Fitch says U.S. property/casualty underwriting has reached “tipping point,” headed downwards

An overall combined ratio of 100.4% for this coming year and a net income of only US$41 billion is projected for the U.S property and casualty industry in 2008, according to Fitch Ratings’ updated forecast.
The projected net income for 2008 would represent a significantly worse result than the industry’s net income posted in 2007 (US$63.4 billion) and 2006 (US$66.7 billion).
In fact, it would represent the worst result since Hurricanes Rita, Wilma and Katrina hit the United States in 2004-05 (when net income ranged between US$38-47 billion).
“Fitch believes that the market has crossed a tipping point in the underwriting cycle, such that industry returns on capital for current accident-year business has slipped to inadequate levels, though a number of more proficient individual underwriters will still produce sufficient returns,” Fitch says in its 2008 forecast.
“The market environment is anticipated to deteriorate further going forward, and it is difficult to project the length and extent of the current soft market, and the circumstances that will promote a shift to hardening market rates.”
Looking forward into 2009, underwriting and operating profits will likely continue their downward trend, according to Fitch. “Though the industry is not producing returns on par with its cost of capital, strong market capacity and other competitive factors are still driving prices to less attractive levels.”
The ratings agency said currently “there is no catalyst evident for a shift to a hardening market trend,” and it would likely take larger underwriting losses or some other significant event to eliminate capital from the market, thus producing an upward pricing shift.
“Fitch does not envision any meaningful shift in pricing trends until the second half of 2009 at the earliest.”