Insurance Industry

Challenges Ahead for Insurers and Brokers

Fitch Ratings expects deteriorating earnings for insurers and only modest improvements for brokers.
By: | December 16, 2015 • 3 min read

Fitch Ratings expects a challenging year for U.S. property/casualty insurers in 2016, but anticipates that ratings will remain stable.

The majority of ratings in the sector is not expected to change in the next 12 to 18 months, according to Fitch’s “2016 U.S. Property/Casualty Insurance Outlook Report.”

Near-term earnings deterioration is anticipated, but a shift toward sharply inadequate premium rates or profit levels approaching operating losses is unlikely, the report stated.

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year.” — James B. Auden, managing director, Fitch Ratings

“Market conditions for U.S. property and casualty insurers will be less favorable in 2016 and overall industry performance will likely decline next year,” said James B. Auden, managing director, Fitch Ratings. “However, statutory capital adequacy will remain strong.”

“The U.S. property/casualty insurance industry faces underwriting challenges, particularly in the commercial lines segment, as a softening premium environment will promote future deterioration in underwriting results,” he said.

“Performance for the P&C universe as a whole is anticipated to deteriorate in 2016 toward a break-even underwriting result.

“P&C underwriters face greater difficulties in generating adequate returns on capital beyond underwriting and pricing,” Auden said.

“The investment contribution to earnings continues to decline as falling portfolio yields reduce investment income, and investment gains reported in the last three years are less likely to continue given economic growth prospects and current equity valuations.”

Factors that promote future movement toward a negative industry outlook include large events that significantly affect the industry’s capital position such as a large natural catastrophe, discovery of adverse claims experience, reserve deficiencies or a large market downturn, Auden said.

“Shifts in underwriting trends resulting in prolonged underwriting losses for insurers could also lead to consideration of negative sector outlooks,” he said.

Outlook for Brokers

As for U.S. insurance brokers, revenues and earnings are likely to improve only modestly in 2016, according to Fitch.

Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

“Continued flat or declining premium rate changes in commercial insurance segments and a soft reinsurance market will pressure brokers’ 2016 organic growth,” said  Gretchen K. Roetzer, an analyst and director in Fitch’s insurance group.

“However, global brokers’ revenues from diverse product and geographic platforms, including health care and benefits, should help offset these headwinds.

“Strong retention and insured exposure growth from a slowly improving economic environment will also promote revenue expansion,” added Roetzer, who has analytical coverage responsibilities for property/casualty reinsurance companies and insurance brokers.

Fitch’s “2016 U.S. Insurance Broker Outlook” report said that near-term operating performance and balance sheet strength support a stable credit ratings outlook for the brokers it covers.

Profit margins are projected to remain stable with modest improvement due to reduced expenses, said Roetzer. “On average, profit margins were relatively flat in 2015 with two of the five publicly traded peers in Fitch’s peer group reporting reduced margins in part from one-time items,” she said.

“Private equity firm interest in brokers remains strong, though banking institution interest in insurance broker diversification has waned,” said Roetzer.

“We expect brokers to continue supplementing organic revenue growth with selective acquisitions.”

Roetzer said that lower rates on commission-based business would affect profit margins and organic growth.

“We expect brokers to continue supplementing organic revenue growth with selective acquisitions.” — Gretchen K. Roetzer, analyst and director, Fitch Ratings insurance group

“This would impact certain brokers more than others based on the mix of business, commission versus fee-based, and depending on the broker’s geographic diversity,” she said.

“A poor economy can affect clients’ willingness and ability to spend resources to outsource or conduct projects, or hire new employees,” she added. “Interest rates may also be pressured and cause lower than normal rates. All of these factors can affect brokers’ revenues and growth.”

Financial leverage increased for several organizations, including the Big Three brokers (Aon, Marsh and Willis) while interest coverage remains favorable and supportive of current ratings levels, the report noted.

There was some uncertainty about Willis Group Holdings, due to its proposed merger with Towers Watson.  Fitch noted that the merger’s closing still needs approval by Towers Watson’s shareholders.

Fitch expects debt to EBITDA for most of the peer group to improve moderately in 2016 if debt levels remain stable or even decrease modestly with various debt maturing, and if EBITDA grows as anticipated.

The firm anticipates few rating changes over the next 12 to 18 months, despite expecting improvement in some credit fundamentals in 2016.

Steve Yahn was a freelance writer based in New York. He had more than 40 years of financial reporting and editing experience. Comments can be directed to [email protected]

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The R&I Editorial Team can be reached at [email protected]