Fitch Ratings has revised its outlook for the underlying fundamentals of the U.S. property/casualty (P/C) insurance sector to negative from stable (sector outlook). 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.
Fitch’s outlook for ratings levels in the sector remains Stable (Rating Outlook); however, Fitch expects to revisit the Rating Outlook again as its analytical work related to the coronavirus pandemic advances.
Fitch is in the process of reviewing its insurance ratings relative to assumptions with respect to the impact of the coronavirus pandemic on capital markets volatility, interest rates, market liquidity and insured claims/reserves. Fitch will compare the pro forma profile of an insurer relative to existing ratings sensitives established by the agency. If sensitivities are notably breached, ratings will be placed on Rating Watch Negative or downgraded. Fitch is at the early stages of this review.
Currently, Fitch believes that the ratings of U.S. P/C insurers will be less impacted by the coronavirus pandemic than those of life and health insurers, which are sectors with Rating Outlooks that were recently revised to Negative by Fitch. However, Fitch’s Stable Rating Outlook for the insurance sector does not imply that no ratings in the sector will be impacted by these ongoing events.
Ratings that currently have a Positive Rating Outlook across all insurance sectors are being prioritized during the review process. In addition, Fitch expects the ratings of some P/C insurers will be placed on Rating Watch Negative. Near-term downgrades are possible, but currently viewed as unlikely.
The U.S. P/C sector benefits from a very strong capital position. The industry reported an underwriting profit for the last two consecutive years, and an estimated 10%+ growth in surplus in 2019 on stable earnings and higher unrealized investment gains. New challenges to performance arise in 2020 with the coronavirus pandemic and recent shifts in investment market and economic conditions. Companies with significant allocations to equity investment will see capital declines in the next quarter and investment income will decline YoY with lower bond yields.
Claims experience from these events 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. Insurers have benefited from favorable recent premium rate movement across the broader commercial lines spectrum. A move towards an economic recession could alter premium growth trends through declines in insured exposures or renewed competitive pressure that restricts pricing momentum.