Friday, April 9, 2010

P&C Sector First Quarter Profits Foreseen By KBW

The property and casualty insurance group is looking at limited top-line growth, but should record a profitable first quarter despite Chilean earthquake and winter storm losses, an investment bank’s analysts said.

Keefe, Bruyette & Woods equity researchers said for the sector, their first quarter projections also foresee some glimmers of price increase in personal lines, a slowing of favorable loss reserve development and merger and acquisition activity that targets smaller regional U.S.-based insurers.

Reinsurers, their report said, did not do well in the quarter being hit hard by catastrophe losses. Bermuda merger action is projected for that sector.

Insurers’ loss ratios, according to KBW are still likely to benefit from reserve releases although at a slower pace than 2009.

The analysts said they believe the companies’ top-line will continue to be a challenge, noting that “competition remains tough and underlying exposures have not grown. We expect investment portfolios to report a good quarter and that the industry was active with capital management.”

KBW said as a result of first-quarter loss events, including the Chilean earthquake that might involve insured losses as high as $10 billion, Europe’s Windstorm Xynthia and U.S. storms, it has reduced earnings per share estimates for a number of companies that have preannounced losses and has made its own estimates of losses for those that did not.

U.S. storm claims will largely be due to roof damage and should be small enough to fall below reinsurance coverage, the firm projected.

Despite losses, EPS estimates are still within the range of what KBW analysts said they view to be a “normal” year. The firm said 2009’s low level of loss events was the anomaly, not 2010’s activity.

KBW said its top equity picks in the sector include ACE Limited, Arch Capital Group, Allied World Assurance Holdings, Chubb Corporation, and Tower Group Inc.

According to the analysis, rates will be down in the mid-single-digit range with personal lines the only sub-segment which manages rates that are flat or increased at a low-single-digit level.

Auto and homeowners insurers, it was noted have been continuing to gradually and selectively increase prices in loss-hit areas, albeit cautiously in markets with less favorable economic conditions.

The “bright spot” for the p&c industry, according to the research report, will be share repurchase programs with most of the insurers and reinsurers that KBW studies using buybacks “as excess capacity grows despite recent loss events.”

For most p&c companies loss favorable loss reserve development will slow, said KBW, but noted that companies it studies actually saw increased favorable development in 2009, which it attributed to better than anticipated accident year loss trends or firms being over optimistic about loss trends and bringing down reserves too aggressively--possibly a combination of both.

Regarding reinsurers the researchers said they were off to a tough start, impacted by the Chilean quake, Windstorm Xynthia, Australian hailstorms and floods and U.S winter weather. “We expect abut a third of the group to lose money in the first quarter with the remainder having earnings reduced in a meaningful way,” they wrote.

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