Insurance News

Bank cuts profits outlook for property/casualty insurers

Posted on: October 11, 2011

Catastrophe losses will cut into the third-quarter profits of property/casualty insurers and reinsurers, but companies operating the sector are benefiting from favorable reserve developments and, in some cases, higher premium rates, Keefe, Bruyette & Woods Inc. said in an analysis released Thursday.

The New York-based investment bank said it had lowered its earnings estimate on many property/casualty insurers but said that stock prices in the sector are relatively cheap.

“(Property/casualty) still represents an area of relative financial strength,” KBW said in its research note, “The Not Totally Terrible Sector: Third-Quarter 2011 Earnings Preview.”

Coastal exposures

KBW cut its estimates for many companies with U.S. coastal exposure, to reflect the impact of Hurricane Irene. In a few cases, KBW said it also expects adverse development from the Japan earthquake in the first quarter of 2011.

The report also notes that that property/casualty insurers and reinsurers are subject to pressures from the weak global economy, dwindling interest rates, and exposure to “potentially severe problems” in Europe.

In some cases, however, the property/casualty sector is seeing some rate increases. For example, reinsurance rates increased between 8% and 12% during mid-year renewals, property rates have seen increases and workers compensation rates have increased in some states, the report states. For most casualty lines, rates are flattening or showing single-digit decreases.

Reserve development

Insurers also are benefiting from favorable reserves development, KBW said.

The industry had a preliminary total of $3.3 billion of favorable reserve development in the second quarter, compared with $3.5 billion of favorable development in the same quarter in 2010, KBW said. The investment bank said it expects more favorable development in the third quarter, but also warned that favorable development won’t boost earnings as significantly going forward as in the past several years.

Copyright © 2011. Crain Communications, Inc.

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