2023 Insurance Year in Review: Economic and World Tensions

The S&P 500 versus the S&P Insurance Select Industry Index

As a result, in 2023, the S&P Insurance Select Industry Index (ticker INDEXSP:SPSIINS) ⁴ underperformed the broader S&P 500 index by 14.5 percent, largely attributed to insurable losses due to winter storms in Q1. The S&P 500 index posted much stronger-than-expected growth in 2023. The significant underperformance of the S&P Insurance Select Industry Index highlights how the 2023 macroeconomic environment hampered growth in the insurance industry. It is important to note that the S&P 500's exceptional returns in 2023 were driven by the "Magnificent Seven" large-cap technology stocks (Nvidia, Tesla, Apple, Microsoft, Amazon, Meta, and Alphabet). When removing the outsized performers, the S&P 500 only grew 8 percent in 2023. ⁵

The focus of this article is on the key drivers in each of the subcategories in the insurance industry and how the hard market—characterized by increasing premiums, restrictive coverage terms, and constrained underwriting capacity—impacted these areas of the insurance industry in 2023.

Life and Health Insurance

The Federal Reserve's interest rate hikes contributed to growth and profitability in this sector, but the low-growth and high-inflation environment continues to affect profitability. Credit downgrades continue to be a key risk, which can influence solvency requirements and escalate unrealized losses. The escalating risks of lapses and surrenders could trigger forced asset sales and capital losses to meet redemption demands.

In 2023, credit-related and lapse-related risks did not materialize. After a decade of a low interest rate environment and tight regulation, the focus shifted from managing earnings from back books, as a period of rising rates can provide relief and spur growth. However, demand will be tempered by the cost-of-living increases and the cost-of-insurance solutions versus those provided by asset managers.

In 2023, total US life insurance realized a new annualized premium sales record; however, growth was moderate compared to 2022. New annualized premiums increased by 1 percent to $15.7 billion in 2023, according to LIMRA's U.S. Life Insurance Sales Survey. LIMRA has forecasted US life insurance premiums to normalize over the near term, forecasting 5 percent annual growth in 2024 and 2025. In 2023, whole life new premium was $6.1 billion, up 1 percent from 2022, and policy count increased by 2 percent. LIMRA is projecting whole life premium to grow 5 percent in 2024 and 6 percent in 2025.

In 2023, term premium reached nearly $3 billion, which is 5 percent higher than 2022 results. The term policy count also grew in 2023, up 3 percent year over year. With inflation moderating and unemployment remaining below 4 percent, LIMRA is forecasting term product sales to normalize with growth between 1–3 percent in 2024 and 2025. In 2023, indexed universal life (IUL) new premium fell 4 percent year over year to $3.7 billion. The number of policies sold rose 19 percent, compared with the prior year. For the year, IUL premium represented 24 percent of the total US premium sold. LIMRA is forecasting IUL premium to increase by 4 percent in 2024.

Variable universal life (VUL) premium totaled $1.9 billion in 2023, an 8 percent jump from prior-year results. For the year, policy sales dipped 1 percent, compared with 2022 results. VUL premium maintained 12 percent of the total US life insurance market in 2023. Strong growth in the VUL market is expected to continue over the next 2 years, with LIMRA forecasting double-digit growth in 2024 and 2025.

Despite the strong growth in Q4, fixed universal life (FUL) new premium was $977 million, which is 3 percent below 2022 levels. Policy count also dropped in 2023, which is down 6 percent, and FUL premium held 6 percent market share in 2023. While rising interest rates were expected to sustain FUL insurance sales, it did not materialize in 2023. After a decade of low interest rates, many insurers have pivoted to focus on other product lines, such as IUL and VUL. As a result, LIMRA is forecasting FUL premium to drop more than 10 percent in 2024 and as much as 8 percent in 2025. ⁶

The average market capitalization of life and health insurers fluctuated in 2023 but maintained its value during much of Q1 before trending downward during March, followed by a slight recovery during the Q3 and Q4 to end the year slightly positive, as shown in the chart below.

Property and Casualty (P&C) Insurance

For 2023, it was a challenging year for property renewals driven by rate increases, limited catastrophe (CAT) bond capacity, continued valuation adjustments, and increased retentions. The year included widespread rate increases, capacity reductions, increased deductibles, and tightening of terms. In the second half of 2023, the property insurance market continued to face numerous headwinds. While insurers cautiously deployed their capacity following their reinsurance treaty renewals, global CAT losses for the first half of 2023 were estimated at near $54 billion, with nearly 70 percent of these losses attributed to 10 severe convective storm events in the United States.

A record total of $25 billion weather and climate events occurred in the United States in 2023, surpassing 2022 and the previous 5-year average (2018–2022) of $18 billion events. Notable events included Hurricane Otis, which is expected to contribute between $2.5 billion and $4.5 billion in insured losses, and the Maui wildfires, which are expected to eclipse $4.5 billion in insured losses. Once figures are finalized, total insured CAT losses for 2023 are expected to exceed $100 billion for the third consecutive year, occurring during a year where hurricane-related losses represented only a small portion of the total. ⁷

In 2023, numerous issues were occurring simultaneously to create rarely seen property marketplace conditions. Rising inflation/valuations, natural catastrophes, and reinsurance costs drove significant changes in premium, rate, capacity, and terms and conditions in 2023. Property values continue to increase as demand remains strong and supply is limited, especially in desirable locations. Additionally, the cost of construction materials and labor has been increasing steadily over the past few years, leading to higher costs for repairs and rebuilding and, in turn, higher insurance valuations. Finally, weather- and climate-related natural disasters have increased in severity and frequency in recent years.

All the factors above compound to result in greater-than-expected claims and losses, which has put pressure on insurers to increase their rates. Significant reinsurance price increases continued to be seen throughout 2023 alongside tighter terms and conditions as reinsurers sought to improve underwriting margins. Prices rose dramatically at January 2023 reinsurance renewals, with properties seeing some of the largest increases. Reinsurance renewal issues are exacerbated by a subsequent shortfall in available capacity on both the traditional and alternative sides of the marketplace, which have reinforced reinsurers' underwriting discipline. ⁸ The one bright spot for the sector during the year was an improving rate environment, which should drive higher investment income as insurers are beneficiaries of a higher interest rate environment. ⁹

The average market capitalization of P&C firms in the United States fluctuated but maintained its value during the first 4 months of 2023 before trending downward during the next 2 months before experiencing a recovery during Q2 through Q4, ending the year with a slight increase during a period of strong performance in the overall equity markets. Average enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples decreased throughout 2023, as shown on the following chart.

Multiline Insurers

Multiline insurers experienced similar revenue and earnings growth as health insurers. International multiline insurers, such as Allianz, AXA, and The Hartford, generally noted an increase in revenue and profitability compared to 2023 results. ¹⁰ The Hartford reported a 2023 operating income of $3.3 billion, an increase of 34 percent from 2022, which was primarily driven by net investment income and P&C earned premiums. The Hartford's 2023 P&C lines rose 8.9 percent in 2023, which was driven by commercial lines premium growth of 10.0 percent during the year. ¹¹

The multiline insurance industry has outperformed the sector over 2023 but underperformed the S&P 500 composite over the same time frame. The solid capital level of the multiline insurers was expected to fuel merger and acquisition (M&A) activities.

The average market capitalization of multiline firms in the United States fluctuated but maintained its value during the first 2 months of 2023 before trending downward during the next 2 months before experiencing a recovery during Q2 through Q4, ending the year with a slight increase. Multiples of enterprise value to EBITDA fluctuated between approximately 8.1x and 10.6x as shown in the following chart.

Insurance Brokers

Market conditions were generally favorable for insurance brokers in 2023, and valuations and earnings continued to grow. For example, Marsh McLennan, one of the largest insurance brokerage firms in the world, reported $22.7 billion of revenue in 2023, an increase of 10 percent compared to 2022, and adjusted operating income growth of 23 percent in comparison to the previous year's results. ¹² Additionally, Aon PLC reported annual revenue growth of 8 percent and operating income growth of 3.2 percent for the full year of 2023 compared to the prior year. ¹³ Given the market dynamics of 2023, the increased demand for insurance policies should allow for an enhanced growth of insurance brokers in the coming years.

To maximize their competitiveness, US insurance brokers are focused on creating new revenue streams, providing additional services within the insurance distribution value chain, including claims management and third-party administration services, or even offering new services and products such as retirement and wealth management advisory services. Large brokers are pursuing digital transformation through investing in technology and acquiring new entrants.

Brokers are investing in new technology for increased efficiencies, better risk management tools, and to justify high valuations. US insurance brokers' primary headwinds in 2023 were fierce competition and high valuations. However, brokers have been able to capitalize on the hard market. Going forward, as the macroeconomic environment stabilizes, this may lead to the flattening of valuations. ¹⁴

Reinsurance

The reinsurance market continues to be impacted by a challenging macroeconomic environment. By year-end, conditions had improved slightly compared to the beginning of the year, with a rebound in overall available capacity and insurers' willingness to accept price increases for favorable terms. ¹⁵

Aon estimates global reinsurer capital rose by $45 billion to $635 billion over the 9 months to September 30, 2023. The increase was principally driven by increased profitability, recovering asset values, and new inflows to the catastrophe bond market.

Aon estimates that shareholders' equity reported by global reinsurers rose by $35 billion to $532 billion over the 9 months to September 30, 2023. The reinsurance segment is viewed as well capitalized relative to the risk currently being assumed, as confirmed by strong regulatory and rating agency capital adequacy ratios. Going forward, more capital is expected to be required to address current unmet needs. Traditional reinsurers performed well in the first 9 months of 2023 despite the frequency of medium-sized natural catastrophe events, indicating the recent reset in property pricing, retentions, and other terms and conditions, and has created a path to more sustainable earnings. Selective underwriting approaches also resulted in some companies reporting reduced volumes.

Most reinsurers performed well in 2023, building capital among the incumbents and possibly encouraging investors to back new entrants in 2024. However, in the near term, a shift in industry dynamics is not expected, given the uncertainty around the impact of climate change and inflation on future loss costs. ¹⁶

Although US hurricane losses were not particularly large in 2023, episodic severe convective storm losses exceeded $59 billion in 2023. The larger number of smaller events, rather than large events, mitigated the impact on reinsurers and resulted in US insurers assuming most of the losses net, given increased retentions and the scarcity of aggregate protection. Differences were significant in personal and commercial lines, with insurers operating in tightly regulated markets and having limited ability to pass on the increased cost of risk. ¹⁷

Enterprise value to EBITDA multiples for the sector decreased significantly, while market capitalization increased modestly in 2023, as shown in the chart below.

Insurance Sector Transactions

While there was a slowdown in other industries resulting from economic uncertainty and rising interest rates, the insurance M&A market remained active in the second half of 2023. The insurance sector remained an attractive target in the rising interest rate environment because it is self-leveraged, which reduces the impact of the rising debt costs that have reduced M&A activity in other industries.

For the 6 months from mid-May 2023 to mid-November 2023, there were 318 announced insurance transactions with over $11.2 billion in announced deal value compared to 298 announced insurance transactions and $7.7 billion in deal value in the previous 6-month period from mid-November 2022 to mid-May 2023. ¹⁸

The M&A activity of private equity and venture capital in the insurance industry slipped in 2023 as investors slowed down due to the high-interest environment. The total volume of private equity/venture capital-backed deals in US insurance was 165 in 2023, a decrease of 27.6 percent from 228 deals in 2022, even as the aggregate deal value ticked up 7.7 percent year over year to $12.49 billion, according to S&P Global Market Intelligence data. Private equity-backed insurance M&A in 2023 was focused on brokers, totaling $6.35 billion in deal value in 2023. Life and health insurance companies followed with $3.25 billion, while P&C insurance companies had $1.50 billion in announced investments. ¹⁹

Conclusion

While many insurance segments performed well, 2023 was a challenging year for insurers. The impacts of sticky inflation, a slower-than-expected supply chain recovery, rising labor costs, and persistent small-to-medium-sized natural disaster activity increased property loss costs and extended recovery periods. The US regulatory environment focused on addressing matters related to insurer solvency, cyber-incident disclosures, and the use of generative artificial intelligence, among other issues.

In 2023, insurers responded to these risks and increases in the regulatory environment by implementing their risk control measures. They undertook various measures, including refocusing their risk profile, adjusting underwriting policies, increasing pricing models, streamlining organizations to reduce costs, and aligning with business partners who share their values. For well-performing, preferred risk profiles, the market had a healthy appetite, underwriting flexibility, the availability of coverage options, and abundant capacity as insurers sought to meet year-end performance targets.

By contrast, challenging risk profiles and segments not targeted for insurer growth faced greater underwriting scrutiny and higher pricing but had fewer options. Across all risks, robust underwriting information and risk differentiation were key drivers of superior renewal outcomes to positively impact underwriting decisions.

Looking ahead, we expect many of the macroeconomic and geopolitical uncertainties that pressured earnings in 2023 to become less uncertain in 2024 as the interest rate environment becomes stable—possibly even lower—and the Federal Reserve achieves its inflation target, which would help the insurance industry achieve sustainable earnings growth. ²⁰