US P&C 2023 outlook: Reinsurance costs, M&A slowdown, E&S evolution (2024)

US P&C 2023 outlook: Reinsurance costs, M&A slowdown, E&S evolution (1)

A chair sits on a flooded roadway in the wake of Hurricane Ian on Sept. 30, 2022, in Matlacha, Fla.
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A hard market, higher reinsurance costs and ongoing low M&A activity are in the cards for property and casualty insurers in the new year.

While they look ahead to 2023, insurers will look back on 2022 as a year full of turbulence. The causes included a pair of destructive late-season hurricanes that exacerbated the ongoing property insurance crisis in Florida, soaring loss costs and severity for personal auto carriers, and a reinsurance market that is poised for increased rate but shrinking capacity.

The yearlong turmoil in the U.S. market morphed into a perfect storm in October when S&P Global Ratings downgraded the P&C sector to "negative" from "stable." S&P Global Ratings Senior Director John Iten said the downgrade was based on "very large catastrophe losses ... the spike in loss cost inflation that's hurting underwriting performance" and "a sustained decline in capital markets that's eroding the value of the investment portfolios."

Another disturbance on the horizon is a bias lawsuit filed in Illinois against State Farm Mutual Auto Insurance Co. that alleges the company's automated claims system discriminates against Black customers when filing an insurance claim compared to white policyholders.

US P&C 2023 outlook: Reinsurance costs, M&A slowdown, E&S evolution (2)

Size looms large in 2023

Scale will be an important factor for the P&C sector this year, with the market likely favoring larger companies over smaller ones.

The reinsurance market is where the larger versus smaller situation is glaringly present, as larger insurers are in a position to buy less reinsurance and take advantage of expected price increases.

The big companies will be able to take advantage of increased rates and their policyholders' knowledge that values need to go up because of inflation, said Joseph Peiser, head of commercial risk in North America for Aon PLC.

"They're going to get more premium even on a like-for-like basis, plus they're going to get rates," Peiser said in an interview. "If they can live with buying less reinsurance, they're going to have quite a good 2023, but I think smaller insurers are going to have a harder time."

When reinsurers do start to assume those risks, their share of insured catastrophe losses will be smaller in 2023 than in past cycles, Keefe, Bruyette & Woods analyst Meyer Shields said in a note.

Shields said the reasons for that come down to a rise in per-occurrence and aggregate contracts that have more "excess of loss coverage attachment points" and an expected increase in the coverage of "only specific named perils" in reinsurance contracts.

These changes, particularly the former, imply more volatile catastrophe reinsurer results, with the primary insurers retaining lower exposure layers producing more certain but frequently less profitable outcomes, according to Shields.

M&A ebb

Insurer M&A activity decreased in 2022 in the face of rising inflation and interest rates and the threat of a recession.

The number of deals for underwriters as of Nov. 30 had decreased to 685 from 1,150 in 2021, while there were only 105 broker M&A transactions compared with 185 the previous year.

The totals in the P&C-multiline sector were even more striking. The number of deals fell year over year by 24.6%, to 61 from 81, while the aggregate transaction value plummeted 90.6% to $1.2 billion from $12.81 billion in 2021.

Of those 61 deals, the largest was Accident Fund Insurance Co. of America's acquisition of AmeriTrust Group Inc. for $740 million announced on April 12. It was the seventh-largest insurance transaction of 2022.

Looking ahead, Aon's Peiser sees that lull extending into 2023 in light of conversations he has had with insurance company leaders who did not express enthusiasm about doing M&A.

"We're gonna see another year of not much activity between interest rates being what they are, and also uncertainty about what the loss development is in existing portfolios," Peiser said.

Berkshire Hathaway Inc.'s $11.57 billion acquisition of reinsurer Alleghany Corp., announced on March 21, was the largest of the year.

Other notable 2022 deals in the U.S. market include the $1.78 billion acquisition of NSM Insurance Group Inc. by The Carlyle Group Inc.; Independence Pet Group Inc. purchasing Crum & Forster Pet Insurance Group for $1.4 billion; and Millennium Trust Co. LLC taking over PayFlex Holdings Inc. for $775 million.

US P&C 2023 outlook: Reinsurance costs, M&A slowdown, E&S evolution (3)

Rise of excess and surplus

With insurance in the traditional market becoming harder to obtain in states such as California and Florida, homeowners and businesses increasingly turned to excess and surplus lines, or E&S, for the coverage they desired.

In the Golden State, the increased use of E&S is a response to the continuous wildfire threat throughout the state that has led to shrinking capacity in the admitted market through coverage denials and nonrenewal of comprehensive homeowners insurance policies.

An S&P Global Market Intelligence analysis revealed that E&S direct written premiums in the U.S., excluding Lloyd's syndicates, increased 27.6% year over year during the first six months of 2022 to $37.60 billion. Comparatively, the total U.S. P&C market, excluding E&S premiums, grew by only 8.4% during the same period.

Peiser said while there has been an ebb and flow in the E&S market in the past, it is becoming more of a systemic change than a cyclical one.

"You're seeing more of the big insurers open up E&S divisions and move business into E&S," he said. "There's more flexibility given to insurers in the E&S space, and there's less of a stigma associated with E&S insurance among policyholders."

Highs, lows for insurtechs

Insurtechs in particular had their share of ups and downs throughout 2022, especially in the first half of the year.

Right off the bat, persistent underwriting struggles led to Root Inc. laying off about 20% of its workforce before securing a $300 million, five-year term loan the following week from BlackRock Financial Management Inc. The company's stock value, which ended 2021 at $55.80, had cratered to $4.73 as of Dec. 21, 2022, a 91.5% decline.

Lemonade Inc. came into the year in a slump fueled by a net loss of $70.3 million in the fourth quarter of 2021 and a net loss of $241.3 million for full year 2021, which was almost twice the $122.3 million loss in 2020.

Things brightened in the third quarter with its acquisition of Metromile Inc., merging the latter's auto insurance experience with the former's multiple lines of insurance. However, like Root, Lemonade's share price soured throughout the year, falling 63.6% from its 2021 year-end price of $42.11 to $15.34 as of Dec. 21, 2022.

The prospects for more of this type of M&A in the sector are uncertain at best, according to Insurtech Advisors analyst Kaenan Hertz, who said he is surprised that the larger incumbent carriers have not been acquiring some of the insurtech start-ups for either their teams or for the intellectual capital.

While he does not see that changing, what will change is insurtechs buying each other up, "even pennies on the dollar." Hertz noted that Appulate Inc., an insurance software and web development firm, has been on a buying spree, and he sees more of that happening in the future.

"There's a hope that they can show top-line growth and gain economies of scale and therefore show a smaller expense base," Hertz said in an interview.

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Property and Casualty Insurers in 2023

The property and casualty insurance industry is expected to face several challenges in 2023. These challenges include a hard market, higher reinsurance costs, and low merger and acquisition (M&A) activity.

  • Hard Market: A hard market refers to a market condition where insurance premiums increase, coverage becomes more limited, and underwriting standards become stricter. This can result in higher costs for policyholders and reduced capacity for insurers.
  • Higher Reinsurance Costs: Reinsurance is a form of insurance that insurance companies purchase to protect themselves against large losses. In 2023, reinsurance costs are expected to increase, which can impact the profitability of property and casualty insurers.
  • Low M&A Activity: The property and casualty insurance industry experienced a decrease in M&A activity in 2022 due to rising inflation, interest rates, and the threat of a recession. This trend is expected to continue into 2023, with insurance company leaders expressing limited enthusiasm for M&A deals.

Size and Scale in the P&C Sector

In 2023, size and scale are expected to play a significant role in the property and casualty (P&C) sector. Larger insurance companies are likely to have an advantage over smaller ones.

  • Reinsurance Market: Larger insurers have the advantage of being able to buy less reinsurance and take advantage of expected price increases. They can also benefit from increased rates and their policyholders' understanding of the need for higher values due to inflation.
  • Smaller Insurers: Smaller insurers may face challenges in 2023, as they may struggle to compete with larger insurers in terms of premium and reinsurance capacity.

Rise of Excess and Surplus Lines

Excess and surplus lines (E&S) insurance has become increasingly important in states like California and Florida, where obtaining traditional insurance coverage has become more difficult. Homeowners and businesses are turning to E&S insurance to meet their coverage needs.

  • Shrinking Capacity: The traditional insurance market in states like California and Florida has experienced shrinking capacity due to coverage denials and nonrenewal of comprehensive homeowners insurance policies. As a result, there has been an increased use of E&S insurance to fill the coverage gap.
  • Flexibility and Less Stigma: Insurers are opening up E&S divisions and moving business into the E&S space. There is more flexibility for insurers in the E&S market, and there is less stigma associated with E&S insurance among policyholders.

Insurtechs in 2022

Insurtechs, which are technology-driven insurance startups, had a mixed year in 2022.

  • Root Inc.: Root Inc., an insurtech company, faced underwriting struggles and had to lay off a portion of its workforce. However, it secured a significant loan and experienced a decline in its stock value.
  • Lemonade Inc.: Lemonade Inc., another insurtech company, had a net loss in 2021 but saw some positive developments in the third quarter, including an acquisition. However, its share price also declined throughout the year.
  • M&A Uncertainty: The prospects for M&A activity in the insurtech sector are uncertain, with larger incumbent carriers not showing much interest in acquiring insurtech startups. However, there may be more consolidation within the insurtech space itself.

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US P&C 2023 outlook: Reinsurance costs, M&A slowdown, E&S evolution (2024)
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