P-C Trends Look Positive Says Keefe, Bruyette & Woods

Second-quarter results for the property-casualty insurance sector were mixed, but overall profits were excellent and the trend should continue, according to an investment bank analysis.

Analysts at Keefe, Bruyette & Woods said in a report they foresee declines in premium levels for insurers and brokers’ revenues, reduced investment income and an active merger and acquisition environment, among other trends.

The report also mentioned further capital management and “modest” deterioration of profit margins.

The firm said underlying earnings results remained strong and because it expects positive trends continuing it favors smaller regional and specialty insurers.

Referring to 50 insurers followed by KBW, the report said, “The group on the whole posted a 12.2 percent annualized ROE [return on equity] in the quarter, down from 15.5 percent in a year ago, but still impressive profitability in our view.”

Among firms that KBW tracks, it said 58 percent beat expectations in the quarter, 38 percent missed and 4 percent were in line—a modest improvement from the first quarter when only 45 percent exceeded expectations and 48 missed.

The company noted particular strength in personal lines and Bermuda-based insurers and reinsurers, which were offset by commercial/specialty lines and brokers.

Merger and acquisition activity included four major deals among insurers (Safeco/Liberty Mutual, Darwin/Allied World, Philadelphia Consolidated/Tokio Marine and CastlePoint/Tower Group) and KBW said it expects “robust” deal making to continue.

With a continuing fall in insurance prices, KBW foresees continued downward pressure on premium volume in coming quarters. In the second quarter, its report said total net written premiums were only up 0.3 percent.

Total brokerage revenue growth for the five companies KBW tracks was 7.8 percent for the second quarter compared with 5.8 percent for the period last year.

KBW said it expects in coming quarters other brokers will join Aon and Gallagher in share buyback activity.

A portion of the report said that frequency of weather-related losses appears to be growing, with tornadoes and other weather causing nearly 60 percent of U.S. catastrophe losses since 1953.

It noted that the United States, averaging about 1,000 tornadoes a year has the highest number of tornadoes “on the planet” and that the first half of 2008 had nearly double the average level of tornado activity.