A new Fitch Ratings report discusses key factors contributing to U.S. property/casualty insurance industry 2012 performance and updates the forecast for industry statutory earnings in 2013.
The industry posted sharply improved statutory profitability in 2012, despite more than $20 billion of fourth-quarter insured losses from Superstorm Sandy. Net income increased by approximately 80% and generated a return on surplus (ROS) of 6.7% versus 3.6% in 2011, which remains below the historical average of approximately 8%. This profitability was driven by premium revenue growth and loss ratio improvement from higher premium rates and reduced catastrophe losses.
Insurance premium rates have significantly improved across most product segments since the second half of 2011. As the industry is still generating a significant underwriting loss, prices are continuing to rise and appear sustainable at least through the latter portion of 2013.
As Fitch anticipates premium growth to remain favorable in the near term, core loss ratio improvement is expected along with a favorable trend in expense ratios. The industry statutory forecast in 2013 is for a calendar year combined ratio of 99.5%. This would represent only the fourth year in the last 35 years in which the market has achieved an underwriting profit.
Improving underwriting results are anticipated to promote higher industry profits in 2013. However, the profit contribution from investment income remains constrained by continued declines in portfolio yields. The projected industry statutory return on surplus in 2013 is slightly below 7%.
Industry policyholders' surplus (PHS) increased by approximately 6% in 2012, following little change in 2011, attributable to improved earnings and significant unrealized investment gains tied in part to stock market performance. Statutory operating leverage ratios were relatively unchanged in 2012, suggesting that industry capital levels remain strong.
Overall, Fitch's rating outlook for the U.S. property/casualty sector remains stable. The industry's improved capital levels coupled with more favorable earnings prospects are positive factors but are tempered by uncertain conditions related to medium-term competitive pressures.