Fitch Forecasts Shrinking P/C Insurer Profits

July 17, 2014

Fitch Ratings is forecasting that 2014 will end up as the second consecutive year of underwriting profits for the property/casualty industry with modest increase in the combined ratio. But the results for 2014 won’t quite match the strong performance by insurers in 2013.

In a new report, the ratings agency also says that in 2015 the P/C industry will again see an underwriting profit although smaller.

Fitch updated its forecast for U.S. property/casualty insurance industry statutory operating performance in 2014 and 2015 in its report, “U.S. Property/Casualty Industry Statutory Results and Forecast.”

According to Fitch, the industry reported its best underwriting results since 2007 with a combined ratio of 96.2 in 2013. This strong underwriting performance sparked a sharp improvement in industry profitability for 2013. Statutory operating earnings surged 80 percent resulting in an 8.5 percent operating return on surplus. The net income return on surplus, which includes realized investment gains, was 11.4 percent.

Industry aggregate policyholders’ surplus grew by 12 percent in 2013 to a record high of $665 billion.

Fitch said that record earnings combined with all-time high unrealized investment gains driven by favorable equity market performance were the key elements behind the increase in surplus.

For 2014, Fitch is forecasting a second consecutive year of underwriting profits with a modest increase in the combined ratio to 97.3. The ratings agency said core loss ratio improvement from recent renewal premium rate increases are likely to be offset by a reversion of catastrophe related losses toward historical levels and moderation in the level of favorable reserve development. Weaker underwriting profits and flat investment income levels lead to a projected industry return on surplus of 7.4 percent in 2014, according to the report.

Fitch says the latest indications are that levels of renewal rate increases are slowing, reversing a several year trend of meaningful renewal rate increases across most lines of business. Fitch anticipates rates will move toward flat levels in the latter portions of 2014 tied to competition intensifying as market underwriting capacity expands.

For 2015, Fitch forecasts a slight underwriting profit and further declines in operating profits.

The full report including the updated forecast for 2014 and 2015 can be found on Fitch Ratings website, at www.fitchratings.com under the title “U.S. Property/Casualty Industry Statutory Results and Forecast.”

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