Net income for P&C insurers increased almost 50 percent in 2012 compared to the year prior, driven by higher earned premiums and slightly-lower, but still high, catastrophe losses, according to a special comment from Moodys Investor Service. For most insurers, investment income increased modestly and reserve releases were down.
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). Retention ratios should remain relatively stable as the rate increases are broad based across the industry, according to Moodys US P&C Insurers Earnings Improve in 2012 Despite High CATs; Pricing Momentum Continues statement. Offsetting these positive factors are headwinds from tapering loss reserve releases and still-low investment yields, which are placing pressure on operating margins but should support the improving pricing environment.
Highlights from the report:
Rate increases continue across all business lines; for rated companies, net premiums written (NPW) increased 5 percent in 2012 as a result of cumulative rate increases and exposure growth. We expect improvement in accident year loss ratios in 2013 as rate increases translate into earned premiums and loss cost trends remain relatively benign, Moodys said.
Catastrophe losses declined year-over-year, though they remain high by historical standards. Superstorm Sandy is expected to be among the costliest of U.S. natural disasters. For our rated insurers, 2012 pre-tax catastrophe losses were approximately 6 percent of shareholders equity with most insurers reporting a profit in Q4 despite Sandy, Moodys said.
Reserve releases continued to support aggregate earnings in 2012. Some insurers, notably workers compensation and other general liability lines, reported adverse reserve development.
Investment income increased, driven by gains in alternative investments and equities. Low interest rates continue to hurt fixed-income portfolio yields, and insurers raised premiums to maintain profitability.
Capital adequacy is solid; at 7 percent, equity growth outpaced net written premium growth of 5 percent. Shareholders equity growth has slowed as a result of active-share buyback programs and shareholder dividends. Share repurchases slowed in 2012 compared to 2011, in part due to Superstorm Sandy. Insured loss estimates from Sandy are estimated at $25 billion, according to Munich RE.
Rates for personal line rates also continued to increase; homeowners insurers reported rate increases in the mid-to-high single digits, and depending on geography, sometimes double digits.
Insurers also tightened underwriting standards and adjusted reinsurance programs, Moodys said, as a response to record high frequency, lower severity weather-related events in 2011. Excluding catastrophes, homeowners profitability increased year-over-year, based on earned-rate increases, underwriting changes and lower non-catastrophe weather related loss compared to 2011.
We expect insurers to continue raising rates, increasing deductibles, and tightening terms and conditions into 2013 in order to further improve margins in this volatile business line, Moodys said.
For personal auto, rate increases were in the low-to-mid single digits. Rate increases accelerated in the later part of the year, as many insurers experienced an elevated loss severity trend for bodily injury claims and property damage. In response, Moodys said leading companies are deploying new products and/or advanced data analytics to help attract profitable new business.