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.
According to a new release from Fitch Ratings, the firm’s compilation of full-year GAAP 2012 financial results for a group of 48 publicly traded reinsurers 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 percent versus 103.4 percent in the prior year were cited as key contributors toward the improvement. However, declining investment income in the prolonged low interest rate environment and a reduced benefit from favorable loss reserve development dampened the group's 2012 financial performance.
Yet nothing seems to have affected results more than the recovery from 2011’s historic cat losses. For the group, natural catastrophe-related losses represented less than 7 percent of earned premium in 2012, while that’s still high compared to historic figures, it came as a relief compared to 11 percent in 2011. This is particularly relevant for reinsurers, who were more deeply affected by global earthquake, tsunami and flood losses in 2011, while primary insurers carried most of the losses from October’s Superstorm Sandy.
Based on this, Fitch reported that the reinsurers examined revealed the strongest improvement in profits for any individual subsegment, generating a 24.0-percent combined ratio improvement to 91.0 percent in 2012 and rebounding from net losses in 2011.
Despite this improvement in earnings, Fitch indicated that individual insurer performance remains below par in many instances. Only one-third of the companies in Fitch's findings 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.
