U.S. Property/Casualty insurers' operating performance improved significantly in the first half of 2012, according to Fitch Ratings in a new report.
The aggregate combined ratio of 47 publicly traded property/casualty (re)insurers improved to 96.2% through mid-year 2012 from 107.9% in the prior year. This improvement was driven largely by sharp reductions in catastrophe-related losses, which declined to approximately 4% of the group's earned premium from 16% in the first half of 2011. Core loss ratio improvements from recent premium rate increases and other underwriting actions was a more modest factor contributing to the year-to-year change in underwriting results.
A large number of (re)insurers returned to generating underwriting profits in the first half of 2012. Underwriting results improved for all but six companies in Fitch's universe of (re)insurers in the first half of 2012.
Reinsurance specialists experienced the sharpest turnaround in performance of any subsegment, as there have been no large catastrophe loss events in 2012 of the magnitude of the earthquakes and floods that took place in 2011. Regional underwriters continue to post underwriting losses and weaker earnings due to several inland-storm related losses and inadequate pricing.
The aggregate group reported an operating profit of $22.4 billion through mid-year 2012 versus a $10.2 billion operating gain in the previous year's first half. The group's operating return on average equity (ROAE), which excludes realized investment gains and losses from earnings, grew to 8.5% in the first half of 2012 from 4.1% in the prior year. Seventeen companies in the group reported an operating ROAE above 10% thus far in 2012 versus only three companies a year ago.
Shareholders' equity grew by 5% for the group since year-end 2011, as earnings growth was coupled with higher unrealized gains. Share repurchase activity declined modestly relative to first-half 2011, as underwriting opportunities have marginally improved. Underwriting leverage, measured by annualized first-half net earned premiums divided by common equity, declined modestly year-over-year to 0.5x.
Commercial line pricing improvements have been better than anticipated and are likely to continue through year-end 2012 and into early 2013. In the longer term, Fitch believes that competitive forces will eventually promote a shift back toward stabilizing rates, and a return to the broad hard market and strong operating performance of the mid-2000s remains unlikely.
The full report, 'U.S. Property/Casualty Insurers' Mid-Year 2012 Financial Results' is available at 'www.fitchratings.com' under the following headers: