Operating profits declined for most property-casualty insurers in the first half of the year, but exceeded the poor performance in the first six months of 2009, according to a Fitch analysis of 50 publicly traded companies.

For the first half of this year, the $16.2 billion of aggregate net earnings reported by these companies represents a substantial improvement, caused by more favorable investment results, particularly among some of the larger companies in Fitch’s universe.

Looking ahead, Fitch said profitability will continue to be pressured by limited premium growth and weaker accident year loss ratios in “a stubbornly competitive” insurance market with a weak economic recovery and low investment yields.

Fitch also said it believes that reserve redundancies that have enhanced earnings for some time have approached exhaustion for many insurers. A reduced ability to mask weaker current year results with favorable prior period development may be a contributing factor towards a future shift in pricing trends.

With profitable growth opportunities scarce and GAAP underwriting leverage at relatively low levels, the pace of share repurchases has, not surprisingly, accelerated. Fitch estimates that companies in Fitch’s universe repurchased roughly $8.4 billion of common equity in the first half of 2010, compared to $1.2 billion in the previous period. Fitch does not expect share repurchases to create downward rating pressure for most companies assuming individual rated entities’ financial leverage and insurance subsidiary capital adequacy levels remain within Fitch’s rating rationale assumptions.

Fitch’s review of first-half 2010 GAAP results reported by property-casualty insurers showed that unusually high catastrophe losses and the deteriorating commercial insurance pricing environment combined to more than offset the continuing benefit of favorable loss reserve development, resulting in lower underwriting margins and a corresponding decrease in operating profitability for most companies, the company said.

For the combined group, favorable loss reserve development in the first six months of this year represented 3.7% of earned premium compared with 2.6% during the first half of 2009. As a result, aggregate annualized operating returns on average equity for each sub- group appear meaningfully lower for the current accident year than they are do on a calendar year basis, which already fell significantly short of providing an adequate return on capital for most companies, according to Fitch.