The property and casualty insurance industry is expected to see an underwriting loss for 2009, with no let-up in the soft market through 2010–barring a substantial market shift, Fitch Ratings predicts.

In its recent report–”Review and Outlook 2009-2010, U.S. Property/Casualty Insurance”–Fitch projects the p&c industry will come in with a combined ratio of 101 for 2009 and an accident-year combined ratio estimated at 103.

Fitch continues to give the industry a “Negative” rating despite improvements in the industry's investment portfolio and the lack of severe catastrophe losses.

Julie Burke, managing director and head of North American Insurance Ratings, said during a conference call that last year's move to “Negative” reflected the onset of the economic crisis and its impact on the industry. She said 45 percent of insurers and reinsurers that Fitch rates have been downgraded, and the majority of the insurance groups Fitch rates are either negative or on “Ratings Watch.”

Moving the industry back to “Stable,” she said, would require confidence that the financial crisis has passed and that there is no new impact to insurer earnings. She said this analysis implies that some insurer ratings will need to move to “Negative” before an overall “Stable” rating is given.

James B. Auden, managing director of insurance for the p&c sector at Fitch, said the industry is solidly entrenched in a soft market and this could be a prolonged cycle–though not be as severe as past cycles.

He said Fitch projects that for 2010 the industry will see a combined ratio of 104, with modest gains in net income. Mr. Auden noted that for the industry to return to underwriting profitability, it will need to record a combined ratio of 95.

When asked by National Underwriter about a widely reported assessment by Todd Bault, an analyst with Sanford C. Bernstein, that American International Group has an $11 billion reserve deficit, Mr. Auden said that while he has not seen the report in question, he does believe AIG has suffered a lot of unfavorable developments.

However, because of the government backing of AIG, Fitch is not concerned any deficit will have an impact, he added.

Ms. Burke noted that as AIG's ownership moves back into the private sector, a reserve deficit could have a negative impact on the ratings.

Regarding the reserve picture of the industry as a whole, Mr. Auden said insurers are in a strong position thanks to the hard market of 2003 through 2006. However, as the current soft market plays out, reserves would be scrutinized more closely.

“They are adequate now, but we are watching,” he noted.

Mr. Auden said he believes the current soft market will continue through 2010 as capacity remains strong and competition intense. A severe market dislocation–such as severe catastrophe, major company withdrawal or merger–could profoundly change the market's direction, but he said he does not see that happening in the near term.

Meanwhile, an analyst with Celent said he is even more pessimistic about the industry than is Fitch.

In an interview with National Underwriter, Mike Fitzgerald, senior analyst with Celent–a Boston-based financial research and consulting firm–said he is more negative when it comes to rating the p&c insurance industry, explaining that the issue with this soft market cycle is that there is “too much capacity. That's the problem.”

In a statement, Mr. Fitzgerald said, “the 'Negative' rating outlook issued by Fitch Ratings for U.S. property and casualty is warranted and, in addition to the pricing and demand concerns mentioned in the press release, there are loss and expense pressures which should dampen expectations.”

He added that “on the loss side, the earned premium flowing through results in 2010 will reflect the full effect of the economic downturn and the lower premiums gained throughout 2009. Even given 'normal' loss levels, this earned effect will increase the loss portion of the combined ratio.”

Fitch projected that for 2009, the p&c insurance industry would run a combined ratio of 101, increasing to 104 for 2010.

Price hardening will come after a long soft cycle, Mr. Fitzgerald said, as companies find single-digit returns no longer acceptable. Without a major catastrophe, he explained, there will be no near-term change in insurance market rates. It will take an “act of enlightenment” before insurers end “the long, hard slog of the soft market playing out” today, he told NU.

“On the expense side, written premiums will increase in line with a general economic improvement, but will not recover to the level needed to spread the largely fixed expenses facing insurers in 2010,” he said in his statement. “Most expenses will be fixed because the downsizing actions available to most insurers in 2010 will be limited, since most actions will have already been taken, so 'shrinking to greatness' will not be an option.”

Insurers will also need a pick-up in demand for insurance that has been depressed due to the economic crisis, he told NU. The industry will lag behind the rest of the economy, he suggested, noting that such a pick-up, which would reduce capacity, will not take hold until 2011.

He said that another price driver–reinsurance–has so far not had an impact on the insurance market because primary carriers are absorbing the cost of increased reinsurance rates to avoid the loss of markets.

Insurers have practically wrung-out all they can on the expense side, according to Mr. Fitzgerald, and if they cut further they risk jeopardizing service and not being in a position to respond when the opportunity comes to grow, he said.

Mr. Fitzgerald added that he doesn't expect a shift to a hardening market to begin until after the first half of 2010 at the earliest, and may become more entrenched by the beginning of 2011.