The property/casualty insurance industry will report an underwriting profit for the third consecutive year in 2015—a streak unmatched since the early 1970s, according to analysts at Fitch Ratings, who also predict 2016 will come in closer to breakeven.
But all bets are pretty much off for an underwriting profit in 2017, Fitch analysts suggest in a new report, which also reveals that aggregate industry policyholders surplus will pass the $700 billion mark for the first time in 2015.
The report identifies price deterioration as a major force behind the less favorable underwriting result next year.
“Premium growth is anticipated to retreat slightly in 2016 given pricing movement and economic growth forecasts,” the report says, forecasting only about 3 percent growth in net written premiums in 2016.
In deriving this year’s calendar year combined ratio estimate of 97.5, Fitch assumes 2.1 points of favorable prior-year loss development, which means the accident year combined ratio (unaffected by prior-year reserve movements) will come in about 99.6.
Looking ahead, Fitch forecasts an accident year 2016 combined ratio of 101.6, which includes 3.7 points of catastrophe losses, compared to only 3.3 points for 2015.
Even though the projections put next year’s accident year combined ratio past the 100.0 breakeven mark and the calendar year result teetering on the edge, Fitch’s “sector outlooks” remain stable for both personal and commercial lines, the report says.
“Though near-term earnings deterioration is anticipated, a shift towards sharply inadequate premium rates or profit levels approaching operating losses is not anticipated,” the report confirms.
Fitch’s “rating outlooks” are also stable. That means the majority of ratings in these sectors are not expected to change in the next 12-18 months, Fitch says.
(Editor’s Note: One of the report’s authors, James Auden, leader of the North American P/C Ratings team, has explained in the past that Fitch’s “sector outlooks” are performance-based outlooks or profit expectations, in contrast to the “rating outlooks,” which reflect expectations about financial strength rating upgrades and downgrades.)
While a record level of capital is one of the factors supporting stable ratings, the report notes that surplus growth is actually slowing in 2015—growing less than 2 percent above the aggregate level for 2014. In 2014, surplus grew 3.5 percent, according to figures in the report. Lower earnings this year, reduced investment gains and capital outflows from shareholder dividends explain the difference—and Fitch is predicting even slower surplus expansion for 2016.
Concluding the analysis with a prediction of a 6.8 percent statutory return on surplus for the industry in 2016, Fitch goes one step further to make a prediction about 2017.”
“It is difficult to find a potential catalyst for improvement in underwriting performance or overall profitability in the intermediate term, so a return to underwriting losses is more likely in 2017.
Additional report takeaways:
- Personal lines will fare better than commercial from growth standpoint, Fitch says. “The commercial lines underwriting cycle has now shifted to a softening phase.”
- Even though the homeowners line will see a third year of underwriting profit in 2015, periodic increases in claims severity and a third-quarter hiccup in frequency may fuel underwriting losses on the personal auto side when the books close for 2015.
- On the investment side, the report points to more yield pressure ahead, noting that a study of 56 large insurers reveals an average coupon rate of 4 percent for bonds maturing in 2015 and 2016, above new money (reinvestment) rates of 3 percent.