KBW Says P-C Can Weather Economic Slump

The property-casualty insurance industry is well-positioned against a likely U.S. economic downturn and can expect more profits in 2008, according to a financial services firm's latest analysis.

Keefe, Bruyette & Woods said reserve releases, stable loss trends, strong cash flow and investment income growth, along with attractive absolute pricing levels should lead to double-digit returns.

The firm said that benign weather, attractive pricing and favorable loss trends have allowed the p-c industry to post two years of record-setting underwriting profitability and “looks positioned for another good year.”

KBW said insurer price-cutting appears controlled, and absolute pricing levels still offer profit opportunities. It noted that loss trends are stable, cash flow is robust, and said it expects continued reserve releases and investment income growth.

It noted that the p-c group is now valued at the lower end of its historical range, indicative of soft pricing fears. KBW remarked that the sector has only fallen below a 1.2-times-book valuation during periods of extraordinary stress, such as “near the painful end of the previous soft market.”

In the context of a recession, KBW said it sees the p-c sector trading on the low end of its valuation range, “but with a solid profit outlook, is well-positioned to outperform as a defensive sector.”

The firm said that among sub-sectors, it favors the outlook for commercial and specialty insurers as well as Bermuda-based operations.

Among commercial and specialty insurers, KBW said it believes rate cuts should continue to be largely offset by reserve releases and stable loss costs, creating potential surprises in earnings per share.

With a weak U.S. dollar, the firm said it views this sector as attractive to foreign buyers looking to build a U.S. presence.

KBW said “the main risks to our thesis” include a spike in claims activity related to an economic or equity market downturn, a major loss event, or severe price-cutting.

While the firm said it currently believes stable-to-lower interest rates should boost book value, an increase in yield would likely hurt p-c stock performance.

KPW said with the publication of its 2009 earnings-per-share estimates, it sees average EPS growth of 4 percent and book value growth of 11 percent for 2009 over 2008.