Industry Underwriting Woes Worsen

Analysis of third-quarter financial data of 46 insurers and reinsurers covered by investment bank Keefe, Bruyette & Woods finds worsening underwriting results but also a glimmer of hope for the industry.

As expected, industry underwriting results took a hit in response to the series of catastrophe-driven loss that have defend 2011 thus far. In Q3, the average combined ratio of the insurers was 101.3 percent some 8 percentage points higher than in the same period a year ago. According to KBW, catastrophe losses which added 11.8 percent to the total combined ratio as opposed 4.6 percent a year ago. Yet catastrophes do tell the entire story. “Most troubling is that the underlying combined ratio, which excludes catastrophes and reserve releases, worsened to 95.2 percent from 93.5 percent in the year ago quarter,” the report states.

What’s more, KBW cites problems with insurers’ other primary revenue stream. “Investment income continued to decline in 3Q11, down 3% on average due to lower portfolio yields and weak results from alternative investments,” the report states. “With expiring yields likely 100 bps higher than new money yields, we view that investment income will continue to decline into 2012 and likely into 2013.”

So where’s the good news? Oddly enough, on Wall Street. “Over the reporting period, the share price gain for our group was 11.7 percent, much better than the S&P 500’s 6.3 percent. In our view, positive commentary on the pricing environment by top management teams at leading U.S. primary insurers was the main driver of the group’s revaluation.”

What’s behind the bullish sentiment? KBW says anecdotal evidence of hardening of the commercial lines market is likely the reason. “The big story of the quarter is that senior management teams at several major insurers reported improving market pricing across their U.S. commercial books. Not only were prices improving but momentum appeared to be gathering, with each successive month, through September, better than the previous. Management teams at Chubb, Travelers and ACE were among those reporting these improvements. We view that this talk was the main driver of stock outperformance over the reporting period as even some companies that had disappointing results saw positive stock performance.”

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