Merrill Lynch Sees P-C Investment Income Rising

Property-casualty insurers' investment income should be up in 2008, but pricing for all lines and reinsurance should be down, according to a recent analysis by a leading investment firm.

The report, with estimates for 2008 and 2009 by New York-based Merrill Lynch, states that despite falling prices, the firm is “not expecting an irrational price war to emerge and price declines should stay in the single digits for most lines of business.”

For brokers, Merrill Lynch said the pricing outlook means their revenues will remain under pressure through 2009 with organic growth in the low- to mid-single digits with “some improvement in operating margins.”

According to the report there will be a deterioration of accident year loss ratios in 2008 and 2009, based on price competition over the next three years.

Merrill Lynch said that premium growth for the 33 traded companies it follows–excluding the startup Darwin Professional Underwriters–on average is expected to be 5.5 percent in 2008 and 4.8 percent in 2009.

Average investment income growth in 2008, excluding Darwin, should be near 9 percent and 8.2 percent in 2009, the report said.

Average earnings per share growth rates forecast by the firm are 4 percent in 2008 and 5 percent in 2009.

Merrill Lynch expects return on equity for the insurers to deteriorate in 2008, but noted that “average estimated ROE of 14.6 percent is still historically healthy as is our 2009 estimate of 13.7 percent.” Returns will move lower beyond 2009, according to the report.

Over the next year, Merrill Lynch said it is expecting to see a tug of war between property-casualty insurers slowing top line growth and “deteriorating margins which tend to depress valuations and strong growth in book values which tend to support valuations.”

According to the firm's analysis, commercial lines prices will be flat to down in most business lines through 2008, while moderate declines are expected in 2009.

Reinsurance pricing, the report said, should move lower over the next three years, and personal lines prices should go lower in 2007 and 2008 “with some stability in 2009.”