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U.S. property/casualty remains solid

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The U.S. property/casualty sector got some good news from S&P Global Ratings Wednesday, which said that the industry appears to be on solid ground.

“U.S. property/casualty insurers have been dealt a good hand,” the ratings agency wrote in its 17-page report. “The cards are unfolding in the form of benign catastrophe events and improving frequency loss-cost trends in recent years, with some exceptions. With that virtuous cycle, excess organic capital has been growing steadily and there has been no shortage of reinsurance/third-party capital.”

Prolonged low interest rates are prompting insurers to focus on maintaining underwriting profitability, S&P said, while investment portfolios remain conservative despite historically low yields.

“Improving data analytics and climbing client retentions with better loss experience in insurer portfolios somewhat alleviate our concerns regarding softening pricing,” S&P Global Ratings credit analyst Tracy Dolin said in a statement.

Although there will always be exceptions, S&P said it does not expect the overall creditworthiness of the sector to change in the coming year. Any disruption to the sector would most likely come from a confluence of unforeseen events that would change the risk perception.

Digitalization and the sharing economy represent new challenges and opportunities for the insurance sector, S&P said, including evolving client interfaces and policyholder requests for insurance products. The ratings agency said that a peer-to-peer business model is being developed, though it is not yet a formidable competitor.

“Technology and automation make small commercial business a more attractive segment for entry,” the report said, “although the market is already saturated. It also seems like every insurer wants to get on the cyber insurance bandwagon, but do they understand the risk?”

S&P said that its base-case scenario sees the 10-year Treasury rate starting to steepen to 2.9% in 2017 and 3.4% in 2018 from 2.3% in 2016, which is still less than historical levels of 4%-5%. The company believes that the disappointing jobs report all but erased chances of a Fed interest rate hike in June.

After another round of data, which will likely indicate that the economy is still on track for moderate growth and once the uncertainty over the United Kingdom's potential withdrawal from the European Union has passed, S&P said it expects the Fed to raise the Fed Fund rate in July by 25 basis points, which it said does not constitute a tectonic shift for insurers.

“Despite both the historically low interest rates and the P/C sector's focus on underwriting profitability,” the report said, “we still expect investment income to remain the largest contributor to earnings in 2016. Underlying underwriting income turned positive in 2012, and it continues to lag net investment income.”

While a Category 3 or higher hurricane has not hit U.S. soil in several years, S&P said the frequency of small weather-related events has been on the rise. Over the past three months Texas hailstorms have been more frequent, effecting mostly personal autos and homes.

S&P noted that, according to the Property Claims Services unit of Verisk Insurance Solutions, the industry recognized about $3.8 billion of insured catastrophe losses through the first three months of 2016, surpassing the 10-year average annual loss of $3 billion for the same period.

In addition, the Insurance Council of Texas estimates about $2 billion of insured losses pertaining to the three San Antonio hailstorms in April.

“Nevertheless,” the report said, “we still expect a normal level of catastrophes during 2016, representing 4%-5% of the industry's combined ratio.”