North American property/casualty insurers reported improved 2019 operating performance, but near-term performance will likely be more challenging with the onset of coronavirus and the resulting economic impact, according to a report from Fitch Ratings.
Fitch's rating outlook for the U.S. property casualty insurance and the global reinsurance sectors remains stable. However, on March 20 Fitch Ratings revised its outlook for the underlying fundamentals of the P/C insurance sector to negative from stable.
Fitch said the sector outlook revision is due to increased concerns over COVID-19, the disease caused by the coronavirus, and related impacts on near term performance and the credit quality of insurers.
"Claims experience relating to coronavirus and related economic disruption is not anticipated to significantly increase loss ratios in the near term, but as the duration and severity of the crisis lengthens uncertainty regarding future sources of underwriting losses expands," said Jim Auden, managing director, Fitch Ratings.
Fitch projects that claims are likely significant in specialty segments, including event cancellation and accident and health lines. The analysts also believe that legal challenges to contract terms excluding pandemics and requiring physical damage for business interruption claims bear watching.
Liability claims in several lines are also likely to emerge, but the extent of losses is difficult to project until the crisis subsides, according to the report.
Insurers have benefited from favorable recent premium rate movement across the broader commercial lines spectrum. But looking ahead, the global coronavirus pandemic "adds tremendous uncertainty to the U.S. economy and financial services sector," Fitch said. "A move towards an economic recession could alter premium growth trends through declines in insured exposures or renewed competitive pressure that restricts pricing momentum."
In 2019, operating performance improved moderately for the group of 47 P/C insurers Fitch tracks as improvement in the calendar-year combined ratio and modestly higher investment income drove results. Annualized GAAP operating ROAE increased to 7.7%, up from 7.0% in the prior year. Seventeen of the 47 companies reported a double-digit operating ROAE in 2019, down from 18 in the prior-year period.
"A decline in reported catastrophe losses, along with a hardening pricing environment across nearly all commercial lines, led to an improvement in calendar-year underwriting results in 2019," said Christopher Grimes, director, Fitch Ratings.
Insurers exhibited improved core underwriting results in 2019 with the group accident-year combined ratio (excluding cat losses) improving by 1.8 percentage points as the group benefited from a favorable pricing environment in most business lines. Underlying results improved for commercial insurers as well as the reinsurance segment in 2019. Nearly every company in the personal lines group posted improved performance in 2019. However, nearly all of the Florida homeowners' specialists reported deterioration, reflecting elevated loss cost trends and unfavorable reserve development.
Fitch says there is evidence of a broader improvement of pricing and insurance premium rates for most P/C insurers.