P/C Sector Expected to Post Strong Q3 Earnings: KBW

October 10, 2012

The third-quarter earnings season is almost here. And analysts at research firm Keefe, Bruyette & Woods published their propety/casualty insurance earnings preview this morning.

Overall, the analysts expressed optimism for the P/C insurance sector. The third-quarter earnings season will reflect initial crop losses from the U.S. drought, and there could also be $1-2 billion of losses from Hurricane Isaac. But all in all, the analysts observed, “for a third quarter, the world appears to have had good luck.”

“With good EPS (earnings per share) and potentially favorable news on capital management activity ahead of us, we expect the P/C sector to have a good third-quarter earnings season,” KBW analysts forecast.

Keefe, Bruyette & Woods analysts provided the following forecast:

• Prices rising. Analysts said they expect pricing pressures to remain “modestly upward.” U.S. commercial lines appear to be up in the 6-7 percent range and personal lines are rising in the 2-3 percent range. In reinsurance, the expectation for January 1 is generally flat, including catastrophes lines, despite what is shaping up to be a cat-free year, analysts said.

• The potential for underlying margin expansion. Analysts noted that 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. Unfortunately, the math gets more complicated when considering reserves and falling yields.

• Reserve pressures growing. Analysts said they expect reserve releases to continue to slow. A year ago, KBW analysts saw 5.3 percent of reserve release benefit and they are expecting at least a point of deterioration from that level.

• Falling yields but good equity returns. The “slow-motion collapse” of investment income should continue into the latest quarterly results, analysts predicted. In second-quarter results, KBW analysts saw an average decline of 3.4 percent across the industry and they said they expect similar pressures in the third-quarter reports. In contrast, those with equity market exposure should have had a good quarter, with the S&P up 5.8 percent, analysts predicted.

• Capital management. KBW analysts said they expect that investors will be keenly focused on capital management during quarterly calls. Amongst the Bermudians in particular, after a quiet hurricane season and what is expected to be flattish January 1 pricing, analysts said they expect to see an uptick in share repurchases.

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