North American P&C insurers’ operating profitability declines in first half of 2016: Fitch

North American property and casualty insurers’ operating earnings decreased in the first half of 2016, as results were challenged by modest underwriting deterioration and low investment yields, according to a new report released on Friday by Fitch Ratings.

For a group of 44 (re)insurers, aggregate generally accepted accounting practice (GAAP) operating earnings decreased by 10.8% to US$21.6 billion, Fitch said in a press release. Operating return on equity for the group declined to 7% in first-half 2016 from 8% in the prior year, according to the report, titled North American Property/Casualty Insurers’ Midyear 2016 Results.

“Maintaining or improving underwriting performance will be the key to generating adequate returns on capital going forward but may prove challenging as competitive forces are promoting flat to declining insurance pricing in many market segments,” said Christopher Grimes, director at Fitch, in the release.

The aggregate group combined ratio deteriorated to 95.7% in first-half 2016, a 1.5 percentage point increase over the prior period, with the personal insurance and reinsurance groups experiencing the greatest deterioration as a result of increased catastrophe losses. Catastrophe losses added 4.9% to the overall group’s combined ratio, up from 3.4% in the prior year, driven largely by severe storm activity in Texas and surrounding states, Fitch reported.

Investment income for the group dropped by 6.8% to US$21.9 billion “as insurers struggled to find yield in a difficult investment market.” However, realized investment gains were comparable with the prior year, remaining at approximately $2.4 billion in first-half 2016.

The overall favourable impact of prior-year reserve development remained fairly constant relative to the prior year, Fitch added. The group benefited from 1.9 percentage points of reserve development relative to earned premium in first-half 2016, equal to the 1.9 points that were trimmed from the first-half 2015 combined ratio.

Fitch maintains a stable rating outlook for each of the sectors covered in this report: U.S. commercial, U.S. personal and global reinsurance. Broad-based rating changes are unlikely in the next 12 to 24 months, the ratings firms said. Personal and commercial lines have “stable” sector outlooks, while the reinsurance sector’s outlook is negative as “intense market competition and sluggish cedent demand have resulted in a soft reinsurance market.”