The U.S. property/casualty industry faced unprecedented catastrophe losses during the year along with broadly inadequate pricing causing operating earnings to decline materially in 2011. The aggregate group reported an operating profit of $22.7 billion in 2011 versus a $34.9 billion operating gain in the previous year.
The group's operating return on average equity (ROAE), which excludes realized gains and losses from earnings, fell to 4.4% in 2011 from 7.5% in the prior year. Only four companies in the group reported an operating ROAE above 10% in 2011 versus 20 companies a year ago.
Weaker earnings and reduced investment gains led to a modest 5.8% increase in shareholders' equity to $523.8 billion for the group at year-end 2011, despite a 32% reduction in share repurchase activity in 2011 compared with the prior year.
Recent favorable pricing movement is encouraging, although questions remain on the sustainability of this new trend. Continued premium growth and a hope for reversion toward average historical catastrophe loss experience will promote profit improvements in 2012. However, depressed investment yields and competitive market conditions will likely prevent any intermediate term return to market-wide double-digit returns on capital.
Fitch believes that a more meaningful removal of capital or underwriting capacity is necessary before insurance pricing can move to levels corresponding with the strong accident year returns produced in the middle of the last decade.