4 December 2018News

Fitch confirms improvement in outlook for US P&C insurers

In a move of interest to many re/insurers on Bermuda, Fitch Ratings has indicated that the landscape for US property and casualty (P&C) insurers has improved by revising the sector’s outlook to stable from negative.

The rating agency said the move follows a “notable rebound by US P&C insurers this past year, following a challenging 2017,” according to Fitch's 2019 outlook report.

It noted that the US P&C industry profitability rebounded in 2018 following a meaningful underwriting loss in 2017, driven by modest improvement in the personal and commercial automobile lines as well as a decline in catastrophe losses relative to the prior year, the agency said.

Fitch's outlook revision also reflects improvement in market fundamentals in 2018 and stabilizing factors, including solid business profiles, very strong capital adequacy and underwriters' effective risk management processes.

Fitch's rating outlook for P&C insurers remains stable as a wide majority of Fitch's coverage universe has Stable Outlooks, indicating ratings are unlikely to change in the next 12 - 18 months, the agency noted.

The overall combined ratio for 2018 is projected to improve to approximately 99 percent, down from 104 percent in 2017. Results weakened somewhat in the second half due to catastrophe losses from hurricanes Florence and Michael, and severe California wildfires, Fitch noted.

The larger 2017 underwriting losses led to price firming across a broader segment of the market than anticipated, with rates in property and auto lines firming significantly, it added. Pricing in several casualty and liability segments also rose modestly or stabilized in 2018.

"While profitability is better and pricing trends were more positive in many segments, we would not characterize this as a hard market,” said James Auden, managing director at Fitch Ratings. “Any further performance improvement in the future is in question, given the potential for future price competition and uncertainty in claims trends," Auden added.

Net earnings in 2018 benefitted from improved underwriting, a return to growth in investment income and benefits from lower corporate tax rates, the agency said.

The industry statutory return on surplus (ROS) is projected at 7.9 percent in 2018, with a modest decline to 7.2 percent in 2019. For 2019, Fitch projects another modest underwriting profit, and a slight decline in net earnings from lower investment gains amidst an environment of rising interest rates and uncertain equity markets.

Losses related to insurers' natural catastrophe exposures represent a key source of volatility in near term profitability, Fitch warned. While the last two years generated catastrophe related insured losses above historical norms, a period of substantially higher losses remains possible and could have a material impact on company earnings, capital levels, and ratings.

Meaningful unanticipated increases in loss costs are another potential source of future profit deterioration. Key claims cost drivers such as medical costs may outstrip general inflation in the near term, the agency continued. Evidence of rising litigation and tort costs in several segments, including auto liability, professional liability and workers' compensation, could be a sign of higher claims severity, it noted.

At the same time, the P&C industry's statutory capital base continues to expand, and capital adequacy measures remain supportive of ratings, Fitch said. Surplus growth is likely to remain moderate in the future with earnings offset by parent dividend outflows. Capital adequacy measures are anticipated to remain stable in the near term, the agency added.