U.S. property/casualty insurers reported significantly higher net income in the second quarter of 2012 relative to second-quarter 2011, driven by lower catastrophe losses and increased growth in earned premiums, says Moody’s Investors Service.

However, operating income for the sector – excluding the positive impact of lower cat losses and favorable reserve development – declined by approximately 11 percent over the second quarter of 2011 for Moody’s-rated insurers. Rate increases have now broadened to the extent that many companies are reporting rising rates across all business lines with an upward trend from the first quarter of 2012, says Moody’s. As a result, Moody’s expects improvement in margins in the second half of 2012 as higher 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,” says Brandan Holmes, a Moody’s assistant vice president.

Severe weather and wildfires in the U.S. led to second-quarter catastrophe losses above the 10-year average although losses were still significantly lower than those seen in the second quarter of 2011, says Moody’s, and diversification allowed many large underwriters to absorb losses.

In addition, the ongoing severe drought in the Midwest is likely to drag on earnings in the third and fourth quarters of 2012 for companies writing crop insurance, says the rating agency.

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, however, to the extent insurance markets and economic conditions continue to improve, companies are expected to retain a greater proportion of capital in order to support growth, says Moody’s.