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First half cats send US P&C combined ratio to 108.5%

The full impact of catastrophe losses has caused the US property casualty (re)insurance sector's combined ratio to deteriorate to 108.5 percent in the first half of 2011, up from 97.2 percent in the prior-year period, according to analysis by Fitch Ratings.

The agency reported that catastrophe losses for the 48 companies it surveyed were almost $22bn in the period, adding 16 points to the combined ratio, compared to 7.4 points in H1 2010.

Losses were most heavily concentrated among reinsurers hit by the record international catastrophe losses of the first quarter, which included the Japanese and New Zealand earthquakes.

Bermudian RenaissanceRe, for example, booked catastrophe losses in the first half that were equivalent to more than 140 percent of its net earned premiums. Cat losses for Platinum Underwriters, Montpelier Re, Flagstone Re and PartnerRe all came in at more than 60 percent on the same measure.

Cat losses in the Fitch analysis were actually lower than those reported by rival ratings agency AM Best, which put forward $27bn before tax - a number that already surpasses what was booked for the whole of last year.

Primary insurers hit by first half catastrophes losses suffered most from the record US tornado and thunderstorm losses in Q2, with regional players State Auto Financial, Horace Mann and Cincinnati Financial recording the highest loss burden as a percentage of net earned premiums, according to Fitch.

The sector's combined ratio would have been worse hit were it not for the positive impact of prior-year reserve releases.

According to Fitch, the majority of underwriters in the group reported favourable development, continuing the trend that has supported underwriting results at carriers for several years through the soft market.

However, the agency noted that the impact of reserve releases has moderated, taking just 2.2 percentage points from the aggregate combined ratio in the period, down from 3.3 percentage points in the first half of 2010.

After stripping out the impact of reserve releases only seven of the 48 companies in the group were able to produce an accident year underwriting profit in H1 2011.

The performance contributed to weak returns on capital in the period, with the group's return on average equity more than halving from 6.9 percent to 3.1 percent in the first half.

"In Fitch Rating's view, the performance in both periods falls short of representing an adequate risk-adjusted return on capital," said the agency.

Fitch added that it believes an adequate risk-adjusted return on capital for most of the companies in the sector should be 10-12 percent.

Nevertheless the US P&C industry's capital base remains strong, with modest growth in shareholders' equity despite the poor underwriting performance.

Underwriting leverage, measured by annualised first half net earned premiums divided by common equity, was largely unchanged at 0.6 percent, despite higher levels of share buybacks than in H1 2010.

Meanwhile, in its survey of US property casualty reinsurers based on analysis of statutory underwriting results for H1, the Reinsurance Association of America (RAA) reported that a group of 19 carriers booked a combined ratio of 116.2 percent, up from 98.7 percent in the prior-year period.

Net written premiums were up from $12.3bn to $13.8bn, and policyholders' surplus was just down from $107.6bn to $107.5bn.

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