2014 ratings outlook for U.S. P&C industry stable

Fitch Ratings has issued a stable rating outlook for the commercial and personal lines sectors of the property and casualty insurance industry in the United States for 2014.

The sector outlook is also stable, based on “expectations for a second consecutive year of underwriting profits in 2014, with a modest reduction in projected underwriting performance and earnings for the year,” Fitch said Wednesday.

Higher premium rates in nearly all lines over the last two years has allowed for premium growth and loss ratio improvement, the ratings firm noted.

A reduction in insured losses from natural catastrophes also means a combined ratio for the industry of 96.4% for the year compared with 103.2% in 2012, Fitch said, noting that the result would be the best underwriting year since 2007.

“Looking forward, there are growing signs that the recent hardening phase of the market underwriting cycle has peaked,” Fitch said.

“Recent premium movements remain positive, but the magnitude of rate changes is declining in many areas. A further flattening in pricing is more likely in the latter half of 2014 as underwriting capacity remains abundant and will likely spur heightened market competition for business.”

For 2014, the firm projects a “modest deterioration in underwriting performance…with an industry statutory combined ratio of 97.3%.”

“The recognition of recent favorably priced business into earned premiums will foster core loss ratio improvement, but this will be offset by an anticipated return to historical loss levels from natural catastrophes and a reduction in favorable loss reserve development from prior underwriting periods,” according to Fitch.

Low investment yields and reduced underwriting profits will also lead to reductions in net earnings, the firm noted.

“Fitch believes that the industry’s capital position remains strong based on several quantitative measures,” it said.

“As such, a change to a negative rating outlook is less likely in the near term, barring a sharp decline in capital from severe catastrophe losses and/or investment market declines, or an interest rate/inflation shock that leads to large losses from not only asset value declines but also underwriting losses from reserve deficiencies and pricing inadequacy.”