NU Online News Service, JUNE 11, 12:05 p.m. EDT
Fitch Ratings said U.S. property-casualty insurance industry profits fell "dramatically" in 2008 and this year the sector has a negative outlook based on economic and investment uncertainty.
The comments came in a special report on the p-c industry statutory results and forecast, which said that currently "market underwriting capacity has not declined to a level that will spark premium rate improvements."
Still, the Chicago-based rating firm said "profitability is expected to improve moderately from the anemic levels of 2008."
According to the company, in 2009 underwriting performance "is likely to suffer from deteriorating accident year loss experience" as well as diminished favorable prior period reserve development.
Fitch said figures for 2004-2008 compiled by Highline Data show trends signaling that there has been "a definitive end" to the hard market that lasted from 2003-2007.
Among the Highline statistics cited for 2008 were a combined ratio increase of nine points to 105.2, and realized investment income loss of $19.6 billion and 10.4 percent reduction in policyholders' surplus.
A primary contributor to the poor underwriting performance for the sector, Fitch said, was the deterioration in results for financial guarantors and mortgage insurers, which are in included in the p-c industry aggregate.
The company noted this segment had large exposures to subprime mortgages and structured securities backed by mortgages and as a group had combined ratios over 250 in 2008.
Excluding the financial guarantor and mortgage insurer group, the p-c sector had favorable prior-period loss reserve development in 2008, cutting the calendar year loss ratio by 3.3 points compared with 1.9 points in 2007.
A "rare" experience of negative total investment returns for 2008 in the p-c sector saw reported unrealized investment losses totaling over $71 billion pretax largely due to equity market declines, Fitch reported.
The study found the p-c industry generated "significant surplus growth" during the hard market and as underwriting opportunities abated in a declining rate environment, capital started flowing out of the market in 2006 and 2007 primarily through shareholder dividend payments.
Fitch said net capital outflows continued in 2009, but were 59 percent lower than the prior year and capital outflows slowed sharply in the second half of the year as investment losses mounted.
The report predicted that the combined ratio this year should improve "a bit" over 2008, but said "another underwriting loss is anticipated.
Among the key factors affecting the sector this year Fitch listed as negatives:
o Pricing trends and recession-related reductions in insurance exposure that will promote a decline in premium revenue and higher expense ratios.
o Higher accident-year loss ratios--ex-catastrophe losses.
o Reduced prior-period favorable reserve development.
o Low investment yields and returns.
As positives the firm mentioned:
o Lower but still significant incurred losses from mortgage insurers and financial guarantors.
o Assumed return to historical level of annual catastrophe losses.
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