U.S. insurers saw their collective net income jump by 50 percentin 2012 compared to 2011, and this year the industry looks as if itwill benefit from some favorable trends in both the insurancemarket and the economy at large, even as it deals with somefamiliar challenges, according to Moody's Investors Service.

In a Special Comment, titled “US P&C Insurers EarningsImprove in 2012 Despite High CATs; Pricing Momentum Continues,”Moody's says the 2012 net-income improvement was driven primarilyby lower catastrophe losses and higher earned premiums stemmingfrom rate increases and growing exposures. Moody's says companiesare reporting rate increases across all business lines.

“Overall, the weighted average combined ratio for the cohort [ofMoody's-rated insurers] improved to 100 from 102; after excludingcatastrophe losses, earnings improved by over 10 percent [comparedto 2011], reflecting rate increases and generally benign loss costtrends overall,” the report notes.

But it was not all good news for the industry in 2012. While catlosses were lower than 2011, they were still high by historicalstandards, Moody's says, led by Superstorm Sandy.

“Insured natural-catastrophe losses in the U.S. in 2012 totalednearly $58 billion, well above the 10-year average of $27 billion,”Moody's notes. “Losses were driven by [Superstorm] Sandy, severedrought conditions (including Federal Crop Insurance losses), andthunderstorm events. Overall, 2012 was the third-costliest year forthe insurance industry worldwide (after 2011 and 2005) and thesecond costliest year in the US (after 2005).”

Moody's says it expects hurricane models will be updated toreflect Sandy's footprint, with firms augmenting theircatastrophe-modeling efforts with scenario/stress testing, “placinggreater emphasis on Northeast U.S. storm scenarios that cause highcoastal surges.”

Looking to 2013, Moody's says, “The favorable pricing momentumand gradually improving economy, coupled with relatively benignloss cost trends, will benefit accident-year loss ratios andunderwriting margins for 2013 (excluding catastrophes).” Withbroad-based rate increases across the industry, retention ratiosshould remain stable, Moody's adds.

But challenges remain for the industry. While reserve releasesin 2012 generally continued to support earnings, Moody's says someinsurers reported adverse development, particularly in workers'comp and other long-tail casualty lines. For 2013, Moody's predictsreserve releases to continue to taper.

Still-low investment yields will also continue to hit operatingmargins, “but should support the improving pricing environment,”says the report.