Fitch: U.S. P/C Industry Shifts To Modest Underwriting Loss In 2008

Fitch Ratings said that following a review of industry aggregate statutory financials for year-end 2007 and 1Q 2008, the rating agency has updated its full-year 2008 U.S. Property/Casualty industry forecast and now projects a modest underwriting loss and significant reduction in profits and return on surplus for the year.

In a new report, Fitch Ratings reviews key drivers influencing industry results for 2007 and going forward. While the property/casualty market has experienced favorable results in 2007 and over the last five years, Fitch believes that this success has led to the development of excess capital in the market, which has fostered intense price competition that will lead to deteriorating profits in 2008 and at least through 2009.

“[T]he market’s previous success has led to more competitive market conditions, and a downward trend in insurance premium rates as evidenced by an unprecedented decline in net written premium volume for the industry in 2007 from 2006. These changes in the pricing environment in turn promote less favorable underwriting performance and profitability,” according to the report.

Fitch believes that the market has crossed a tipping point in the underwriting cycle, and industry returns on capital for current accident-year business has slipped to inadequate levels, although the rating agency notes that a number of more proficient individual underwriters will still produce sufficient returns.

“The market environment is anticipated to deteriorate further going forward, and it is difficult to project the length and extent of the current soft market, and the circumstances that will promote a shift to hardening market rates,” Fitch wrote.

“With a trend of deteriorating underwriting performance developing and continued declines in premium rates across the broader market, the projected industry combined ratio has shifted from a 98.1 percent combined ratio to a modest underwriting loss for the year,” Fitch wrote. This underwriting result, coupled with a modest decline in estimated investment income, has led to a corresponding decline in projected net income, such that the estimated return on surplus is now 7.6 percent, down from 9.2 percent previously.”

Fitch also forecasts flat written premium growth for property/casualty insurance in 2008, similar to 2007, and a combined ratio of 100.4 percent in 2008, compared with 95.6 percent in 2007.

To access this report, “Property/Casualty Industry Statutory Results And Forecast: Shift To Modest Underwriting Loss In 2008” visit http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=389682&sector_flag=4&marketsector=1&detail=

Source: Fitch Ratings