S&P Global Ratings recently revised its view on the U.S. property/casualty (P/C) sector to negative from stable, reflecting our expectation of weaker credit trends over the next 12 months, including more negative than positive rating changes and a negative shift in the distribution of rating outlooks. Our view on the sector reflects several factors, including:

• The negative impact on GAAP capital from rising interest rates and the consequent decline in the market value of fixed-income portfolios captured within accumulated other comprehensive income (AOCI);
• The negative impact on statutory capital and reported GAAP earnings from the decline in the value of equity investments;
• A steady rise in required capital to fund ongoing business growth;
• Higher levels of capital returned to shareholders; and
• Weaker underwriting results due to elevated natural catastrophe losses, including losses from Hurricane Ian, and higher claims costs, particularly in personal lines.

Underwriting performance, as measured by the U.S. P/C industry's statutory combined ratio, deteriorated in the first nine months of 2022 to 102.3% from 99.6% in the prior-year period, according to S&P Market Intelligence. This follows a four-year period (2018-2021) of modest but stable underwriting profitability, with a combined ratio of 99%-100%, notwithstanding the impact of the COVID-19 pandemic. As a result, we expect the full-year 2022 combined ratio will be 101%-102%, with continued strong underwriting profitability in commercial lines only partially offsetting the deterioration in personal lines.

After improving significantly in 2020 due to COVID-19-related social distancing measures, personal auto underwriting results came under pressure in mid-2021 as miles driven recovered to near pre-pandemic levels and claims costs accelerated due to unforeseen increases in inflation on replacement parts, labor costs, and new vehicle shortages driving up used car prices. These adverse claims cost trends continued during 2022, catching many insurers off guard and leaving them scrambling to raise rates to catch up with loss cost trends.

For many years capital adequacy has been a relative strength for most of the P/C insurers that we rate, and in aggregate rated U.S. P/C insurers entered 2022 with a significant capital buffer at the 'AA' confidence level. However, that buffer deteriorated in the first nine months of this year due to the decline in the market value of fixed income and equity investments. According to S&P Market Intelligence, the industry's statutory capital and surplus fell 11.8% through the first nine months of 2022, to $928.8 billion at Sept. 30 from $1.05 trillion at year-end 2021. This change largely reflects a decline in the value of equity investments as the S&P 500 index fell over 20% in that period. The drop would have been larger but for the fact that most fixed income securities (investment-grade securities that the National Association of Insurance Commissioners [NAIC] designated 1 or 2) are carried at amortized cost under statutory accounting rules. Fixed income markets had their worst year in decades as the Fed tightened its reference interest rate aggressively in response to surging inflation. As a result, the decline in shareholders' equity for the companies whose capitalization we assess based on their consolidated GAAP financials was significantly worse.

Expectations For 2023

For 2023, we expect personal auto insurers to continue pursuing rate increases in the mid- to upper-single digits as they attempt to catch up with elevated claims costs. For commercial lines, we anticipate that rate increases, which have been slowing gradually over the past two years, will stabilize at 5%-7% for standard commercial lines (varying by line of business) and remain at or above loss cost trends. These expectations should lead to a modest improvement in the industry's statutory combined ratio to 99%-101%, assuming catastrophe losses contribute about 8 percentage points to the loss ratio. We are also assuming that the U.S. economic outlook does not deteriorate materially beyond what S&P Global's economics team currently projects, which is a modest deterioration in GDP of 0.1% in 2023.

We expect to downgrade those insurers whose capitalization has fallen materially below our expectations and whose projected earnings and capital management options, in our view, will be insufficient to rebuild capitalization to a level consistent with our current ratings over the next 24-36 months.

Distribution Of Rating Outlooks Turns Negative

During 2022 there were only two rating changes in the U.S. P/C sector. We downgraded American Family due to weak underwriting performance and reduced capital adequacy and upgraded RSUI Indemnity due to its acquisition by higher-rated Berkshire Hathaway. We have excluded any rating changes driven by a revision in the group status of a subsidiary within a larger insurance group.

However, our distribution of rating outlooks within the sector--an indicator of potential future rating actions--became significantly more negative in 2022. We began the year with 92% of our financial strength ratings having stable outlooks, and 8% with negative outlooks or ratings on CreditWatch with negative implications. By year-end 2022, the percentage of stable outlooks in our portfolio had fallen to 78%, while ratings with negative outlooks or on CreditWatch negative rose to 19%. There was one outlook revision to positive from stable during the year, for AEGIS based on its strong operating performance leading to capital improvement. We expect more downgrades than upgrades in 2023 given this negative bias in outlooks.

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Struggling Economy Strains Insurers' Bottom Line

The same macroeconomic headwinds that P/C insurers faced in 2022 will likely persist into 2023. Inflation rose to levels not seen since the 1970s, with the 2022 core consumer price index (CPI) estimated to have risen 6.3% year-over-year. Property lines, especially personal auto, felt the biggest impact. Last year, personal auto claim frequency rebounded to pre-pandemic levels from the unprecedented lows of 2020. The rebound in frequency coincided with a sharp rise in severity. Supply chain disruptions lingering from the pandemic caused a shortage of replacement parts, the strong and competitive job market drove up labor costs, and surging demand from a population shift to the suburbs from urban areas drove up demand for used cars.

Many personal lines insurers have struggled to increase rates to keep pace with the inflationary pressures. We predict that inflation likely peaked in third-quarter 2022 but will remain high until late 2024. The inherent lag in achieving rate adequacy due to the time it takes for rate increases to be filed, approved, and earned will likely continue to pressure personal lines insurers' underwriting income until mid to late 2023.

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We expect that real GDP will contract 0.1% in 2023 as the U.S. enters a shallow recession and then rebound to growth of 1.4% in 2024. While growth in P/C direct premiums written has generally paralleled that of nominal GDP growth, the two will likely diverge in 2023 as property-exposed lines earn in 2022 rate increases and exposure bases increase due to inflation. Commercial lines pricing remains favorable as well, further supporting a divergence in GDP and direct premiums written. However, S&P Global is forecasting an uptick in unemployment to 4.9% in 2023 and 5.3% in 2024 before moderating, which will depress workers' compensation premiums and partially offset growth in direct premiums written.

Claims Inflation In Personal Lines And Elevated Catastrophe Losses Hurt 2022 Underwriting Performance

Based on S&P Global Market Intelligence data, the P/C industry's underwriting performance, as measured by the statutory combined ratio, deteriorated to 102.3% in the first nine months of 2022 from 99.6% in the prior-year period. The reported loss ratio rose by over 3 percentage points, which was partially offset by a half-point improvement in the expense ratio. Though a breakdown of results by sector will not be available until full-year statutory data becomes available, a review of the reported nine-month results for the rated insurers that prepare GAAP financials revealed a clear deterioration in the performance of insurers writing predominantly personal lines versus those focused on commercial coverages. So, it is reasonable to assume that most, if not all, of the deterioration in the industry's underwriting results came from personal lines.

Personal lines writers have experienced a sharp deterioration in their accident year loss ratios (excluding catastrophe losses and prior year reserve development) because of the impact of higher inflation and pandemic-related supply chain disruptions on the cost of car parts, building materials, and labor. The sharp increase in inflation, together with higher claims litigation costs, is also prompting some insurers to strengthen their prior year loss reserves. An elevated level of catastrophe losses, including convective storm losses in the Midwest and losses from Hurricane Ian, have also depressed underwriting performance. With industry loss estimates for Hurricane Ian of $50 billion to $65 billion (according to Swiss Re), this storm had the potential to be a major loss event for P/C insurers. However, the uptick in the industry's year-to-date loss ratio from the six-month to the nine-month reporting period in 2022 was 2.8 points, which was less than the 3.4 points in 2021, so the bulk of Ian losses appear to have been absorbed by foreign reinsurers, alternative capital providers, and government-sponsored entities including the National Flood Insurance Program. To help offset some of the challenges on the loss side, personal auto insurers have cut back their advertising expenditures, which should help slow growth until pricing catches up with the loss cost trend.

Fortunately, commercial lines underwriting results have remained strong, partially mitigating the deterioration in personal lines for multiline insurers. Commercial lines have benefitted from rate increases in excess of loss cost trend, which has led to improved underwriting margins for the insurers in that segment of the market, although there are signs that this improvement may have peaked.

We expect the industry to report a full-year 2022 combined ratio of 101%-102%, which would be the highest since 2017 (103.9%) and above the 10-year average of 99.6% (2012-2021). For 2023, we anticipate modest improvement in the industry's statutory combined ratio to 99%-101%, assuming catastrophe losses contribute about 8 points to the loss ratio as personal auto carriers work to restore their profit margins and commercial lines writers maintain their profitability.

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P/C Insurers Maintain Pricing Discipline

The favorable momentum in commercial lines rates that began in earnest in 2019 and peaked in late 2020 continued to slow in 2022, but for most insurers rate increases still matched or exceeded rising loss cost trends, leading to generally stable accident-year loss ratios.

In contrast, rate increases for personal auto writers have failed to keep up with the significant increases in claims frequency and severity that took hold in mid-2021 as miles driven recovered to pre-pandemic levels and claims severity jumped in response to supply-driven inflationary pressure on used car prices, replacement parts, and labor costs. In response, insurers have stepped up their filings for rate increases to slow and ultimately reverse the deterioration in underwriting margins.

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The average rate change for standard commercial lines peaked in the third quarter of 2020 at 11%, according to the quarterly pricing survey conducted by the Council of Insurance Agents & Brokers (CIAB), and slowly declined to about 6% in the first half of 2022 before rising to 7% in the third quarter. Inflation worries prompted much of the positive rate momentum, which was particularly evident in umbrella/excess casualty where rate increases peaked at 23% during 2020 and are still relatively high at about 11%. Commercial property rate increases moved up noticeably in the most recent quarter, likely because of the elevated natural catastrophe losses and inflation in construction costs.

The average loss cost trend referenced by many commercial lines insurers has risen in the past year to over 6% from about 4%. Even so, with the compounding of rate increases in excess of loss cost trends for the past three years, we believe that many insurers have achieved what they consider to be rate adequacy in large portions of their business and so have been able to dial back their rate increases to maintain margins and preserve market share. The only major line where the pricing dynamics are different continues to be workers' compensation, where rates have been flat to modestly negative in recent years due to a very favorable long-term decline in claims frequency.

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Personal auto rate increases haves been steadily 4%-5% for the past two years, according to the MarketScout pricing survey, despite the general expectation that insurers would be pushing for higher rates to offset the significant rise in claims losses driven by the normalization of claims frequency and higher severity. For homeowner's insurance, we expect continued mid-single-digit rate increases due to more frequent natural catastrophes and other weather-related events, the more recent increase in the cost of building materials and labor, and rising reinsurance costs.

With interest rates still relatively low and inflationary pressures driving higher loss costs, we think the industry's pricing and underwriting discipline will continue in 2023.

Natural Catastrophe Losses Stay High

The U.S. P/C market has seen multiple years of elevated weather-related losses, highlighting the growing threats of climate change and the growing importance of secondary perils like convective storms, wildfires, and flooding that exacerbate losses. The industry reported $24.4 billion of catastrophe losses in the first six months in 2022, compared with $28.9 billion in 2021 and $24.7 billion in first half 2020, according to the Insurance Services Office (ISO) estimates. Conditions did not improve in the second half of the year, with Hurricane Ian producing gross estimates for insured losses of $50 billion to $65 (according to Swiss Re), and severe winter storms bringing exceptionally cold weather to much of the U.S. in December. Hurricane Ian was one of the costliest insured losses on record, second only to Hurricane Katrina in 2005, according to Swiss Re institute.

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We expect the impact of insured losses from natural catastrophes on the combined ratio for 2022 will again exceed the five- and 10-year annual averages of 7.7 points and 6.0 points, respectively. With most predictive catastrophe loss models projecting increased loss severity due to elevated climate volatility and inflation adding to higher insured losses, we expect the average annual natural catastrophe loss ratio will continue to rise. Potentially higher catastrophe risk retention by primary insurers due to rising reinsurance costs could exacerbate this trend.

Capital Strength For the Sector Is Less Robust

Our negative view on the industry is partially due to the weakening of capitalization from capital markets volatility, strong levels of growth consuming additional capital, higher levels of capital returned to stockholders, and weaker underwriting results for personal line carriers, partly offset by stronger commercial lines results and higher net investment income. Rated U.S. P/C insurers in aggregate, including both statutory and GAAP companies, started 2022 with a 12% risk-based capital buffer at the 'AA' level per our capital analysis. This was down modestly as business expansion and higher exposure to risk assets due to the equity market run up consumed 2021 earnings-driven capital and surplus growth. However, things took a turn for the worse in 2022, creating some vulnerability to the industry's capital strength.

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The industry's statutory capital hit a record high at year-end 2021, increasing 13.3% to $1.05 trillion before retreating 11.8% to $928.8 billion as of Sept. 30, 2022. The drop was mainly due to unrealized losses of $125.5 billion from common stock holdings and higher dividends to stockholders of $30.6 billion, both outpacing net income excluding capital gains of $30.1 billion. Under statutory accounting rules, investment-grade fixed income securities are carried at amortized cost, so the capital and surplus base has been less affected by the decline in the market value of bonds, which has been sizeable in GAAP financial statements (see chart 10). Interest rates stabilized in the fourth quarter and there was a small recovery in equity markets, but overall, we expect year-end 2022 capital to be materially weaker for rated insurers relative to 2021.

Chart 10

Capital eroded for the rated GAAP filers through the first nine months of 2022, more so than for statutory filers due to the inclusion of changes in the fair value of fixed income securities. While they started the year with an aggregate estimated 'AA' redundancy above 15%, this was almost completely wiped out by mark-to-market adjustments in the bond portfolio, elevated returns of capital to shareholders, and growth in exposures measured by net premiums written and reserves, partly offset by an increase in the time value of money within reserves and unearned premium, net income (reduced by unrealized losses on equity investments), and a reduction in the charges associated with asset risk because of the drop in investment values.

For 2023, S&P Global Ratings expects the 10-year Treasury bond rate to average 3.9%, up slightly from year-end 2022, which indicates that further unrealized losses should be modest and likely offset by the amortization of unrealized losses as these securities move closer to maturity and their par values. We believe that most insurers will not be forced sellers as the unrealized losses on bonds are interest rate driven and not due to credit concerns despite the recessionary backdrop. This supports our view that if operating cash flows remain positive, insurers should be able to rebuild capital as their bond portfolios mature and they reinvest cash at higher rates. However, higher expected net retentions for catastrophe exposure, growth in net written premiums and reserves, continued capital returns to shareholders albeit at lower levels than the prior two years, and depressed market values for assets will likely challenge the maintenance of 'AA' aggregate capital adequacy, at least over the next 12 months.

On Oct. 4, 2022, S&P Global Ratings advised the market that a new request for comment on proposed changes to our capital model criteria will likely be released in the first quarter of this year (see "Update On Timing Of Proposed Methodology And Assumptions For Insurer Risk-Based Capital Adequacy"). Since the proposed criteria has not been finalized, we don't incorporate expectations about potential effects on capital and earning assessments into our current ratings and outlooks.

Reinsurance Purchasers Face Higher Pricing And Increased Retentions

Strong rate momentum persisted during 2022 in the reinsurance market across most lines, with property lines being the most challenged. The positive rate movement for reinsurers reflects the ongoing challenges from inflationary pressure (financial and social), more frequent and severe natural catastrophes including rising secondary peril risks, constrained alternative capital and retrocession capacity, and reinsurers' push for margin improvement to achieve their cost of capital.

With the Jan. 1, 2023, renewal season recently ended, we believe reinsurers held the line for rate needs and remained vigilant in differentiating cedants' placement characteristics that include loss experience, claims performance, geographic risk concentration, and depth of cedent partnership. The large rate increases, especially in short-tail lines, also reflect changes in risk appetite by various market participants. While capacity was adequate for non-loss-affected upper layers, finding capacity for loss-affected programs, lower layers, aggregate covers, multiyear, and per risk was more challenging. Ultimately, this could translate into certain insurers facing shortfalls in their programs and differentiated terms.

Casualty capacity was generally stable, and renewals were accommodating for quota share business as loss experience showed improvement. Ceding commissions are still favorable for primary insurers but down somewhat (100-200 basis points) from 2022. Casualty excess of loss programs saw reinsurers push for margin improvement after years of volatile results.

Despite the noise surrounding Jan. 1 renewals, we believe national P/C insurers were able to renew most existing coverage levels, with the ability to add more tail protection if desired or use more insurance-linked securities as needed. However, carriers will likely end up increasing their retentions, especially in the working layers, to manage their cost and in response to changes in the risk appetite of reinsurers. This may further expose insurers' earnings to natural catastrophe losses.

Higher Investment Yields Are The Light At The End Of The Tunnel

Last year saw financial markets turmoil, with most asset class returns in the red, leading to mark-to-market losses in either the income statement or balance sheet, depending on the accounting principles used. The S&P 500 had its worst year since 2008, down over 19%, while the total return for investment-grade corporate bonds was down over 10%. Fixed income returns will benefit due to the increase in rates, with the yield on the 10-year U.S. Treasury bond starting 2022 at 1.63% and finishing the year at 3.88%. Translating this to new money yields, insurers are benefitting from an over 250-basis-point increase from the prior year, which will boost net investment income. Additionally, despite large mark-to-market losses from the rapid pace of the Fed's benchmark rate increases, credit quality has not deteriorated, which means that most of these paper losses should recover as the bonds approach maturity, as long as insurers are not forced or opportunistic sellers.

For the first nine months of 2022, the annualized net yield on invested assets increased approximately 76 basis points to 3.41%. Despite a 2.3% drop in the invested asset base during this period (not reflecting mark-to-market adjustments for investment-grade fixed income), net investment income increased by almost $15 billion, according to S&P Market Intelligence data.

Chart 11

The P/C sector's statutory investment mix is predominantly made up of fixed-income securities, representing over 55% of invested assets as of Sept. 30, 2022 (see chart 11). While higher than last year, the allocation to bonds has declined by 10 percentage points over the last 10 years, offset by a similar increase in the allocation to equity investments. The rapid Fed rate increases caused a reevaluation of the market value for existing bonds; however, that does not affect the investment-grade bond portfolio under statutory accounting rules because they are carried at amortized cost.

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The credit quality of the fixed-income portfolio remains strong with over 75% of the bonds invested in NAIC 1 securities. Allocations to NAIC 2 and speculative-grade bonds (NAIC 3-6) remained at the same level as the prior year but over time have moved moderately higher. We continue to believe that most insurers are not chasing yield and the shift from higher investment-grade bonds to securities rated NAIC 2, which equates to the 'BBB' category, largely reflects the long-term shift in the distribution of the investable bond universe toward lower rated categories.

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The share of high-risk assets has been gradually growing over the last 10 years mainly because of the growing allocation to unaffiliated equity and preferred securities that represented about 29% of the total industry investments at year-end 2021, up from 27% in 2020. Other invested assets reported in Schedule BA of statutory annual statements (includes hedge funds, private equity, real estate and other asset classes) represented about 3% of total investments as of year-end 2021, similar to the prior year.

In recent years, the strong performance of these asset classes due to lower interest rates helped bolster capital while becoming a growing proportion of the invested asset mix. However, 2022 reversed this trend--at least temporarily--as economic weakness and rising rates led to a 19% drop in the S&P 500. While we think insurers will maintain their allocations to these higher risk and volatile asset classes, a more attractive fixed income market should lower the allocation to these assets somewhat compared with the last three years.

As investment portfolio yields rise, investment income will become a larger proportion of pretax operating income, especially for personal lines insurers whose underwriting results are strained, and support P/C insurers' profitability. While S&P Global Ratings' base-case economic forecast calls for rates to rise further in 2023, the benefit of these and the rate increases in 2022 on the portfolio yield will not be fully reflected for several years, with insurers having a shorter duration investment portfolio recognizing a more immediate benefit.

P/C insurers continue to reevaluate their environmental, social, and governance (ESG) driven investments, but at this point we do not believe there have been any tangible changes to investment allocations from these initiatives.

Reserve Development Is Favorable Overall, But Some Problems Persist

Changes in loss factors beyond what is incorporated in reserve assumptions--notably what appears to be a higher inflation trend--could exacerbate reserve volatility across many lines. However, the long-term industry trend of reserve releases appears set to continue, at least in the near term. In the first quarter of 2022, the industry released about $5.3 billion of reserves, down slightly from $6.3 billion of favorable development from the same period a year ago, according to the ISO. Moreover, in the past 15 years (2007–2021), the industry released nearly $145 billion of reserves, lowering the reported combined ratio on average by about 2 percentage points annually.

Of the $653 billion in statutory loss reserves (excluding loss adjustment expenses) reported at year-end 2021, the industry held 51% ($340 billion) in incurred but not reported (IBNR) reserves, the same as at year-end 2020. Property lines, other liability, auto liability (both personal and commercial) and, to some extent, medical malpractice contributed the bulk of the IBNR.

During 2021, P/C insurers reported a net $10.3 billion of favorable reserve developments from prior accident years, compared with $7.6 billion of reserve releases in 2020 for all lines, excluding mortgage and financial guaranty. Similar to the prior year, the industry has been releasing reserves from workers' compensation and short-tail lines amounting to $13.6 billion. Excluding these lines, the industry booked $3.3 billion of unfavorable development, the seventh consecutive year of this reserve development pattern. As expected, the biggest culprits for the $3.3 billion in unfavorable development were commercial auto liability and other liability, which together booked nearly $3.0 billion of adverse development compared with $5.7 billion in 2020. Reduction in the adverse development in these lines was mainly because of lower reserve development in commercial auto liability due to a reduction in claims frequency in 2020 largely due to COVID-19-related travel restrictions.

Chart 14

Overall, we believe the broader industry is holding a prudent reserve margin. However, we're keeping an eye on workers' compensation, considering continued rate decreases, as nearly 52% of the $5.9 billion of reserve releases from this line came from the less mature accident years between 2017 and 2020.

We believe the industry may continue to strengthen reserves for long tail casualty lines as long-term expectations for loss cost inflation and litigation expenses move higher than reserving assumptions. Further, we expect that personal auto liability will experience reserve strengthening due to the significant increase in the claim frequency and higher severity in 2022, which caught some carriers by surprise.

Capital Markets Activity Expected To Remain Weak

The rise in interest rates across all maturities in 2022 resulted in a general decline in corporate debt issuance following strong years in 2020 and 2021. Expected further increases in interest rates in 2023 is likely to continue the trend of low debt issuance volume. An insurer accessing the debt markets will likely be responding more to a specific capital need and less to prefunding of near-term maturities, a common practice in 2020 and 2021, or for working capital purposes.

For the first nine months of 2022, insurers were very active in terms of share buybacks, and some companies have indicated this trend will continue in 2023. However, because of the effect rising interest rates have had on investments, combined with underwriting losses for personal lines insurers, management teams will be challenged to walk a fine line between shareholder-friendly share buybacks and policyholder capital strength.

Chart 15

In 2022, P/C insurers raised approximately $12.3 billion of rated debt and hybrid securities, which is slightly higher than $11.2 billion in 2021. However, excluding $7.5 billion of debt and hybrids issued by Corebridge Financial Inc., the life subsidiary of AIG, as part of the group's capital restructuring in preparation for its IPO, P/C insurer rated debt issuance fell below $5 billion. Debt issuances were mostly used to prefund upcoming maturities, with some insurers using issuances to fund acquisitions or bolster balance sheets for general corporate purposes. The weighted average coupon was 4.3% compared with 3.2% for the previous two years.

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In first nine months of 2022, there was a slight increase in share buyback activity, totaling $13.5 billion compared with $12.1 billion for the same period in 2021. The rise was driven by AIG's $4.4 billion of share repurchases compared with $1.6 billion of purchases for the first nine months of 2021. Other insurers active in share buybacks were Allstate, Chubb, Hartford, and Travelers, which together repurchased $7.7 billion worth of shares compared with $8.7 billion for the first nine months of 2021.

Merger And Acquisition Activity Is Likely To Remain Muted In 2023

Mergers and acquisition (M&A) activity for U.S. P/C insurers totaled approximately $12.8 billion in 2022, which was little changed from 2021. However, there were only four transactions announced, compared with seven in 2021. These transactions were acquisitions announced by U.S.-domiciled companies where the acquiring company writes predominantly primary P/C business, and the transaction size is greater than $100 million. Most of the total acquisition value came from one transaction representing approximately 90% of the $12.8 billion--Berkshire Hathaway Inc.'s acquisition of Alleghany Corp. completed in October 2022. In April 2022, Michigan-based specialty and workers' compensation writer Accident Fund announced the acquisition of AmeriTrust Group, which closed in January 2023.

Chart 17

Other M&A activity included Liberty Mutual's acquisition of State Auto Group, completed in March 2022. Companies also completed or announced some international acquisitions during the year. In 2022, Chubb completed the acquisition of the personal accident, supplemental health, and life insurance business of Cigna in six Asian markets and received regulatory approval to increase its stake in China-based Huatai Insurance Group. Liberty Mutual completed the acquisition of the Malaysian insurer AmGeneral Insurance Berhad.

We expect 2023 M&A activity to be more incremental rather than transformational. The higher cost of capital directly affects the economics of large transactions, which we believe will lead insurers to focus on gaining scale organically, supplemented with small M&A transactions to enhance capabilities or expertise.

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