NU Online News Service, July 21, 2:00 p.m.EDT

As reserve releases slow, accident-year losses rise, andinvestment yields weaken, property and casualty insurers may needto reconsider cost reductions in the form of cutting salaries andadvertising budgets to improve profitability, according to a Keefe,Bruyette & Woods industry update.

While the industry is not yet talking about cost cutting, KBWsays, the lack of growth may force the issue. “Many companiesalready went through a round of layoffs and cost cuts in2008-09—always a painful effort and not one which management teamswant to go through again,” the firm notes.

But KBW adds, “As hopes for a meaningful improvement in theeconomy fade and the end of the soft-market pricing appears to bemore of an easing rather than a traditional hardening, we believethat a lift to premiums may yet be distant. Cost cuts, in additionto capital management, may be the easiest tool available to improveprofitability.”

KBW says its review of industry expenses for companies under itscoverage show “significant growth” in recent years in salaries,head counts and advertising spending. “All of these increasesoccurred despite a slowdown in growth and worsening margins,” saysKBW.

The industry's expense ratio, the firm says, has grown steadilyfrom 24.6 percent in 2003 to 28.3 percent in 2010. Actual expensegrowth has declined since 2006, KBW notes, but that has not keptpace with the decline in premium growth, leading to the risingexpense ratio for the industry over that time.

Analyzing where the industry's expenditures are coming from, KBWsays salaries have increased 16 percent since 2005, to $27.3billion. KBW notes that Allstate and Liberty Mutual have managed todecrease salaries paid from 2006 to 2010, while Geico increasedsalaries by almost 22 percent.

Advertising for the industry increased 72 percent from 2005 to2010 to over $5 billion. “The $2.1 billion increase inadvertising…is eye-catching and brings to mind the barrage ofinsurance commercials we all frequently skip over as we use ourDVRs,” KBW says.

From 2006 to 2010, State Farm has increased its advertising byalmost 105 percent and Progressive increased advertising by nearly87 percent. Geico's advertising budget, though, is nearly 50percent higher than the next-largest competitor, KBW notes.