2008 P-C Profits Will Drop, Says Fitch

NU Online News Service
March 26, 4:16 p.m. EDT

The U.S. property-casualty insurance and reinsurance industry’s profits will drop off this year, and most firms’ net return on average equity will not exceed 12 percent, Fitch Ratings said today.

While the industry reported strong results in 2007, they nevertheless fell short of the record net profits and underwriting performance of 2006, Fitch reported.

Fitch said that for the second consecutive year underwriting results benefited from benign natural catastrophe activity and positive loss reserve development that combined to partially offset the adverse impact of a deteriorating insurance pricing environment.

While competitive factors are likely to promote further deterioration in rates, Fitch said it expects insurers to post a more modest underwriting profit in 2008.

The rating service said it anticipates 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 and reinsurers as a net return on average equity of between 11- and 12 percent.

Fitch compiled GAAP earnings release and 10-K filing data from publicly traded p-c insurers in its debt rating universe, as well as several other insurance organizations of interest, to evaluate full-year 2007 performance.

Net income for the group of 50 p-c organizations Fitch examined declined by 10 percent in 2007. The net income return on equity for Fitch’s universe dropped to 13 percent in 2007 from 16 percent in 2006, which still represents an acceptable rate of return on capital, Fitch said.

Reserve development for the insurers and reinsurers in Fitch's publicly held insurer universe remained favorable in 2007. Fitch estimates that reserve releases trimmed 2.1 combined ratio points off of 2007 underwriting results.

The calendar-year aggregate combined ratio of Fitch's universe was 89.3, which implies an accident-year combined ratio in the low 90s. These results compare to calendar- and accident-year results of 84.7 and 85.5, respectively, in 2006.

The detailed report is available at www.fitchratings.com.