KBW: Low Investment Yields Will Likely Offset Benefits of 2012 Rate Increases

NU Online News Service, Oct. 24, 2:26 p.m. EDT

While property and casualty insurers are “excitedly discussing” the prospect of 2012 rate increases and improving loss ratios, the net impact of such a development will likely be tempered by expectations of low investment yields, according to analyst firm Keefe, Bruyette & Woods.

In an Industry Update, KBW says, “In a scenario where loss ratios improve modestly while investment yields decline, the net impact for most appears to be close to a wash.”

Making matters worse for insurers, KBW adds that lower reinvestment rates “appear to be more of a certainty than improving loss ratios.”

KBW says rate increases may not automatically lead to underwriting profits, as factors such as loss trends, reserve releases/additions, and the weather can offset the benefits of improved rates.

On the other hand, KBW says that “the Fed has pledged a low-rate environment and the different in yield between maturing and new yields for the industry is material.”

The net impact of a possible “better loss ratio/worse yield” environment varies depending on the company, KBW says. “Generally speaking, smaller regional insurers with higher underwriting leverage appear positioned for benefit,” the firm notes.