Fitch Predicts Continued P-C Struggles Through 2009

Bloomberg News
December 22, 2008

Fitch Ratings expects more downgrades than upgrades within each of the property-casualty sectors over the next 12-18 months, as core underwriting results fail to improve in 2009 and profitability continues at unattractive levels, according to a recent outlook.

In a report titled "Review and Outlook 2008-2009, U.S. Property-Casualty Insurance," Fitch said the soft market cycle, high catastrophe losses and poor investment performance combined to cause a projected 83 percent decline in statutory earnings and a 10 percent reduction in statutory capital in 2008.

While the trouble in the financial markets has affected other financial services segments more than p-c insurance, insurers were impacted by the investment market volatility in the second half of the year.

"Asset classes favored by property-casualty insurers, including equities, corporate bonds and tax-exempt securities, were affected by the contagion from the mortgage market collapse in the last few months," the report stated.

The report also said excess capital and the industry's loss reserve cushion shrank in 2008. From 2003-2007, Fitch said, the industry's surplus grew nearly 80 percent because of strong underwriting profits and favorable investment results. In 2008, Fitch expects a 10 percent decline in industry surplus, as underwriting and investment conditions have worsened.

The soft market has caused some reduction in loss reserves. The report stated, "Unfortunately, the market is in a cycle in which current accident-year loss reserve margins are more likely to narrow as underwriting losses develop and the impact of changes in rates and policy terms make loss experience less predictable."

Speaking to the market cycle, Fitch said, "Softening rates were not surprising as underwriting success and strong capital formation traditionally fuel greater market competition. Fitch previously noted unfavorable pricing trends would continue as the market was in the midst of a normal soft cycle phase with underwriting results that were still better than longer-term historical averages and that no catalyst for a change in pricing trends was evident."

Now, given the economic downturn, high catastrophe losses and insurer investment losses, Fitch said it is difficult to project where prices will go in 2009. Fitch predicted rates will, at best, stabilize in 2009 outside of segments that have incurred large claims growth.

"Any positive shift in market premium rates that materializes will take some time to flow through reported financial results, so improvement in underlying underwriting performance is unlikely in 2009," the report stated.

Regarding specific lines, Fitch said property catastrophe risks could harden if there is a natural disaster, and the report added that even though there have been improvements in predictive modeling, exposure to catastrophes in areas that have not experienced recent losses--such as a California earthquake or Northeast hurricane--would produce much larger than anticipated losses.

Professional liability could be the "next trouble spot" for insurers as the global recession progresses, and corporate failures and bond defaults across multiple industries lead to E&O and E&O claims, Fitch said.

On the underwriting side, Fitch expects a 0.5 percent increase in net written premium in 2009, "as most segments continue to experience premium rate declines." The rating agency also predicted a 104 combined ratio.

On the investment side, Fitch predicted lower investment income "as yields are not expected to improve and realized losses will continue to adversely impact earnings."

Fitch said net income is projected to increase slightly, and return on surplus is estimated "at a still unfavorable 2.7 percent."

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