Fitch Says Lower Investment Yields Pressure Insurers

NU Online News Service, Aug. 26, 2:28 p.m. EDT

Insurers' uncertainty over future performance of their loss-riddled investment portfolios will increase their demand for underwriting profits to meet earnings objectives, a rating service said.

In a report titled "Property/Casualty Insurer Investment Risk and Performance," Fitch Ratings in Chicago said that in order to achieve return objectives in the future, there will need to be "a higher imperative for insurers to produce strong underwriting profits."

Fitch noted that in 2008 investment-related risk moved to the forefront for United States property and casualty insurers "as economic turmoil promoted a sharp, unfavorable turn in asset performance."

Investment losses and asset exposures "have become more prominent contributing factors" in negative rating actions taken by Fitch for insurers, the firm said.

The report noted that while p&c insurers were less affected by the economic downturn because they had less exposure to mortgage-backed securities and other derivatives, the industry still suffered from stock and bond market declines, and other factors led to "rare negative total returns on investments" for insurers in 2008 and sharp declines in profitability and policyholders' surplus.

The 2008 investment results were "greatly unfavorable relative to long-term historical results," Fitch said.

Companies that experienced the highest investment losses held above-average positions in common equities or were multiline insurers with asset allocations similar to life insurers. These companies had higher mortgage and structured securities concentration, Fitch noted.

Insurers have shifted their assets "moderately to a more defensive position." However, these changes, while reducing volatility, bring lower investment yields, and coupled with other economic factors will contribute to lower earnings, said the rating firm.

A copy of the full report is available at www.fitchratings.com.