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U.S. commercial, personal lines sector will remain stable in 2016 despite challenges: Fitch Ratings


December 8, 2015   by Canadian Underwriter


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One day after Fitch Ratings reported that the insurance market underwriting cycle is turning unfavourable in many commercial market segments in the United States, the ratings firm said that it is maintaining its stable ratings outlook in both the commercial and personal lines sector of the U.S. p&c industry in 2016.

Ratings in the U.S. p&c industry are not expected to change in the next 12 to 18 months

The majority of ratings in the sector are not expected to change in the next 12 to 18 months, according to Fitch Rating’s 2016 U.S. Property/Casualty Insurance Outlook Report, released on Tuesday. Near-term earnings deterioration is anticipated, but a shift towards sharply inadequate premium rates or profit levels approaching operating losses is unlikely.

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year; however, statutory capital adequacy will remain strong,” said James B. Auden, managing director, Fitch Ratings, in a statement.

As noted on Monday, the U.S. property and casualty insurance industry faces underwriting challenges, particularly in the commercial lines segment, as a softening premium environment will promote future deterioration in underwriting results. Competitive factors and market underwriting capacity will support continuation of this trend following a three-year run of profitable industry underwriting results, from 2013-2015. “Performance for the p&c universe as a whole is anticipated to deteriorate in 2016 toward a break-even underwriting result,” the statement said.

P&C underwriters face greater difficulties in generating adequate returns on capital beyond underwriting and pricing, Fitch Ratings noted. The investment contribution to earnings continues to decline as falling portfolio yields reduce investment income, and investment gains reported in the last three years are less likely to continue given economic growth prospects and current equity market valuations.

Statutory capital strength is a primary element supporting insurer ratings. Industry policyholders’ surplus (PHS) will reach a new record level in 2015, though surplus growth has slowed recently. Capital adequacy measures remain at conservative levels with industry net written premiums / PHS at approximately 0.75x.

According to the report, factors that “promote future movement towards a negative industry outlook” include: large events that significantly affect the industry’s capital position such as a large natural catastrophe, discovery of adverse claims experience and reserve deficiencies and a sharp equity market downturn. Shifts in underwriting trends that led to prolonged underwriting losses for insurers could also lead to consideration of negative sector outlooks, the statement concluded.