Industry Net Income Up 50% in 2012; Favorable Trends Seen for 2013

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

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

“Overall, the weighted average combined ratio for the cohort [of Moody's-rated insurers] improved to 100 from 102; after excluding catastrophe losses, earnings improved by over 10 percent [compared to 2011], reflecting rate increases and generally benign loss cost trends overall,” the report notes.

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

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

Moody's says it expects hurricane models will be updated to reflect Sandy's footprint, with firms augmenting their catastrophe-modeling efforts with scenario/stress testing, “placing greater emphasis on Northeast U.S. storm scenarios that cause high coastal surges.”

Looking to 2013, Moody's says, “The favorable pricing momentum and gradually improving economy, coupled with relatively benign loss cost trends, will benefit accident-year loss ratios and underwriting margins for 2013 (excluding catastrophes).” With broad-based rate increases across the industry, retention ratios should remain stable, Moody's adds.

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

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