NEW YORK ( TheStreet) -- U.S. property and casualty insurers reported positive results today, but once you look under the hood the picture is not as rosy.

Insurers' industry-wide net income rose to $16.5 billion from $6 billion in the first-half of 2010, but that's to be expected as the industry recovers from the financial crisis, argues one analyst.

"It is less impressive then it looks," said Meyer Shields, analyst at Stifel Nicolaus. "We had year to year growth on the profitability side, but they are leaning on reserve releases. The underlying results are less impressive."

Data released from the Insurance Information Institute, ISO and the Property Casualty Insurers Association of America boasts :
  • The annualized rate of return on average policyholders' surplus was up 6.3 percent from 2.6 percent;
  • Net investment gains rang in at $13.3 billion to $25.8 billion, up from $12.5 billion in first-half 2009
  • Insurers' reported underwriting losses of $5.1 billion for the first half of 2010 compared a $2.1 billion loss for the same time period last year.

Shields points out that one of the most important takeaways of the results should be that there is still sustained weakness in investment income. He added that interest rates and yields are also still low. "This matters more to carriers like State Farm that will have to raise rates due to regulation, Allstate ( ALL) is clearly taking advantage of that," he said.

Shields also says that the there is too much capital in the industry, which is tied to the lack of major storms in the past year. According to ISO, U.S. catastrophe losses increased by $0.2 billion in first-half 2010 and totaled about $7.9 billion in direct insured losses for all insurers.

One company to watch, in particular, is Allstate, that has almost reached the capital levels that it had since before the financial crisis. "If we make it through this hurricane season... then it doesn't make sense for this company to be trading at 7.5 times earnings"

Shields says the real challenge that the industry is going through is lack of consolidation. "There are just too many insurance companies, especially when you look at the personal lines side," Sheilds says. Just before the second-quarter earnings there were a bunch of deals announced and a few businesses shut down, but the bottom line is there are just too many companies and that hinders growth."

Shield foresees consolidation in specialty insurance particularly medical malpractice insurance. He says that investors should watch American Physicians Service ( AMPH ), American Physicians Capital ( ACAP ), ProAssurance Corporation ( PRA) and FPIC Insurance Group ( FPIC ).

"Most likely sellers will specialize in a certain area of business. I don't see a player like FPIC having the same pressure to sell as the rest and ProAssurance has already been a buyer. That doesn't mean they aren't a target though," Sheilds said. Shields says that Bermuda carriers will also consolidate and Montpelier Re ( MRH ) could be a target.

"There are dozens of companies in Bermuda and we are seeing management retire, and a lot of that can go along with a sale," Shields said.

--Written by Maria Woehr in New York.

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