Fitch: P/C Insurer Profit Up in 2012; Reinsurers Recover

March 18, 2013

Property/casualty insurers’ operating profits improved in 2012, driven by reduced incurred losses from natural catastrophes and core loss ratio improvements from recent underwriting and pricing actions.

Fitch Ratings’ compilation of full-year GAAP 2012 financial results for a group of 48 publicly traded (re)insurers reveals a 75 percent improvement in operating earnings and operating return on equity of 7.3 percent versus 4.4 percent in 2011.

A 5.0 percent increase in annual premium revenue and an underwriting combined ratio of 98.6 versus 103.4 in the prior year were the key contributors toward this earnings improvement. According to Fitch, declining investment income in the prolonged low interest rate environment and a reduced benefit from favorable loss reserve development modestly dampened the group’s 2012 financial performance.

Natural catastrophe-related losses were lower in 2012 but remained higher than historical norms. For the group, natural catastrophe related losses represented under 7 percent of earned premium versus 11 percent in 2011. While reinsurers were more deeply affected by global earthquake, tsunami, and flood losses in 2011, losses from October’s superstorm Sandy were proportionally borne more by primary insurers.

Based on this catastrophe experience, the group of 11 reinsurers Fitch examined reported the strongest improvement in profits for any individual subsegment, generating a 24.0 percent combined ratio improvement to 91.0 in 2012, and rebounding from net losses in 2011.

Despite this improvement in earnings, Fitch said individual insurer performance remains below par in many instances. Only one-third of the companies in Fitch’s universe generated an underwriting profit on an accident-year basis in 2012, and only one-quarter of companies reported an operating return on equity of 10 percent or higher for the year.

Continued momentum in premium rate increases and a reversion towards historical insured catastrophe loss levels would promote further profitability improvement in 2013, Fitch said.

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