Prospects for the U.S. property/casualty insurance market are unlikely to improve in 2011 as competitive fundamentals continue to promote inadequate pricing, according to Fitch Ratings. Signs of a meaningful shift in market underwriting capacity are not apparent, notes the agency in a new report.
In review of the industry’s capital strength, Fitch revised its rating outlook on both personal and commercial lines insurance sectors to “stable” in September, 2010. The “stable” outlook is based on the industry’s strong capital position and expectations that market pricing conditions are unlikely to improve in the near term, while not reverting to the extreme under-pricing experienced at the beginning of the decade. While investment risk related to rising interest rates, credit losses on municipal bonds and equity market declines remain, industry capital can withstand some asset volatility.
The forecast for 2011underwriting performance includes only slight premium growth for the industry amidst a continuing moderate economic recovery. The combined ratio is expected to rise to approximately 103.6% from an anticipated 101.5% in 2010. Net income and return on surplus is projected to be lower in 2011 versus the last two years, in line with Fitch’s view that returns on capital will be mired at mid-single-digit levels for the next several years.
Profitability will continue to be hindered by current accident-year underwriting losses, low investment yields, and below historical average asset and operating leverage. Reported calendar year profits going forward will also benefit less from favorable prior year loss reserve development.
Given the P&C industry’s historical volatility and current position in the market underwriting cycle, Fitch views an outlook revision to “positive” for the industry as unlikely. Further, the agency notes that a sharp deterioration in capital from a catastrophe event or other shock loss could even lead to a shift to a negative outlook. Additional weakening in market pricing that corresponds with industry accident year loss ratios above 110% combined with limited signs of imminent profitability improvement would also promote a negative outlook shift.
Fitch believes that a future turn to a negative outlook is currently more likely in the commercial lines sector versus personal lines. Personal lines are exhibiting premium rate increases in many markets, and are likely to remain closer to a break-even underwriting result going forward.
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