KBW: Some Positive Signs in Q2, but Industry Environment Remains Challenging

NU Online News Service, Aug. 13, 1:56 p.m. EDT

Despite rising rates and second-quarter performance that met or beat estimates for most insurers, the outlook for the industry is considered “challenging,” according to one analyst firm, as loss trends are picking up in personal lines and investment income is worsening across the industry. 

Second-quarter earnings for P&C companies were “OK,” firm Keefe, Bruyette & Woods says in its latest analysis. “In our universe of 48 companies, 32 met or beat EPS [earnings per share] estimates,” says KBW. But the firm adds that many companies had pre-announced catastrophe losses, which caused a reduction in EPS expectations.

The combined ratio of 96.4 was well below the 106.2 posted in 2011's second quarter, owing to a drastic reduction in catastrophe losses. excluding catastrophes, though, the 93.6 accident-year combined ratio was still below the same period in 2011, when the industry posted a combined ratio of 94.7. 

“We expect that improved pricing, a little luck and perhaps some optimism are the drivers of the improvement,” KBW says in its analysis.

While rates are rising, a positive factor for carriers, KBW notes that increases do not appear to be accelerating “as cat markets level off and clients generally are retaining more risk.”

Insurers are still seeing favorable reserve development, with the average company benefitting by 4.6 percent in their loss ratio from reserve releases. But KBW says this is down from 2011's second quarter (6.2 percent) and 2012's first quarter (4.8 percent).

In fact, KBW notes that several companies reported adverse reserve development in the quarter, and while the firm does not see these companies' reserve issues as significant, investors appeared to punish these companies in the stock market. KBW calls the investors' reactions “reserve noise,” and says it is “clear that the market will penalize adverse development of nearly any degree.”

Investment income for the industry declined 3.4 percent in the second quarter, up from a 1.1 percent decline in the first quarter, and KBW says this is not surprising given the current yield environment. KBW notes that the low-investment yields “have crushed the traditional P&C business model of trying to break even on underwriting and making returns through investment income.

KBW expects companies to face further underwriting challenges through the year as the industry faces crop losses from a worsening drought in the U.S. and with the possibility of another U.S. storm season before the year is over. “With the industry likely to face more stress, individual companies will see their reserves, balance sheets and underwriting acumen tested,” KBW says.