Fitch says U.S. P&C industry should be aiming for 95% COR in 2008

Fitch Ratings says the U.S. property and casualty insurance industry will need to produce a combined ratio of about 95.5% in 2008 in order to meet the goal of an 11% return on surplus.
Fitch made this observation in a report outlining the rating agency’s five-factor model for determining return on surplus. The five factors in the forecasting model include:
combined ratio (underwriting losses + expenses)/net premium;
investment yield (investment income/invested assets);
operating leverage (net premium/surplus);
asset leverage (invested assets/surplus); and
tax rates (the level at which pre-tax income is taxed).
For the purpose of forecasting into 2008, the ratings agency assumed operating leverage to be 0.8x, asset leverage to be 2.4x and a tax rate at the long-term average effective rate of 23%.
“With these fixed parameters, at the industry’s portfolio yield of approximately 4.5%, the industry would need to produce a combined ratio of around 95.5% to earn our estimated 11% hurdle rate for return on surplus in 2008,” Fitch notes in its report, ‘Property/Casualty Insurance Profit Dynamics.’
“Fitch is projecting a 99% combined ratio and a 9% return on surplus in 2008, so the industry is not expected to earn a return in excess of its cost of capital for the year.”
Based on its analysis, says Fitch, significant underwriting profits will become even more important to generate, even though the pricing environment is becoming more competitive.