U.S. property/casualty insurers will rebound in 2018 from the late-2017 onslaught of hurricanes and wildfires, but it will take a while to return to “significant underwriting profits,” Fitch Ratings predicted in a new report.
“While performance is likely to rebound in 2018 from recent catastrophe events, market fundamentals point to several challenges hindering a return to significant underwriting profits and an adequate market return on capital,” the Fitch report said.
Part of the hindrance will come from added caution after a rough fall. Fitch said the natural catastrophe surge in late 2017 will make primary underwriters more likely to spend additional funds in reinsurance protection. In doing so, they’ll put into play aggregate catastrophe reinsurance instead of per-occurrence treaties.
Fitch also expects underwriters to use more per risk and facultative cover to manage net retentions, and their actions mean the market will have some short-term strong reinsurance market capacity.
Fitch said that the P/C industry’s outlook remains negative. However, the rating outlook is stable for U.S. property/casualty insurers in personal and commercial lines, and a majority of companies in this space that Fitch covers have stable outlooks, which indicates that “ratings are unlikely to change in the next 12-18 months.”
Fitch pointed out that underwriting performance worsened rapidly in 2017 in the wake of Hurricanes Harvey, Irma and Maria, as well as Q4 California wildfires. As insurers confronted claims from these catastrophes, they dealt with significantly higher catastrophe losses, and Fitch said U.S. P/C insurers will deal with a 104.4 combined ratio for 2017 as a result (up from 100.7 in 2016).
But as hard as it may be to return to profitability from those hits, Fitch said that insurers are buttressed by generally strong capital strength. “The industry’s capital remains very strong under several observed measures, providing most individual insurers with resources to absorb near-term volatility and the effects of adverse events,” Fitch said. “Limited insurer capital raising activity following 2017 severe catastrophe losses provides an indication of this capital resiliency.”
Fitch said it expects price stabilization as large property losses produce higher premium rates in “loss-affected market segments.” Fitch said that some segments that are underperforming could see flatter pricing versus recent declines.
For 2018, Fitch said the U.S. P/C industry should see a return to combine ratios that come close-to break even, as catastrophe loss experience returns to “longer-term norms.” But this trend, combined with a limited change of investment earnings growth means the industry’s returns on capital should still be below normal.