Investment Finds Seen In P-C Insurers
NU Online News Service, May 29, 4:10 p.m. EDT?The prospects for property-casualty insurers look favorable and investors can still find "gold to be mined" in the non-life insurance business, Merrill Lynch & Co. Inc said today.
In a research note, the New York-based investment bank said that the first-quarter earnings from p-c insurers were a "solid indication" that rate increases and better terms and conditions are working their way down to the insurers' bottom line.
Merrill Lynch said that, while it does expect to see a "pattern of decelerating rate increases" over the next 18 months, prices should continue to rise for the rest of the year and will likely stay ahead of underlying claims inflation in most areas.
Jay Cohen, insurance analyst at Merrill Lynch, said first quarter earnings were generally "in line or better than expected," thanks to better-than-expected underwriting margins.
Mr. Cohen pointed to the lack of large catastrophe losses during the first quarter, as the force behind some of the surprisingly strong numbers during the period, especially among reinsurers.
"Still, excluding the impact of weather, it appears that underlying underwriting results were solid and we saw more upward estimate revisions than downward revisions in reaction to earnings releases," he said. Mr. Cohen also added that Merrill Lynch expects the same positive pattern over the next three quarters.
Looking further ahead, Merrill Lynch forecast that earnings growth in 2004 for most insurers, excluding start-ups, could be in the 10-to-15 percent range.
Still, there could be some potential pitfalls along the way. "The most likely culprits that will hold back earnings will be reserve charges, light investment income and weather," Merrill Lynch predicted.
In the second quarter, the weather will "certainly be an issue" for some carriers because of the costly spring storm season, Merrill Lynch said. Additionally, reserve-related earnings trouble is another possibility looming in the background. "A reserve-related earnings miss would likely be the most disturbing earnings-related issue to investors and is the most difficult to forecast," the research note suggested.
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