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Fitch Report: P/C Insurers' Midyear 2010 Results Review


Posted on 27 Aug 2010

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A report complied by Fitch Ratings finds that the U.S. property/casualty insurance industry's performance in the first half of 2010 was affected by unusually high catastrophe losses that combined with the deteriorating pricing environment to more than offset the continuing benefit of favorable reserve development. The net result was modest deterioration in underwriting results and a corresponding decline in operating profitability for most companies.

The report is a compilation of mid-year GAAP 2010 financial results for Fitch Ratings’ universe of 50 publicly traded (re)insurers. The analysis examines results for the group on the whole and various industry subsectors, comparing relative performance and considering the primary drivers of profitability and capital formation for the year.

While the industry’s aggregate combined ratio of 97.1% for the first six months of 2010 remains solid from a historical perspective, Fitch notes that the combined ratio for the current accident year exceeded 100% for the first half of 2010, which suggests that underwriting margins will shrink further if the benefit of loss reserves decreases as Fitch expects.

Although operating profits (excludes realized investment gains/losses) for most companies in Fitch’s universe decreased versus the prior year period, the group’s $16.2 billion of aggregate net earnings represented a substantial improvement versus the prior year due to more favorable investment results, particularly among some of the larger companies in Fitch’s universe. Additionally, the first half of 2010 saw continued unrealized investment gains, which led to a substantial increase in GAAP equity bases.

For most companies, GAAP equity currently exceeds levels reported at year-end 2007, before the tumultuous events of 2008 and early 2009 caused most insurance market participants to suffer significant realized and unrealized investment losses.

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. In general, Fitch views measured share repurchases as a more prudent use of capital rather than funding acquisitions or premium growth in a softening rate environment.

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.

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.