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North American P/C re/insurers’ operating earnings continue to fall: Fitch

29th March 2017 - Author: Luke Gallin

A continuation of low investment yields and underwriting deterioration combined with higher catastrophe losses in 2016 to further pressure the operating earnings of North American property/casualty (P/C) insurers and reinsurers, according to Fitch Ratings.

In a new report, international financial services rating agency, Fitch Ratings, reviews the 2016 GAAP results for a group of 43 North American P/C re/insurers. The study shows that during 2016 the group of re/insurers aggregate operating Return On Average Equity (ROAE) declined to 6.6% in 2016, compared with the 7.4% recorded in 2015.

In fact, Fitch claims that the aggregate operating earnings of the group in 2016 declined to its lowest level since 2011, a year when the insurance and reinsurance industry experienced substantial catastrophe losses.

Insured catastrophe losses in 2016 were reportedly the costliest for the last four years at $54 billion, although this is still around half of the $110 billion insured loss recorded in 2011. This highlights just how challenging the current operating landscape is for insurers and reinsurers in North America, as the aggregate operating earnings of the group has declined closer to 2011 levels with just 50% of the insured loss.

Fitch explains that just 10 companies in the group recorded a full-year 2016 double digit operating ROAE, with specialty insurers being the only group to report material ROAE improvements.

“Personal lines and reinsurance produced the strongest operating returns amongst insurers over the last five years; however, reinsurers reported the weakest net premium growth due to pricing competition,” said Christopher Grimes, Director at Fitch.

For the group of re/insurers examined by Fitch insured catastrophe losses increased by more than 50% to approximately $12.6 billion, while prior-period reserve releases, which have been used to bolster weak underwriting performance by some companies, declined by 17% to $7.9 billion in 2016, excluding AIG’s results.

Higher insured losses and lower prior-period reserve releases saw the aggregate calendar-year combined ratio of the group weaken to 96.7%, according to Fitch. Grimes also said that looking forward it’s likely that P/C industry favourable reserve development will diminish further, suggesting efficiency and discipline will remain vital practices for insurers and reinsurers in a challenging marketplace.

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