Better, but not great—this is what Fitch Ratings is predicting for the U.S. property/casualty (P&C) industry’s final underwriting loss and profitability for 2009, relative to 2008.

Key elements contributing to this improved underwriting result are significantly lower catastrophe losses, reduced losses related to mortgage insurers and financial guarantors and continued favorable loss reserve development.

The P&C market also has benefited from the recovery of investment markets in 2009, with lower realized investment losses, and a large positive shift in market value for insurers' bond portfolios due to narrowing credit spreads.

However, the rating agency predicts the improvement won’t last long. It predicts higher underwriting losses and below average returns on capital in 2010. Fitch's negative rating outlook on the industry implies that downgrade actions are likely to exceed upgrades within the P&C sector going forward, although the number of downgrades is unlikely to approach the levels reached in early 2009.

The rating outlook continues to reflect lingering uncertainties related to the broader economy and financial market conditions. Ratings concerns are shifting, however, toward traditional underwriting cycle and competitive pressures as premium rate levels are inadequate across nearly all segments with few signs of positive pricing momentum.

Mike Fitzgerald, senior analyst with Celent, chimed in about the outlook. “The negative rating outlook issued by Fitch Ratings today for U.S. P&C is warranted,” he says. In addition to the pricing and demand concerns Fitch mentioned, Fitzgerald says there are loss and expense pressures which should dampen expectations. “On the loss side, the earned premium flowing through results in 2010 will reflect the full effect of the economic downturn and the lower premiums gained throughout 2009. Even given ‘normal’ loss levels, this earned effect will increase the loss portion of the combined ratio.”

Future prospects continue to look less attractive due to more challenging underlying market fundamentals with inadequate premium rate levels across nearly all segments, and few signs of positive pricing momentum. Also, the economic recession has led to reductions in insured exposures and demand for coverage in many areas, which has promoted negative premium growth and a more aggressive stance by insurers to retain existing business. Given these market fundamentals, the industry statutory combined ratio is projected to increase to 104% in 2010 from 101% in 2009. Industry statutory returns on capital are likely to remain in the mid single-digit range going forward. However, Fitch does not currently anticipate a return to the extremely competitive pricing of the late 1990s and early 2000s.

Fitzgerald says most “expenses will be fixed because the downsizing actions available to most insurers in 2010 will be limited (since most actions will have already been taken), so ‘shrinking to greatness’ will not be an option.”

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