Fitch: First-Half 2010 Operating Profits Decline for Most U.S. P&C Insurers

NEW YORK--(BUSINESS WIRE)--First-half 2010 operating profits declined for most companies in Fitch's universe of 50 publicly traded property-casualty (P&C) insurers, according to Fitch Ratings in a new report. However, the $16.2 billion of aggregate net earnings reported by these companies represents a substantial improvement versus the prior year due to more favorable investment results, particularly among some of the larger companies in Fitch's universe.

Fitch's review of first-half 2010 GAAP results reported by P&C insurers showed that unusually high catastrophe losses and the deteriorating commercial insurance pricing environment combined to more than offset the continuing benefit of favorable loss reserve development, resulting in lower underwriting margins and a corresponding decrease in operating profitability for most companies.

For the combined group, favorable loss reserve development in the first six months of 2010 represented 3.7% of earned premium compared with 2.6% during the first half of 2009. As a result, aggregate annualized operating returns on average equity for each sub- group appear meaningfully lower for the current accident year than they are do on a calendar year basis, which already fell significantly short of providing an adequate return on capital for most companies.

Looking forward, profitability will continue to be pressured by limited premium growth and weaker accident year loss ratios in a stubbornly competitive insurance market with a weak economic recovery and low investment yields. Also, Fitch believes that reserve redundancies that have enhanced earnings for some time have approached exhaustion for many insurers. A reduced ability to mask weaker current year results with favorable prior period development may be a contributing factor towards a future shift in pricing trends.

With profitable growth opportunities scarce and GAAP underwriting leverage at relatively low levels, the pace of share repurchases has, not surprisingly, accelerated. Fitch estimates that companies in Fitch's universe repurchased roughly $8.4 billion of common equity in the first half of 2010 versus $1.2 billion in the previous period. Fitch does not expect share repurchases to create downward rating pressure for most companies assuming individual rated entities' financial leverage and insurance subsidiary capital adequacy levels remain within Fitch's rating rationale assumptions.

'Property/Casualty Insurers' Mid-Year 2010 Results Review' is available at 'www.fitchratings.com' under the following headers:

Sectors >> Financial Institutions >> Insurance >> Research

Additional information is available at 'www.fitchratings.com'

Related Research: Property/Casualty Insurers -- Mid-Year 2010 Results Review

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=551365

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