Major reinsurers will meet or exceed earnings expectations in the fourth quarter, according to an investment bank report.
Tamara Kravec, a Bank of America analyst, wrote that "our expectation is for reinsurers to give outlooks for 2007 earnings that are in line with or modestly better than expectations."
Ms. Kravec added, "We believe capacity remains constrained for U.S. catastrophe-exposed property insurance, keeping rates firm."
Such commentary may be influenced by a recent study by Willis Group Holdings of the Jan. 1 renewal season, which showed that reinsurance rates for both property and casualty exposures have remained flat.
The report also said the major exception was U.S. property business, where an insurer has significant East Coast or Gulf Coast wind-exposed business.
Willis Re Chief Executive Officer Peter Hearn said that last year's benign catastrophe losses have not only helped generate strong underwriting results for reinsurers, but also fueled the competitive environment this year.
Ms. Kravec said worldwide catastrophe losses may be slightly higher in the fourth quarter of last year than in the previous quarter due to storm losses in the United States, Asia and Europe. "But we believe there were no major events in the quarter that would have a significant effect on reinsurers' earnings," she wrote.
In a recent period of low catastrophe losses, reinsurers that write a significant amount of property insurance as a percent of their overall business typically have been reporting roughly in line to better than expected results.
The Bank of America Securities analysis of p-c industry reserve development indicates there was little slowdown in the amount released through the first three quarters of 2006.
"Even if positive reserve development is lower in the fourth quarter than in the prior quarter, it should still make a positive contribution to earnings," Ms. Kravec wrote.
In the bank's coverage universe, Aspen Insurance Holdings should enjoy the greatest incremental increase in investment income in the fourth quarter compared to the previous one, which Ms. Kravec called a "wind in the sails of reinsurers' profitability."
"In most cases investment income tends to increase each quarter and is easier to model than other sources of reinsurers' profits such as underwriting income," she wrote.
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