Investment declines and deteriorating accident-year underwriting results dropped U.S. property-casualty insurers' profits at the half-year mark, but negative impacts were partially offset by favorable prior years' loss reserve development, a rating firm said.

New York-based Fitch Ratings reported a number of insurers also experienced equity declines in the period, 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.

Net income for the group in the Fitch report "declined precipitously" to $1.8 billion from $33 billion in the first half last year. Most of the drop in profits was the result of investment losses of $17.6 billion, of which $12.2 billion was attributed to American International Group.

But even excluding AIG, Fitch found the group's aggregate net income still fell almost 40 percent to $15 billion from $24.9 billion last year.

Fitch said that while competitive factors are likely to promote further deterioration in rates, the firm expects most publicly traded insurers it tracks to post a calendar-year underwriting profit this year.

The firm also looks forward to seeing accident-year results shift closer to breakeven, assuming that catastrophe activity in the second half of the year approximates historical averages.

Insurers' overall profits will decline in 2008, said Fitch, and the industry will struggle to produce an adequate return on capital, which Fitch estimates for most (re)insurers as a net return on average equity of between 11 percent and 12 percent.

The Fitch report was based on GAAP earnings release and Securities and Exchange Commission 10-Q filing data from publicly traded property-casualty insurers in its debt rating universe as well as several other insurance organizations of interest.

Net income for this group of 50 p-c firms declined by 95 percent in the first six months due largely, Fitch said, to pre-tax realized investment losses totaling more than $17 billion. The net income return on equity for Fitch's universe dropped to 0.9 percent in the first half from 15.9 percent in the comparable 2007 period.

Reserve development for the re(insurers) remained favorable in 2007, Fitch said, and its analysts estimate reserve releases trimmed 2.9 combined ratio points off of this year's first-half underwriting results.

The calendar-year aggregate combined ratio of firms Fitch studied was 91.7, which corresponds with an accident-year combined ratio of approximately 95. These results compare to calendar- and accident-year results of 87 and 89.4, respectively, in the year-ago period.

Combined earned premium revenue for the group was $129 billion.

Fitch's Special report, "Property/Casualty Insurers' Mid-Year 2008 Results Review" is online at www.fitchratings.com under Financial Institutions > Insurance > Special Reports.

Special Reports /

P-C Sector 6-Month Results Mixed, Says Fitch

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