Fitch: Capital Levels, Continued Profits Support Stable P/C Outlook

In addition to opining that the momentum behind premium rate hikes is now exhausted in the property/casualty insurer sector, Fitch Ratings delivered predictions on key financial measures for 2014 and 2015 in a new report. The report, “2015 Outlook: Property/Casualty Insurance,” published Tuesday, notes that the industry’s strong capital position and another year of underwriting profits, are two of the factors supporting a stable outlook for the sector. “Nearly all Fitch-rated P/C insurers have a stable outlook …Rating changes are unlikely in the next 12-24 months,” the report says. Other key takeaways from the report include:

• Fitch’s forecast that policyholders surplus will be just shy of $700 billion at yearend 2014, projected to rise to over $715 billion in 2015.
• The fundamental sector outlook is stable based on expectations that industry earnings will decline in 2015, but the market in aggregate will generate an underwriting profit for the year.
• For 2014, industry will generate a second consecutive year of underwriting profits with a projected combined ratio of 97.5, up from 96.2 in 2013.
• For 2015, Fitch’s statutory combined ratio forecast is 99.0, assuming catastrophe losses remain within normal historic ranges and the trend toward moderating favorable reserve development continues.
• The combination of less attractive pricing and falling investment income will knock overall statutory net profit down 24 percent in 2014, and another 18 percent in 2015.
• Translating net bottom-line earnings into returns on surplus, the industry average will fall to single-digits, coming in at about 8.1 percent in 2014, compared to 11.4 percent in 2013.
• The absence of strong realized investment gains in 2014 as compared to 2013 explains part of the reason for dip in overall returns.
• In 2015, Fitch estimates an overall return on surplus of 6.4 percent.
• Fitch believes that P/C industry reserves are adequate in the aggregate; reported calendar-year redundancies will fall moderately over the next few years.
• In 2014, favorable reserve development shaved 2.1 points off the overall industry combined ratio by Fitch’s tally, compared to 2.9 points in 2013.
• In 2015, reserve takedowns will only lower the industry combined ratio by about 1.3 points.
• Turning to premium growth, Fitch’s estimate is for a 4.3 percent jump in 2014.
• For 2015, Fitch is forecasting premium growth of 3.5 percent.