NU Online News Service, July 7, 12:00 p.m. EDT
In this turbulent economic environment, personal-lines insurers have the edge over their commercial-lines counterparts and are a more attractive place for investors, according to a recent report.
The financial and investment banking firm Stifel Nicolaus released its “2Q11 Insurance Industry Earnings Preview,” saying that personal-lines insurers are a good place for investors because personal-auto and homeowners premium rates are continuing to increase on a year-over-year basis while the commercial-insurance market remains mired in a soft market.
“Long-standing discipline implies rate increases will match recent loss-cost inflation,” the report says.
It also notes that, with respect to personal lines:
- The impact of prior years’ rate increases are rolling into earned premiums.
- Drivers are reverting back to normal driving patterns as gas prices subside.
- Major personal-lines carriers can expect continued growth due to economy of scale.
For commercial carriers, their earnings will suffer in the short term from:
- Exhaustion of reserves from catastrophe losses.
- Soft-market price declines that continue to flow through earnings.
- Companies with cash possibly deciding on a mergers and acquisition strategy.
- The effect of uncertainty over Solvency II capital requirements in Europe on valuations.
For insurance brokers, the report was positive.
It anticipates that a market turn in 2012 could help boost organic growth as premiums increase, improving commissions.
Benefit brokers are seeing stabilization in head counts at businesses as the economy improves. Additionally, changes in the healthcare law will require consulting expertise, creating opportunities for brokers and consultants.
Also, the recent spat of catastrophes, revisions in catastrophe models and regulatory changes should boost demand for reinsurance, a plus for reinsurance brokers.
Among some of the companies favored by the investment house:
- Allstate, Progressive, Aon and Marsh are cited as the favorite stock.
- W.R. Berkley will likely beat consensus (earnings estimate of 57 cents a share, according to Stifel Nicolaus).
- Berkshire Hathaway (estimate $1,562 a share), Markel ($3.13 a share) and RLI (92 cents a share) are likely to miss earnings estimates “on unqualified catastrophe losses.”