The property/casualty industry withstood the global financial crisis reasonably well, according to Fitch Ratings. In its recent report, “Property/Casualty Insurers’ Financial Leverage and Debt-Servicing Capacity,” the firm analyzed key holding company financial factors of U.S. property/casualty insurance organizations, examining changes in financial leverage and debt-servicing capacity for the last several years and in 2009.
After analyzing 10-K filing data from all publicly traded property/casualty insurers in Fitch's debt rating universe, the firm found that most companies experienced solid operating earnings and a significant recovery in investment portfolios in 2009, which led to a material increase in reported GAAP shareholders’ equity and, thus a decline in financial leverage for Fitch Ratings’ property/casualty insurer universe, in aggregate.
The report also features evaluations of insurers' liquidity from insurance subsidiary dividend capacity. While most of the companies highlighted in the report had increased maximum dividend capacity for 2010, and most of these had double-digit increases, there were a few exceptions to the improvement: XL Capital Ltd. with a 44% decline in capacity; Odyssey Re Holdings Corp. with a 36% decline in capacity; Berkshire Hathaway Inc. with a 22% decline in capacity; and Zenith National Insurance Corp. with a 12% decline in capacity.
The majority of the insurers highlighted in the report experienced favorable underwriting performance fueled by fewer catastrophe-related losses and recognition of reserve redundancies, which contributed to higher GAAP interest and preferred dividend coverage ratios and a number of companies continue to hold cash at higher than traditional levels at the holding company level.
The industry still faces continued earnings and capital pressure due to the economic recession and a persistent competitive insurance pricing environment, Fitch says. Earnings will also be strained by less attractive investment yields and poorer core underwriting results, due to less benefit from favorable loss reserve development. Fitch’s rating outlook for the sector remains negative for these reasons.
While the industry’s capital position remains strong, companies face extreme challenges to profitably deploy capital generated from current earnings. As such, Fitch anticipates significant increases in share repurchase activity from its property/casualty (re)insurer universe in 2010, which are likely to moderately increase financial leverage.
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