% drop in the S&P 500 index.
Previously, BMO Capital became selective in the selection of insurance stocks.
