Rating agency S&P has maintained its stable outlook on the US property and casualty (P&C) sector going into 2020, with strong capitalisation and pricing momentum offset by weakening reserves and concerns around loss emergence.
Capital in the P&C industry keeps reaching record highs, with analysts estimating that US insurers had a 20% risk-based capital buffer as of 2018, up from 9.5% in 2017.
Overall industry surplus levels similarly peaked at $822.4 billion in September 2019, although S&P largely attributes this capital growth to unrealised gains of $50 billion, versus unrealised losses of $45 billion in 2018.
While headline pricing movements have been positive recently, the firm also believes that the industry has made more fundamental adjustments to its underwriting standards.
“To harden rates, there has to be an impetus, and in this case the industry points to ‘social inflation,’ not replenishment of capital,” said S&P Global Ratings credit analyst Tracy Dolin.
“Pricing complacency may be the more immediate yet less palatable impetus for this hardening pricing cycle, one that we believe will continue to play out into 2020.”
On the other hand, continued reserve releases continue to be a concern, and S&P expects to see more slippage of reserve strengthening on a by-line basis even as aggregate release remain positive into 2020.
Share buyback activity was subdued during 2019, with the sector repurchasing approximately $4.1 billion of shares during the first nine months of the year, compared with $4.8 billion for the same period in 2018, and $11.7 billion in 2017.
Insurers also are retaining a larger proportion of their net earnings in their operating companies with a payout ratio of 51% through nine months in 2019, slightly up from 48% in 2018 but well below the 10-year average of 130%.
S&P forecasts that the number of ratings upgrades and downgrades in the US P&C sector will be roughly equal over the next 12 months.
As of year-end 2019, 85% of P/C insurers rated by S&P had stable outlooks, 7% had positive outlooks, 5% had negative outlooks, and 2% were placed on CreditWatch negative.
