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Earnings for U.S. property/casualty insurers were down on catastrophe losses in the 2010 second quarter, but their capital positions remained solid, according to a report issued by Moody's Investors Service.

In a special report titled "U.S. P&C Insurers' 2Q10 Earnings Down on Catastrophe Losses; Capital Still Solid," Moody's said the results were not surprising.

"The results were generally consistent with expectations, as underwriting margins continued to be pressured by the competitive commercial p&c market and a slow economy," said Moody's analyst Ben Goldberg in a statement.

Second-quarter net income for this year was below that of the same period last year, affected by sizable losses related to hailstorms, tornadoes and flooding in the Midwest and South of the country. The results were offset to some degree by continuing positive reserve development.

"In aggregate, net written premiums were flat versus the prior-year level, with some companies showing modest reductions, while others reported positive growth," Goldberg said.

He noted in particular that some insurers are seeing a weakening in terms and conditions. This can potentially be more problematic than rate inadequacy given the limited transparency of policy language and the difficulty of assessing the long-term impact of changing terms, he said.

Insurers' equity capital increased on average five percent during the first half of the year due to rebounding investments and net income, offset by ongoing share repurchases.

Investment losses declined from the high levels of 2008 and 2009, Moody's said. Share buybacks were up almost 5 times over the prior-year period, reflecting continued earnings, improved capital positions and limited growth prospects in a slowly recovering economy.

"The majority of P&C carriers do not have sizable exposures to problematic asset classes such as real estate-related investments, where risks remain elevated," said Moody's analyst Bruce Ballentine.

He noted that, on average, 25 percent of P&C insurers' investment portfolios are in municipal bonds and the portfolios generally are of high quality.

Operating margins in the second half of 2010 are expected to be pressured by the soft pricing environment, lower investment yields, and swings in catastrophes and reserve development.

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