Fitch: P/C Profits Decline Sharply in First-Half 2008

August 28, 2008

The U.S. property/casualty insurance industry reported mixed results in the first six months of 2008, according to a new Fitch report. Profitability declined due to poor investment performance and deteriorating accident-year underwriting results, which were partially offset by favorable prior years’ loss reserve development.

While competitive factors are likely to promote further deterioration in rates, Fitch expects most insurers in its publicly traded universe to post a calendar-year underwriting profit in 2008, while accident-year results will shift closer to breakeven, assuming catastrophe activity in the second half of the year approximates historical averages.

Fitch continues to expect that insurers’ overall profits will decline in 2008 and that the industry will struggle to produce an adequate return on capital, which Fitch estimates for most insurers as a net return on average equity of between 11 percent and 12 percent.

Fitch compiled GAAP earnings release and 10-Q filing data from publicly traded property/casualty insurers in the debt rating universe as well as several other insurance organizations of interest, to evaluate first-half 2008 performance.

Net income for this group of 50 property/casualty organizations declined by 95 percent in the first six months of 2008 due largely to pre-tax realized investment losses of more than $17 billion. The net income return on equity for Fitch’s universe dropped to 0.9 percent in the first half of 2008 from 15.9 percent in first half of 2007.

Reserve development for the insurers in Fitch’s publicly held insurer universe remained favorable in 2007. Fitch estimates that reserve releases trimmed 2.9 combined ratio points off of first half of 2008’s underwriting results. The calendar year aggregate combined ratio of Fitch’s universe was 91.7 percent, which corresponds with an accident year combined ratio of approximately 95 percent. These results compare to calendar and accident year results of 87 percent and 89.4 percent, respectively, in the year-ago period.

A number of insurers also experienced declines in GAAP common equity during the first half of the year (1H08), largely as a result of significant unrealized investment losses following equity market declines and widening credit spreads that caused unfavorable mark-to-market adjustments in insurers’ and reinsurers’ investment portfolios.

To access this Special report, “Property/Casualty Insurers’ Mid-Year 2008 Results Review” visit: the Fitch Ratings Web site, at under Financial Institutions > Insurance > Special Reports.

Source: Fitch Ratings

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