While insurers are taking advantage of the current interest rate environment to replace higher-coupon debt at lower interest costs, a new report from Fitch indicates that this is not substantially boosting financial leverage. In aggregate, financial leverage for Fitch's P&C (re)insurer universe declined modestly to 22.7 percent in 2012 from 22.9 percent in the prior year.

Yet in the report published today, which analyzes key financial factors of P&C insurers, Fitch affirms that U.S. P&C insurers continue to maintain balance sheet strength and adequate debt-servicing capacity, noting that earnings growth led to improved shareholders' equity, which more than offset the higher borrowings seen in the sector.

GAAP fixed charge coverage for the sector improved to 5.5x in 2012 from 3.4x in 2011. The improvement was largely due to higher operating earnings driven by lower catastrophe-related losses in 2012, said Dafina Dunmore, director at Fitch. Pricing improvement in most primary insurance market segments and lower borrowing costs also contributed to the improvement, according to Fitch.

Fitch estimates the amount of statutory dividend capacity available to be paid in 2013 increased by 9 percent, or 6.5x estimated fixed charges. This metric is significantly impacted by greater dividend capacity for non-U.S. insurers due to less restrictive regulatory requirements. Bermuda companies' average dividend capacity is very strong at 17.4x compared with 5.0x for U.S. insurers.

Additionally, a number of companies continue to hold elevated levels of cash at the holding company, which improves flexibility and near-term debt-servicing capacity. Some holding companies may maintain balances to prefund upcoming debt maturities.

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