U.S. property/casualty insurers reported significantly higher net income in the second quarter of 2012 relative to 2011, driven by lower catastrophe losses and increased growth in earned premiums, said Moody’s Investors Service.
Yet operating income — excluding the positive impact of lower cat losses and favorable reserve development — declined by about 11 percent over Q2 of 2011 for Moody’s-rated insurers. Many companies are reporting rising rates across all business lines with an upward trend from Q1 of 2012. Thus, Moody’s expects improvement in margins in the second half of 2012, as rates are recognized in earnings.
“Investment income remains stable and reserve releases, while higher this quarter, are expected to continue their moderating trend through the second half of the year, prompting companies to turn up the dial on rate increases to meet their return targets,” said Moody’s Brandan Holmes.
Severe weather and wildfires led to Q2 catastrophe losses above the 10-year average, although losses were lower than those in Q2 of 2011. Diversification allowed many large underwriters to absorb losses. The Midwest drought is likely to drag on earnings in Q3 and Q4 of 2012 for companies writing crop insurance, Moody’s said.
P/C insurers’ equity capital remains solid and increased on average 4 percent, driven by profits and unrealized capital gains, although trailing net written premium growth of 6 percent. Companies continue to pursue active share buyback programs. To the extent insurance markets and economic conditions continue to improve, companies are expected to retain a greater proportion of capital to support growth, Moody’s said.