NU Online News Service

Continuing solid pricing will lead to strong property-casualty underwriting profits this year, according to a new report from Fitch.

The U.S. property-casualty insurance industry reported record net profits in 2006.

Fitch said the good results were caused by benign natural catastrophe activity, positive loss reserve development and a favorable insurance pricing environment that remains despite recent market softening in many noncatastrophe-affected segments.

Competitive factors will likely promote further deterioration in rates, particularly in noncatastrophe-exposed lines, according to the rating from.

But Fitch said it expects insurers to post a strong underwriting profit in 2007, assuming that incurred catastrophe losses approximate historical average levels, and that the impact of adverse reserve development is either modestly favorable or largely neutral.

Concurrently, preliminary forecasts for Atlantic seasonal hurricane activity support an above-average probability of a major hurricane landfall in the United States in 2007, which could provide a litmus test for the industry’s ability to adapt, Fitch said.

“Organizations that fail to demonstrate that they have reacted to greater capital exposure to catastrophe losses are likely to experience negative rating actions, especially if this failure is illustrated by large insured losses from 2007 natural catastrophes,” the report asserted.

Fitch has drawn several conclusions from insurers’ year-end 2006 operating results.

First, underwriters’ overall strong underwriting results reinforce Fitch’s previously held contention that although pricing has softened in most lines, rates remain at levels more than adequate to support attractive underwriting returns.

Underwriting results improved significantly for the publicly traded companies covered by Fitch in aggregate in 2006 relative to the prior year, and net income for the group more than doubled.

“Each of the 13 reinsurers in our universe achieved an underwriting profit in 2006 and reported healthy operating profits reflected by operating returns on equity that ranged from the mid-teens to the high 20%’s,” the report stated.

In contrast, only one reinsurer (Arch Capital) reported an underwriting profit in 2005, and nine of these 13 companies reported a net operating loss for the year.