Despite weaker profitability, both the commercial and personal lines sectors of the U.S. property/casualty insurance industry have maintained their stable designations from Fitch Ratings, and the market's capital position remains strong, as most rated insurers have sufficient capital to meet significant future adversity.
Fitch found that surplus levels are still at historically high levels and capital adequacy measures, based on traditional operating leverage or on a risk-adjusted basis under Fitch's Prism capital model, remain “very strong.” Investments in high-quality and liquid bonds, adequate loss reserve levels and moderate reinsurance and other credit exposures, continue to contribute to capital strength.
Fitch said the market pricing environment is hardening, as returns on capital remain below the cost of capital and historical norms. P&C insurers also have benefited from premium rate increases in nearly all major commercial and personal product lines and that trend is likely to continue at least through late 2013. Previously insurers have endured years of inadequate pricing and stern market competition.
Underwriting results and earnings in the first nine months of 2012 have improved compared to last year, however, catastrophe losses from Superstorm Sandy will significantly dampen Q4 results.
Fitch said that reported loss estimates related to Sandy are likely $20 billion or slightly less, based on loss reports from individual companies, and that a larger proportion of losses were incurred from commercial lines versus personal lines. Fitch does not anticipate significant rating changes tied to Superstorm Sandy.
For 2012, Fitch projects a 103.4 percent industry combined ratio, a 5.0 points improvement compared to last year, and projected statutory earnings at nearly 40 percent higher than last year; statutory return on surplus is projected at 4.9 percent.
For 2013, Fitch expects underwriting results and net profits to improve despite declining investment yields.
Fitch projects “very modest” underwriting profit for 2013, assuming insured catastrophe losses return to historical averages, which would be just the fourth time in the last 35 years that the industry has reported an underwriting profit. Fitch forecasted an improvement to 6.6 percent for the industry return-on-surplus. However, the inherent volatility and continuing operating and competitive challenges may make it difficult for the P&C industry to further boost returns in 2014 and beyond, the company said.
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