North American P&C Sector Exhibits Steady Performance

Fitch Ratings reported that higher investment income and modestly weaker calendar-year underwriting margins kept operating performance for North American property and casualty (P&C) insurers steady during the first half of 2019. Compiling generally accepted accounting principles midyear results for a group of 47 companies revealed a 6 months aggregate combined ratio of 94.7 percent relatively unchanged from 94.3 percent for the same period in 2018.

Recent re/insurer earnings call commentary frequently highlights benefits from improved pricing in numerous segments. However, underlying loss ratios in aggregate were virtually unchanged period to period. Changes in the group's combined ratio were more greatly influenced by reductions in favorable loss reserve development, offset by lower expense ratios and catastrophe-related losses.

"Improved pricing in many product lines is likely to support performance through the second half of the year," said Christopher A. Grimes, director of insurance at Fitch. "Overall improvement in full year results will again hinge on second half catastrophe experience."

The last 2 years were affected by large fourth-quarter catastrophe losses from hurricanes and California wildfires. Hurricane Dorian, the first major hurricane of 2019, struck the Bahamas on September 1 and is expected to have a meaningful impact on results for the second half of 2019. However, it will take some time for damage estimates to emerge, and uncertainty remains regarding subsequent tropical storm events.

Operating earnings for the group expanded by 4 percent for the period versus the first half of 2018. Operating return on average equity (ROAE) was unchanged at 8.3 percent in the first half of 2019. Also, 23 of the 47 companies reviewed reported an operating ROAE above 10 percent for the period.

Separately, growth in investment earnings, particularly unrealized gains on equities and fixed income holdings, strongly contributed to an 11 percent increase in the group's shareholders' equity to $748 billion at midyear 2019 from $674 billion at year-end 2018, helped also by strong net earnings. More volatile equity market performance and a potential for greater second-half share repurchase activity may likely reduce the pace of book value gains over the remainder of the year.

Fitch maintains a stable sector and rating outlook for the US P&C sector.