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.