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P/C insurers at risk from pandemic, cat losses in H2: Fitch Ratings

1st October 2020 - Author: Charlie Wood

While US property-casualty insurers’ results in the second half of 2020 will continue to be impacted by COVID-related insured losses and premium volume declines, significant hurricane and wildfire losses are likely to emerge as the greater threat to profitability, according to Fitch Ratings.

Fitch-RatingsFitch says the full-year 2020 combined ratio will likely move toward 100% versus 98% at midyear, due to further recognition of pandemic-related losses in casualty segments.

However, these are likely outpaced by natural catastrophe losses, as third-quarter California wildfires and Hurricanes Laura and Sally could generate combined insured losses of over $20 billion.

Overall, Fitch says the fundamental sector outlook remains negative due largely to earnings uncertainty.

While a review of industry 1H20 statutory financials shows that P/C insurers have absorbed insured losses from the pandemic, the largest initial effect of the pandemic on was reportedly the unrealised losses on equity investments, punctuated by the market selloff in 1H20.

Meanwhile, investment market volatility led to a 25% Year-on-Year drop in net income from lower investment income and a larger change in realised capital gains.

This contributed to a 3.3% reduction in policyholders’ surplus at midyear from record levels reported at YE 2019, as did an $80 billion period-to-period shift in unrealised investment gains/(losses).

Fitch adds that the pandemic has introduced considerable near-term uncertainty for underwriting performance that is expected to extend into 2021.

The H1 industry loss ratio declined by 1.4 points despite substantial pandemic-related losses, driven by rising premium rates in the broader commercial lines sector, as well as reductions in economic and social activity that boosted underwriting performance in personal auto insurance.

Loss ratio improvement was largely offset by a rare 1.0-point increase in policyholder dividends.

Fitch believes premium revenues will show effects from the pandemic over the next 12-18 months.

The workers’ compensation segment showed the largest direct written premium decline in H1 as this segment has experienced decreasing prices in response to very strong underwriting results.

Meanwhile, the personal auto line had modest direct premium declines, with further premium return actions in H2 likely to sustain this trend.

However, Fitch says other commercial segments will likely see continued growth based on recent acceleration of rate increases.

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