Pricing in the property and casualty insurance industry may be on the rise—but several signs point to worsening returns on equity and earnings per share, says financial-services specialists Keefe, Bruyette and Woods (KBW).

For the 46 insurers and reinsurers KBW follows, premium growth was 9.5 percent in the third quarter and there appears to be momentum, with pricing in the quarter gradually better than the previous month through September.

Talk of these price increases likely drove the group’s overall earnings per share.

However, catastrophe losses added 11.8 points to the group’s average third-quarter combined ratio of 101.3, which was about 8 points more than the same quarter in 2010.

Also, reserve releases slowed, and KBW says that slowing is expected to continue.

The group’s overall average combined ratio benefitted 5.3 points from reserve releases, but that is slower than 6.7 points from reserve releases during the third quarter of 2010.

The observation of slowing reserve releases falls in line with an analysis from Stifel Nicolaus of 55 companies it reviewed (see top story, page 8).

Yet even while excluding catastrophes and reserve releases, the third-quarter accident-year combined ratio for the group worsened to 95.2 from 93.5 a year ago, KBW reports. “We would estimate the main driver to simply be loss costs outpacing pricing,” KBW says.

“All else being equal, if we saw a continuation of the accident-year deterioration, we would see another 1.5- to 2-point decline in underwriting margin on an ex-catastrophe, accident-year basis,” KBW adds.

Investment income also proved to be problematic for return on equity. Investment income was down 3 percent in the third quarter—and KBW says it will continue to decline into 2012 and likely into 2013.

Special Reports /

KBW: P&C Pricing May Be on the Rise, But Strong Headwinds Remain

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