Fitch Ratings has maintained its stable outlook for both the commercial and personal lines sectors of the U.S. property/casualty insurance industry. Insurers have withstood less favorable underwriting and economic conditions in the past several years, which has promoted weaker profitability. However, the market's capital position remains strong, and most insurers in Fitch's rated universe have sufficient capital to meet significant future adversity.
Industry surplus levels remain at historically high levels, and capital adequacy measures, which are based on traditional operating leverage or on a risk-adjusted basis under Fitch's Prism capital model remain very strong. Factors that contribute to capital strength include an investment emphasis on high-quality and liquid bonds, adequate loss reserve levels, and moderate reinsurance and other credit exposures.
Property/casualty insurers are benefiting from premium rate increases in nearly all major commercial and personal product lines following several years of inadequate pricing and stern market competition. This trend is likely to continue at least through late 2013. Fitch still views the market pricing environment as 'hardening' as returns on capital remain below the cost of capital and historical norms.
The industry generated significantly improved underwriting results and earnings in the first nine months of 2012 relative to the prior year. However, record fourth-quarter catastrophe losses from Superstorm Sandy will significantly dampen results.
Based on individual companies' reported loss estimates related to Sandy, a $20 billion or slightly lower insured loss total appears likely. Due to the size and nature of Sandy, a larger proportion of losses were incurred from commercial lines versus personal lines. While Sandy will represent one of the five largest insured natural catastrophe loss events in history, Fitch does not anticipate significant rating changes tied to this event.
Fitch projects a 103.4% industry combined ratio for 2012 which is still 5.0 points better than the prior year. Statutory earnings are projected at nearly 40% higher than 2011 and the statutory return on surplus is projected at 4.9%.
Underwriting results and net profits are expected to improve in 2013 despite continued challenges from declining investment yields. Fitch is projecting a very modest underwriting profit in 2013, assuming a return to historical average insured catastrophe losses. This result would represent only the fourth time in the last 35 years that the industry has reported an underwriting profit.
The industry return on surplus is forecasted to improve to 6.6% in 2013. The property/casualty business' inherent volatility and continue operating and competitive challenges may make it difficult to further boost returns in 2014 and beyond.