The U.S personal lines insurance industry remains financiallysound despite significant catastrophe losses last year from highfrequency, low-severity events and Superstorm Sandy, Moody'sInvestors Service says in a new industry outlook report.

One key to this is strong pricing in both the auto andhomeowners markets, Moody’s said in two reports issued on thepersonal lines industry.

The reports said Moody’s stable outlook on the industry reflectsthe focus by companies on price adequacy given low re-investmentrates, along with improvements in underwriting and risk management,and balance sheet strength despite catastrophe losses.

“Catastrophe exposure, whether related to severe industry-typeor the more frequent weather-related events, will continue to driveearnings volatility, leaving exposure management a high priority,”Moody’s said in the report. “We expect that key rating factorswill remain unchanged over the next 12 to 18 months as earned rateincreases and improving combined ratios contribute to a stablefinancial profile.”

The report said auto pricing continues to rise, and is outpacingliability loss cost trends as insurers seek to protectoperating margins and stem the impact of low re-investmentrates. Analyst Enrico Leo, said, however, that “we note that rateincreases are moderating as severity trends which previouslyincreased have begun to decelerate."

"Direct writers of auto insurance continue to gain market shareand possess significant competitive advantages in terms ofeconomies of scale, low expense ratios, and the ability to offercompetitive prices to consumers," Leo said. "In addition, in orderto generate growth, some agency writers have recently announcedintentions to lower expenses and set their rates morecompetitively,” Leo said.

As for homeowners, insurers continue to institute rateincreases, tighten underwriting standards, and implement other riskmanagement initiatives in response to high catastrophe andweather-related losses over the last few years, Moody’s said.

As a result, underwriting margins are improving. “The employmentof sophisticated data analytics in front-end underwriting willremain a key driver for insurers seeking to improve profitabilityin this volatile business line,” the report said.

Moody’s said competition in the personal lines market appears tobe increasing as companies shift their focus to growth after takingunderwriting actions to improve homeowners profitability.