The property-casualty industry will enjoy a profitable 2007, although maybe not at the same level as 2006, according to an investment bank analysis.
Keefe Bruyette & Woods in its annual forecast said the attractive pricing, strong reserves and favorable loss trends that marked 2006 will remain potent profit drivers through next year.
The New York-based firm forecasts earnings growth for the p-c sector at 5 percent through 2008.
KBW is the most bullish on the commercial lines sector, with its greater potential for mergers and acquisitions activity and less catastrophe exposure. It remains cautious on the auto market and neutral on Bermuda.
"Current valuations reflect modest expectations and present opportunity as earnings surprise," the report said.
Similarities exist to the late 1980s period when stocks outperformed as profitability lasted longer than widely expected, KBW noted.
"In 1988, the hard market turned soft, investors doubted the sustainability of attractive returns and the group underperformed. However, in 1989, the group strongly rebounded, up 45 percent as profits continued, despite a weak top-line," the report said.
The earnings estimate assumes a more normal weather pattern than the storm-free season of 2006 and loss ratio deterioration due to price cuts. But investment income strength, robust cash flow, solid reserves and benign loss trends should help buck that trend.
The report forecasts returns on equity and book value growth in the midteen range, "offsetting potential valuation pressure on the downside and providing strong returns should valuations hold or improve."
"We see the main risk to our optimism to be severe rate cutting, which would cause us to dampen 2008 estimates, or a surprise negative turn in loss trends," the report said.
In addition, KBW said sharply rising interest could have a dampening impact on insurance stock pricing.
The report also said the p-c industry is ripe for merger and acquisition activity, particularly in the U.S. primary commercial and specialty lines market. And Bermuda could see mergers of equals.
"Once an accretive deal is announced, we expect a valuation boost across the sector," the report said.
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