First-half 2010 operating profits declined for most publicly traded property/casualty insurance companies that Fitch Rating follows, according to 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 percent of earned premium compared with 2.6 percent 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.
Fitch predicts that looking forward, profitability will continue to be pressured by limited premium growth and weaker accident year loss ratios in a 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.
Source: Fitch Ratings, www.fitchratings.com
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