The property-casualty insurance industry can expect a growing surplus and shrinking combined ratio next year, Fitch Ratings said today in giving its annual p-c outlook.
"Fitch anticipates that net written premium will increase from an estimated 3.2 percent this year to about 5.6 percent in 2006," the company said in a report.
Despite the large catastrophe losses, the industry will most likely produce an overall profit in 2005, while policyholder's surplus will rise by 1.9 percent from last year, Fitch predicted.
The agency said it expects surplus to grow 10.8 percent next year, while the combined ratio will shrink to 97.9 from an estimated 105.5 figure for this year.
In a conference call this morning, Fitch analyst James Auden said that he expects price momentum from the 2005 catastrophe losses to be short-lived.
But, he said, rating agency pressure to increase capital for catastrophe losses will help shore up pricing. "We believe that periods of pricing adequacy across the broader market is a temporary phenomenon," Mr. Auden said. "Loss costs are expected to continue to rise over time, and insurance pricing is not likely to follow course due to competitive pressures," he added.
Overall, Fitch has maintained a stable outlook for the personal, commercial and reinsurance sectors, asserting that catastrophe losses could spur enough market hardening to prevent a slew of downgrades.
In addition, Fitch said, personal lines should benefit from a stable competitive environment as insurers focus on profitability rather than market share.
Fitch also noted that most of the new capital that has entered the market in the wake of the '05 catastrophe losses has been in the form of equity or "very equity-like hybrid securities."
"Thus, insurers have not increased their financial leverage significantly with this new capital markets activity," Mr. Auden said.
For the 2005 start-up entities, Mr. Auden said he foresees some tough challenges since the established companies did not really suffer any surplus-threatening losses.
"They will face significant challenges in forming a viable management team and developing critical mass, and may quickly become more competitive on pricing to build a book of business," he said.
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