Fitch Raises U.S. P&C Rating Outlook to Stable

Fitch has revised its sector outlook on the U.S. property and casualty insurance industry to stable from negative for both the commercial lines and personal lines sectors.

Fitch said it believes the vast majority of insurer ratings will be affirmed as they are reviewed over the next 12-18 months.

Fitch said the change in outlook reflects its view that the industry withstood the recent financial crisis reasonably well, particularly in comparison with other financial services sectors.

While the p&c market suffered material reductions in capital in 2008, Fitch said, insurers benefited from the investment market recovery in 2009. This, coupled with improvements in underwriting performance, promoted a return to previous strong capital levels. The industry also has experienced a shift toward material net unrealized gains in investment portfolios for many insurers, Fitch said.

Since Fitch's October 2008 shift in sector outlook to negative, rating downgrades in Fitch's p&c universe have outpaced upgrades by a ratio of about 12 to 1. More recently in 2010, the trend of rating actions shifted more toward rating affirmations and revisions to a stable rating outlook from negative at the insurance company level, Fitch noted.

The rating agency said future profitability prospects look better in personal lines than commercial lines. While the homeowners segment continues to be underpriced in many markets and insurers have faced an inordinate amount of losses from inland weather-related events, the personal auto segment is experiencing aggregate price increases at a higher rate than loss cost growth, Fitch said.

In commercial lines, premium rates continue to decline across nearly all segments, reflective of excess market underwriting capacity, and accident year combined ratios were over 100 percent in key casualty segments in 2009, Fitch said. Fitch added that a near-term shift in pricing trends is unlikely based on current market fundamentals.

Continued pricing declines coupled with a significant rise in loss cost inflation for longer tail casualty lines would imply the development of an acute downcycle and would potentially lead to a reassessment of Fitch's commercial lines rating outlook.