Optima FY23: FY23 ROE bounced back into target range territory and more of the same forecast for FY24

Date26th October 2023

Finity's annual state of the industry report, OptimaLite, has highlighted that largely driven by improved investment returns, FY23 saw the industry’s ROE bounce back to 14% in FY23, ending a three-year run of low single-digit returns.

Turning to FY24, a higher level of underlying losses and a lower level of COVID-19 business interruption reserve releases will be a headwind. However, this will be almost fully offset by a lower expense ratio and higher investment return. As a result, our experts forecast FY24 ROE at 13%, lower than FY22 but still firmly within the target 10% to 15% range.

Now in its 17th year, Finity’s eagerly anticipated Optima report was launched on Tuesday at Crown Sydney at an event attended by over 200 industry professionals.

Optima lead author and Finity Principal, Andy Cohen said, “The strong industry reported profitability is a remarkable result given ongoing challenges, on multiple fronts, in the operating environment.”

The report noted top line growth (gross earned premium) in FY23 was 12.5% – even stronger than the 10% achieved in FY22 (again driven much more by rate change than volume growth).

The industry’s reported net loss ratio of 68% was 2 points worse in FY23 with many factors contributing to this outcome: there were some positives such as a benign year for catastrophe claims costs and higher reserve releases (including from COVID-19 business interruption reserves) relative to FY22. However, the negatives outweighing the positives included a weaker upside from discount rate movements and an increase in attritional/smaller catastrophe claims costs.

Looking at investment returns, FY23 could not have been any more different to FY22. A swing to an investment profit in FY23 from an investment loss in FY22, as a result of higher running yields, drove a strong boost to the industry’s reported margins and ROE in FY23.

As a result, ROE bounced back strongly to 14%, putting it firmly back in the target range. This is equivalent to net profits after tax of $3.6b, a strong increase on the average level of just $0.5b reported between FY20 and FY22.

Finity’s Managing Director and co-author Scott Collings said, “Looking forward to FY24, we see the ITR margin and ROE holding up (at 10% and 13% respectively), albeit slightly lower than in FY23.”

Key elements of the FY24 forecast are: top line growth still in the double-digits at 11%; reported net loss ratio up 4% due to an increased underlying loss ratio (+1%), lower COVID-19 business interruption releases (+1%) and, with no discount rate movements assumed, the loss of this as a tailwind (+2%).

But, like FY23, it is higher investment returns and, to a lesser extent, a lower expense ratio that will keep profitability at close to FY23 levels. Expenses are increasing but not by as much as premiums so the expense ratio is forecast to be lower by almost 1%.

That leaves investment returns where, with a return to a more ‘normal’ interest rate environment from emergency lows after COVID-19, we forecast a 5.4% return, which is 1.8% higher than the returns achieved in FY23.

Optima is Finity’s flagship annual state of the industry document, exploring the key general insurance market trends from the previous financial year, and presenting Finity’s in-house view of financial forecasts for the year to come. The report also assesses overall industry and class of business performance and future prospects across 11 classes of insurance.

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OptimaLite summarises the overall General Insurance industry and class of business performance and trends in a condensed report.