Reinsurers' price trends will outstrip primary insurers' levels when second-quarter results are reported, an investment bank forecast yesterday.
David Small, property-casualty analyst for Bear Stearns, wrote that second-quarter financial results should highlight the growing divergence in pricing trends between the two industry segments.
"We expect reinsurers will discuss successful June 1 and July 1 renewals, where property increases met very robust expectations and new programs were characterized by higher retentions and less limits offered per risk," Mr. Small wrote.
Insurers, on the other hand, will most likely focus on market softening in all other major lines.
"Results, particularly for insurers, should be typical of what can be expected soon after a cycle peak," Mr. Small wrote.
Similar to the first quarter, when six of the seven underwriters within the Bear Stearns coverage realm surpassed estimates, Mr. Small said he expects return on equity figures to remain strong as insurers earn through higher-priced business from previous periods.
In addition, larger investment accounts and higher interest rates will drive investment income growth and severity of losses in liability lines will remain benign, he wrote.
"However, indications regarding future profitability should limit investor enthusiasm and prevent share outperformance," Mr. Small added.
Although reinsurers have bounced off their low share prices, he said that Bear Stearns' analysis indicates their valuations remain attractive.
"Even though commercial line insurer stocks have sold off, price-book multiples are still one standard deviation over the mean, driven by smaller specialty lines and E&S [excess and surplus lines] players where ROE expectations continue to be elevated," he wrote.
Mr. Small continues to favor Allstate for the primary sector. "We expect continued solid results from the auto book to drive results as pricing trends hold up longer than investors expect," he wrote.
As for reinsurers, according to Mr. Small, Everest Re had balance sheet flexibility to write significant new business at the July 1 renewal season, and "we expect positive commentary regarding new MGA relationships that we anticipate will strengthen profitability during the second half of the '06."
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