The good news for insurance companies is that, in general, rate increases may have outpaced loss trends in this year's third quarter. But the benefits to carriers may be offset by growing reserve pressures and the continued "slow-motion collapse" of investment income, according to new analysis by Keefe, Bruyette & Woods.
In its third-quarter earnings preview for the P&C industry (titled "Better Than Feared"), KBW forecasts commercial-lines insurers will report rate increases in the 6-7 percent range, while personal-lines insurers are expected to show increases in the 2-3 percent range. For reinsurers, KBW expects Jan. 1 renewals to be generally flat, including those in catastrophe lines.
"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," the report contends, but KBW notes that "the math is more complicated," as it outlines headwinds insurers face as they prepare to release Q3 results.
For one thing, the firm 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 it remains watchful of companies that have already reported some reserve-leaking in 2012.
KBW also points to the continued challenge of low 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," the report says, adding that insurers with equity-market exposure should have a good quarter, as the S&P 500 is performing better.
Broken down by P&C subsectors, KBW says regional and specialty carrier third-quarter commentary will likely be similar to Q2, with pricing up by mid-single digits, driven by Commercial Property and Workers' Comp 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.
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