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Property & Casualty Insurance Rates Will continue to Rise Through 2013

itch Rating Service says property and casualty insurance rates will continue to rise through 2013, producing modest increases in industry net income, but a return to a sustained hard market is considered unlikely.

In a report released Friday, Fitch says that after suffering a period of severe losses in 2011 the “long-awaited shift to positive pricing momentum portends a sharp improvement in 2012 results.”

Fitch projects net income for the P&C industry will increase 90 percent by the end of this year to slightly more than $38 billion from $20 billion in 2011.

Looking further ahead to 2013, net income is predicted to rise 6 percent to more than $40 billion.

Fitch says 2013 results are projected to break-even, but the “chances of a return to true hard market and the strong underwriting profits experienced in the mid-2000’s are remote.”

Modest investment income growth amid a low interest rate environment and a slowdown in pricing momentum are considerable headwinds to an insurer looking to widen profit. Fitch says price improvement is in response to “recent losses rather than a reduction in market capacity, and competitive forces are likely to dampen favorable pricing momentum as 2013 unfolds.”

However, insurance rates are expected to continue to improve through the rest of this year before stabilizing in 2013 after the industry saw an unusual three-year period (2007-2009) of declining written premium volume.

The industry combined ratio of 108.4 in 2011 was the worst deterioration since 2001 due to natural catastrophes that added 9 percentage points to the calendar year loss ratio, the report says.

Fitch says a return to “historical average catastrophe loss experience and modest improvements in current accident-year underwriting experience” would produce a combined ratio of 101.1 in 2012. The combined ratio is projected to come in slightly lower in 2013 to 100.3

While the report’s projections were made using historical averages, James Auden, Fitch’s Managing Director of P&C Insurance, notes in an interview with National Underwriter that this is the middle of the hurricane season and “anything can happen,” which could “change the year end results quite a bit” should a significant catastrophe strike.

Auden says rates are expected to stabilize in 2013, which translates into continued modest to flat increases. He points out that it is difficult to know if that means another soft turn in the market after 2013 since competitive forces still remain in play and, “There is still a lot of capital in the market that needs to be put to use.”

Another measure of profitability, return on surplus, is expected to remain below the long term average of 8.1 percent through 2012 and 2013. Return on surplus for 2012 is estimated to be 6.7 percent and 2013 at 6.9 percent.

Auden says that for the industry to reach the long term average there will have to be a combination of continued light catastrophe years into 2014 plus underwriting rate increases will need to continue.

“To get to the hard market level of 2003-2007, will need a longer period of sustained increase or further shift in rates,” says Auden.

The latest report is one of a series of commentaries from analysts that say the foundations are in place for rate increases to continue.

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