NU Online News Service, March 15, 11:09 a.m. EDT

Until another significant event occurs to take a large bite out of industry capital or underwriting capacity, a true hard market will remain elusive, says Fitch Ratings.

In a report on property and casualty insurers' year-end financial results, Fitch says it believes a “meaningful removal” of capital is needed “before insurance pricing can move to levels corresponding with the strong accident-year returns in the middle of the last decade.”

“Generating an operating return on equity (ROE) above 10 percent remains a challenge in the current marketplace,” Fitch adds.

Operating ROE in 2011 was 4.4 percent compared to 7.5 percent in 2010.

The rating agency, which based its report off the full-year results of 47 publicly traded insurers and reinsurers, says that “questions remain on the sustainability” of recent favorable pricing momentum.

Currently, market segments hit hardest by recent catastrophes are seeing the most price improvements, such as property reinsurance, primary commercial property, homeowners in catastrophe-affected areas, and workers' compensation.

The group of 47 companies experienced a 35 percent decline in net income in 2011, according to Fitch. Without the earnings of American International Group Inc. and Berkshire Hathaway, the decline was 60 percent.

Profits in 2011 were still augmented by favorable prior-year reserve development, as large catastrophe-related losses in 2011 from events in Japan, Thailand, New Zealand, Australia and the United States were $30.8 billion—more than 11 percent of $274 billion in earned premiums last year.

Reserve redundancies reduced the group's loss ratio by 3.3 points, compared to 2.5 points in 2010, reports Fitch.

Of all industry segments within the companies followed in the report, the combined ratio was highest from a group of 13 reinsurers. The ratio was up 23.6 points to 115.5 in 2011. Reinsurers posted a $1.7 billion operating loss in 2011 compared to a gain of $4.5 billion in 2010.

Personal lines insurers saw operating income drop 35 percent in 2011 to $1.9 billion, says Fitch. This group of six companies reported an aggregate combined ratio of 99.9 in 2011, which was 3.4 points higher than 2010.

Results for specialty commercial insurers were the best in the Fitch report. Seven of 12 specialty insurers included in the report posted a combined ratio below 100 in 2011. The group's aggregate combined ratio was 95.7 in 2011, up from 91.5 in 2010. Operating results decline 37 percent to $1.6 billion. Four companies (American Financial Group, Assurant, HCC Holdings and RLI Corp.) reported underwriting profit.

Special Reports /

Fitch: Another Capital-Draining Event Needed for True Hard Market

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