With the hardening price phase officially over for property/casualty insurers by some accounts, analysts are not yet predicting any severe price declines for the year ahead—and underwriting profits will continue in the 2015, they say.

Still, combined ratios will move closer to breakeven, Fitch Ratings predicted its report, “2015 Outlook: Property/Casualty Insurance,” which also said that the rating agency will keep stable rating outlooks on both the commercial and personal lines sectors of the U.S. P/C insurance industry for 2015.

Analysts at ALIRT Insurance Research and Nomura also released their year-to-date reviews and outlook reports for the P/C market recently. Using slightly different metrics to pinpoint the stage of the underwriting cycle, all three suggested that peak pricing for commercial lines and peak underwriting profit margins could be a memory in 2015.

Fitch said it directly. “The recent hardening phase of the market underwriting cycle has peaked as abundant underwriting capacity and heightened competition are promoting a shift towards flat-to-declining insurance premium rate changes,” the rating agency said in a statement about its outlook report.

Still, after nearly three consecutive years of premium rate increases in most primary market segments, “U.S. primary lines are unlikely to experience abrupt premium rate declines in the near term in contrast to the more severe softening of reinsurance market pricing,” Fitch said in the report.

According to Fitch, the market reached its cyclical profit peak in 2013, with operating profits forecast to decline in 2014 and 2015. On the bright side, Fitch notes that industry profitability improved between 2011 and 2013—to an operating return on surplus of 8.4 percent in 2013.

But that’s not even close to the cyclical peak of the prior cycle in 2006, which was five points higher, Fitch says. In fact, if returns are adjusted to an accident-year basis with losses fully developed to include favorable reserve changes, the 2006 peak was 16 percent.

Hard, Soft or Adequate?

“U.S. primary lines are unlikely to experience abrupt premium declines in the near term in contrast to the more severe softening of reinsurance market pricing.

In a Dec. 2 report looking back at P/C industry results for the first nine months of the year, ALIRT was less certain that price increases are over. “We would not be surprised to see aggregate price increases to continue their descent toward breakeven and below,” ALIRT’s report said.

To arrive at the conclusion, ALIRT proposes two ways of understanding the market cycle: one way that simply looks at price changes relative to a prior period, which is the traditional approach; the other, looking at “the degree to which premiums exceed loss costs.”

ALIRT argues that the “degree of rate adequacy” is a better measure, referencing prior troughs and peaks under the first measure to explain why.

For example, thinking about the huge price jumps in 2001—traditionally thought of as a hard market year—ALIRT notes that the double-digit hikes failed to make rates adequate because they followed a prolonged period of severe rate inadequacy. In eyes of carrier management teams then, the pricing still felt “soft.”

Likewise, even when prices started falling in 2005-2007, premiums still exceeded ultimate losses because there was a big run-up in prices during the four prior years. While 2006 prices were lower than those of prior years, they were still adequate, ALIRT says.

Measuring the current environment on this “rate adequacy” scale, ALIRT turns to P/C executives to gauge the current stage of the market. Citing third-quarter earnings commentary from Travelers CEO Jay Fishman and Chubb CEO John Finnegan, both indicating that many accounts have become “rate adequate” after several years of consecutive increases, ALIRT notes that ACE’s Evan Greenberg delivered the bluntest assessment of a possible tipping point.

“Depending on the class of business, I think the level of rate increases are either not keeping pace with loss costs or barely keeping pace with loss costs,” he said. “Naturally, over time, if you look at the kind of combined ratios we are producing, I would expect the combined ratios to rise. That’s just natural,” Greenberg said during a third-quarter conference call.

Separately, Nomura Equity Research, in a P/C Outlook report published Tuesday, displays a graph charting annual inflation rates (measured by the CPI) against P/C prices. “We are close to pricing falling below loss trend,” Nomura concludes, referencing the graph showing annual inflation rates for the last four years—resembling a narrow sine curve with a slight upward slope at about 2 or 3 percent in 2014—against a higher amplitude P/C pricing curve rising from -4 percent in 2010 up to between and 4 and 5 percent in 2012, and falling back down to 2 or 3 in 2014.

“We expect the competitive environment to continue to give little room for organic growth and we’ll enter negative average pricing across sectors …,” Nomura says.

Soft Landing or Slaughterhouse?

Fitch’s report notes that the rating agency analysts aren’t foreseeing any drastic price drops on the primary insurance side. The report references various industry price monitors showing continuing price hikes for commercial lines such as workers compensation and commercial auto in 2014 as the rest of the space flattens.

Reinsurers, on the other hand, are in for another round of double-digit price declines for property-catastrophe coverages, Fitch notes, estimating that primary insurers will reap the benefits rate cuts of 10 percent or more on upcoming renewals.

“Looking forward, alternative capital sources are demonstrating more interest in casualty lines and in establishing more comprehensive reinsurance programs with individual insurers,” the Fitch report says.

While the lower reinsurance costs works to help primary insurer profit margins, working in the other direction is the fact that “premium rate momentum” is out of steam for the most part—”exhausted,” using the language of the Fitch report.

That’s not causing Fitch any near-term worry as strong capital levels and a forecasted combined ratio still under 100 for 2015—99 to be exact—are supporting a stable rating outlook for P/C insurers.

Looking further out, the ALIRT report has some questions about the longer term.

Following up on the remarks of P/C carrier CEOs suggesting that rates are now adequate to meet carrier return hurdles for many accounts—” … it would be unwise for us to attempt to continue to increase rate significantly … and risk the relationship with agent and customer” in Fishman’s words—ALIRT notes that every carrier will have a different concept of rate adequacy because each has as different return hurdle.

“By all appearances, rate adequacy has been achieved across a wide swath of the industry after more than three years of higher pricing,” ALIRT says, referring to the executives’ remarks.

“What we do not know is how long they will defend existing, now profitable books of business once operating earnings begin to erode and targeted ROE hurdles come under pressure”—as they may if they cannot lower equity positions (through buybacks, dividends or M&A) or achieve higher investment returns.

“Will the market leaders have enough influence to guide the industry towards a soft landing and ever-more circumscribed pricing cycles, or will the aggressive defending of books of business ultimately turn into a mutual slaughterhouse, as in the past,” the ALIRT report asks.

“With aggregate prices still higher on a year-over-year basis, there is time yet for an answer to manifest itself,” the report concludes suggesting that the answer might not yet be apparent in 2015.