Rate Hikes Aiding Bottom Lines, but Investment, Reserve Pressures Remain

The good news for the insurance industry is that, in general, rate increases may have outpaced loss trends in the third quarter. But the benefits to companies may be offset by growing reserve pressures and the continued “slow-motion collapse” of investment income, according to a Keefe, Bruyette & Woods analysis. 

In its third-quarter earnings preview for the property and casualty industry, titled “Better Than Feared,” KBW says it expects commercial-lines insurers to report rate increases in the 6 percent to 7 percent range, while personal-lines insurers will likely report increases in the 2 percent to 3 percent range. For reinsurers, KBW expects Jan. 1 renewals to be generally flat, including for catastrophe lines.

KBW says, “One potentially bullish point for the sector could be signs that the pricing improvements have outpaced loss trends, with the benefit falling to the bottom line.”

But the firm notes that “the math is more complicated,” as it outlines headwinds insurers face as they prepare to report third-quarter results. 

For one, KBW says it expects reserve releases to continue to slow. “A year ago in [2011's third quarter], we saw 5.3 percent of reserve-release benefit, and we expect at least a point of deterioration from that level,” says KBW, adding that the firm remains cautious on companies that have already reported some reserve leakage in 2012.

KBW also points to continued challenges with investment returns. “In [2012's second quarter], we saw an average decline of 3.4 percent [in investment income], and we expect similar pressure in Q3,” KBW says. But the firm adds that insurers with equity-market exposure should have a good quarter, as the S&P 500 performing better.

Broken down by P&C sub-sectors, KBW says regional and specialty carrier third-quarter commentary will likely be similar to the second quarter, with pricing up by mid-single-digits, driven by commercial property and workers' compensation, and a modest growth in insured exposures. “Unfortunately for some carriers,” says KBW, “adverse reserve development may offset the underwriting boost from a relatively mild storm season [in [the quarter].”

For personal-lines insurers, KBW says the weather was relatively mild, other than Hurricane Isaac and “some small tornadoes.” As a result, KBW raised its earnings-per-share estimate for Allstate to $1.15 from $0.97.

Personal-auto insurers should report modest premium growth, but KBW says it expects continued pressure on accident-year profitability due to mid-single-digit increases in severity and low-single-digit increases in frequency.

KBW says the “macro picture” for brokerages is bright, as revenue growth is expected to be driven by gradually improving organic trends and “robust M&A activity, particularly for middle-market brokers.” 

For Bermuda insurers and reinsurers, KBW expects favorable operating results due to light weather-related losses.