Fitch Ratings expects Australia and New Zealand insurer earnings to remain steady next year, with strong competition constraining premium rate increases and underwriting margins.

Investment yields are expected to remain at historically low levels, insufficient to support earnings growth until interest rates rise.

“Insurers have room to reallocate more investments to growth assets and higher-yielding fixed-income securities without compromising their credit profiles, because they maintain conservative portfolios dominated by highly rated fixed-income securities,” Fitch says.

The ratings agency has recorded a stable outlook for the sector, supported by strong capitalisation levels and solid earnings, but warns of potential risks to the credit profile if there is a severe economic slump or persistent and large natural catastrophes.

Australian reinsurance premium rates in property are expected to remain flat to lower, due to competition and surplus capital, despite reinsurers recording a 71% loss ratio in the year to September after averaging 51% in the three previous corresponding periods.

“The recent earthquake in New Zealand may cause a spike in premiums covering earthquake peril [in 2017], but as long as capacity remains strong we expect competition to be attracted to the higher returns that would follow,” Fitch says.

New Zealand’s annual catastrophe losses averaged $NZ56 million ($53 million) over 49 years to September 30 this year, excluding the 2011 and 2016 earthquakes. The average climbs to $NZ671 million ($642 million) if those events are included.

The agency forecasts Australia will report solid GDP growth of 2.9% this year and next year, while New Zealand’s GDP is expected to expand 2.8% this year and 2.7% next.

“However, household budgets constrained by high financial leverage and softer wage growth may weaken demand for insurance,” Fitch says.