Fitch Says Insurers’ Capital Position Is Strong, Issues Stable Outlook

December 15, 2011

Fitch Ratings said in its new 2012 outlook report that the P/C insurers’ capital position remains strong. It observed that most P/C insurers have sufficient capital to manage through significant future adversity.

The New York-based ratings agency has issued a “Stable” outlook for the industry.

The report said healthier premium growth from economic growth and pricing improvement are anticipated to improve underwriting performance and materially boost industry profits in 2012.

Fitch said hopes are mounting in the industry for pricing turn in commercial insurance. Recent expansion of underwriting losses has promoted a recent shift in market pricing after years of softening rates, revealed through several market surveys and company earnings discussion commentary.

The report observed that this positive premium rate movement remains in an early stage, but market competition remains fierce.

Fitch suggests the jury is still out on how significant commercial-lines rate hikes will be next year. The extent of capital destruction required to shift market behavior toward the next hard market is unclear. However, recent market pricing information provided by market experts, such as Advisen’s ADVx Pricing Index, and company management discussions in earnings conference calls indicate a shift to a slight increase and stabilization in pricing.

Industry Still Faces Major Challenges

The report also highlights difficulties the industry will continue to face. For example, it forecasts the industry will again have an overall underwriting loss in the coming year.

Fitch warned that the P/C market is likely to continue to produce underwriting losses with returns on capital below historical averages for the foreseeable future. Fitch is projecting a combined ratio of around 103 percent and an industry return on surplus of 5 percent in 2012. Considering current meager investment yields and historically low leverage metrics, returns on capital are likely to remain in the mid-single digits for the foreseeable future.

103 Percent Combined Ratio Projected for 2012

Fitch said that over the longer term, large capital depleting losses (potentially from catastrophes, investment market declines, or unfavorable reserve actions) could result in the industry returning to a negative outlook. Further significant deterioration in underwriting performance, without anticipation of a future pricing turnaround, would also lead to an outlook shift to negative.

It also noted that the commercial lines sector is more likely to deteriorate to a negative outlook in the near term compared to personal lines, given differences in recent results and fundamental pricing trends.

Fitch expects that favorable reserve development from prior year periods will be far less supportive of underwriting results going forward than they have been in the last several years. Furthermore, in several cases insurers have reported reserve deficiencies in certain product lines, particularly longer tail risks, such as casualty, workers’ comp, and asbestos reserves.

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