Despite underwriting results holding up well and the combined ratio for the sector at a very good 94.3 percent on average for the second quarter, the outlook for the P&C sector remains challenging, according to Keefe Bruyette & Woods (KBW).

The investment bank released its report, “2Q12 P&C Review: A Group Under Pressure,” stating the Q2 combined ratio is significantly better than the prior-year quarter’s 104.4 percent, which was marred by losses in the Japan quake and bad weather in the United States. This quarter experienced some loss events in the mid-Atlantic and in the central United States, resulting in 4.3 percent of cats, but KBW characterizes these as typical for a Q2.

P&C stocks were down over the 2Q12 reporting period, underperforming broader markets, as ROE pressures continue to build, according to the report. Loss trends are picking up in personal lines and may pick up more broadly, largely offsetting rate increases. Low investment yields have crushed the traditional P&C business model of trying to break even on underwriting and making returns through investment income. Reserves broadly are developing favorably but the points of leakage are growing.

Highlights of 2Q12 include:

• Favorable development fell to 4.6 percent in 2Q12 from 6.2 percent in 2Q11, with companies showing adverse development sharply punished by the stock market.

• 3.8 percent premium growth is a positive but appears to be leveling off.

• The pace of investment income decline worsened to down 3.4 percent.

• Book value grew 1.9 percent on average in the quarter.

As insurers head into the second half of 2012, the industry is already facing crop losses from the worsening drought in the United States and the prospects of another storm season are threatening. With the industry likely to face more stress, individual companies will see their reserves, balance sheets and underwriting acumen tested. KBW expects a few insurers to pass those tests with strong reserves and quality franchises—Ace Ltd., Chubb Corp., Marsh & Mclennan Cos. and Proassurance Corp.

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