Reduction of capital surplus in U.S. P&C market not enough to foster a hard market

Despite a predicted 10% decline in the U.S. property and casualty market’s surplus in 2008, Fitch Ratings predicts the industry’s capital adequacy will remain favourable.
The U.S. property and casualty industry experienced surplus growth of nearly 80% between 2003 and 2007, due to strong underwriting profits in three of the last four years and favourable investment results, Fitch notes.
At year-end 2007, the industry’s operating leverage (industry net premiums to surplus) was 0.83 times (x), marking a “near historic low level.”
In its Review and Outlook 2008-2009 report, Fitch predicts a 10% decline in surplus by the end of 2008, driven by significant underwriting and investment losses and shareholder dividends.
“Despite this decline, the industry’s capital adequacy remains favourable and operating leverage will remain below 1.0x at the year-end 2008,” the report says.
“While this capital reduction may influence market conditions going forward, market capacity and other competitive factors have not changed enough to foster a hard market turn.”