Cat Activity Lower Than 2011, but Still Above 10-year Average

While many recent reports correctly point to lower catastrophe activity as a primary reason behind insurers' improved 2012 Q2 results, the period still beat the 10-year average for cat losses, a Moody's report says.

In a Special Comment on Q2 results, Moody's Investors Service says insurers have seen strong earnings growth through the first half of the year, driven by lower catastrophe losses and increased premium growth.

The ratings agency says Q2 net income was “up substantially” over last year, rising 343 percent for a group of 26 property and casualty companies Moody's follows.

However, considering the outsized catastrophes of 2011, Moody's also compared year-over-year profits based on operating income excluding cats and reserve development. By that measure, profits decreased by about 11 percent for the 26 companies due to higher severity non-cat losses, and rate increases not yet making their way into earnings.

And even though cat losses in 2012's second quarter were drastically lower than the year before, Moody's notes that cats in the period were still above the 10-year average.

“While the law of averages would lead us to expect that catastrophe losses will likely be lower in 2012, the severe weather and wildfires experienced through large parts of the U.S. have provided for a difficult first half, although less so than 2011,” says Moody's. “The generally strong capital positions for P&C insurers and the increase in catastrophe loss expectations should help mitigate the risk of earnings and capital surprises.”

Meanwhile, Moody's says P&C insurance rates are rising, and pricing momentum is expected to continue through 2012 as insurers make up for an expected reduction in reserve releases.

The ratings agency says rate increases broadened in the second quarter relative to the first, leading to a 6 percent year-over-year increase in net-written premiums, up from a 4 percent increase in the first quarter.

The ratings agency adds that companies may “turn up the dial on rate increases” as the year progresses due to an expectation of moderating reserve releases.  

“According to pricing surveys and conference calls, pricing was stronger in the second quarter with commercial-lines insurers reporting mid-to-high single-digit rate increases; property and workers' compensation lines insurers exhibited greater increases compared to other commercial lines,” Moody's says. The report adds that excess and surplus lines business is growing modestly, which is “typically a sign of an improving insurance market” as it means standard carriers are exiting traditional E&S lines.