U.S. P/C Insurers’ Capital Strength, Pricing Improvement Support Stable Outlook

U.S. property/casualty (P/C) insurers are poised to generate slightly improved underwriting profits in 2019 and could do so again in 2020, according to Fitch Ratings' outlook for the sector. Fitch maintains a Stable Outlook for the sector's fundamentals and its ratings in 2020.

Source: Fitch Ratings | Published on December 31, 2019

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"Rising premium rates in many commercial lines segments should benefit underwriting profits modestly," says Jim Auden, Managing Director. "As that trend accelerates, loss cost trends including disruption from rising litigation costs and social inflation in the liability space and the ever-present risk of catastrophe losses are issues to watch." Across the P/C industry, pricing changes are forecast to modestly outpace loss costs in 2020, contributing to a projected 97% industry combined ratio for the year that improves upon Fitch's 98% forecast for full-year 2019.

Pricing trends in two major segments are running counter to the prevailing hardening trend. Workers' compensation pricing continues to deteriorate, but has been the most profitable commercial segment for several years. In the personal lines space, auto insurance pricing has flattened following multiple years of rate increases. This segment's recovery to an underwriting profit in 2018 and 2019 is likely unsustainable based on loss severity trends.

In the liability space, rising premiums will help offset increasing loss costs currently being experienced across multiple lines of business. Many claims are settling with a higher severity due to increasing litigation expenses, settlement costs and jury verdicts, including in the commercial auto, excess liability and umbrella, professional liability, medical professional liability and product liability lines. Potential for near term adverse reserve development in these longer tail segments is heightened given these claims trends.

The risk of catastrophe losses is ever-present for U.S. P/C insurers, representing the largest source of underwriting volatility. Insured catastrophe losses were slightly lower in 9M19 compared to the year prior. Fitch projects full-year insured losses from catastrophe events to be slightly below the historical norm of 4% of net earned premiums in 2019, following above-average losses in 2018 of 5% and 2017 at 10%.

U.S. P/C insurers' financial strength continues to reflect strong statutory capital positions that provide capability to withstand considerable adversity in performance. Operating profits and large unrealized investment gains led to a substantial increase in policyholders' surplus in the first nine months of 2019 to approximately $840 billion.

The full report, "Fitch Ratings 2020 Outlook: U.S. Property/Casualty Insurance," is available at www.fitchratings.com.