Fitch Ratings expects property/casualty insurers to report improved operating results this year, following a period of heavy catastrophe-related losses and weak earnings in 2011. However, a continuation of depressed investment yields and competitive market conditions will likely delay a recovery to marketwide double-digit returns on capital.

The deterioration of insurer operating results last year reflected not only the impact of heavy catastrophe-related losses (notably the Japan earthquake and numerous inland storms in the U.S.), but also a continuation of weak P/C market fundamentals. Catastrophe losses for the 47 major insurers reviewed in 2011 totaled $30.8 billion, which represented more than 11% of earned premiums. This compares with 5% in 2010, which was also considered a relatively heavy year for catastrophe losses.

Evidence of broader improvement in insurance premium rates is mounting, reflected in recent management commentary, as well as renewal rate information from brokers and other pricing surveys. Market segments hardest hit by recent large loss events are experiencing more significant price movements, including property reinsurance, primary commercial property, and homeowners in catastrophe-affected areas, as well as workers' compensation, which has deteriorated into the worst-performing commercial segment.

While recent favorable pricing movement is encouraging for the industry, questions remain over the sustainability of the trend. Continued premium growth and a hope for reversion toward average historical catastrophe loss experience would be supportive of better profitability in 2012.

We continue to believe that a more meaningful removal of capital or underwriting capacity is necessary before insurance pricing can move to levels corresponding with the strong accident year returns produced in the middle of the last decade.

For a detailed review of P/C insurance operating results in 2011, see Fitch's upcoming report "U.S. Property/Casualty Insurers' Year-End 2011 Financial Results" at www.fitchratings.com.

Additional information is available on www.fitchratings.com

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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