P&C insurers’ operating earnings will improve modestly in 2014, and insurance rate increases will moderate into 2015, according to Keefe, Bruyette & Woods. In its report, “2014 Outlook: Prepare for a Soft Insurance Rate Landing,” the boutique investment bank said returns are no longer either poor enough to sustain the recent pace of insurance pricing improvement or rich enough to stimulate meaningful rate softness outside of a few lines. “While we’re neutral on the sector as a whole, we still see attractive opportunities within individual stocks with unique earnings improvement drivers or valuations,” KBW said in the report.

Within personal auto, KBW said insurers with significant scale and analytical advantages or specialized niches offering competitive moats and targeted pricing advantages will be better bets. “Smaller generalist personal lines insurers will face an incrementally tougher environment over the next few years,” according to the report.

KBW said the homeowners’ rate environment is slightly better than auto’s and is estimating the industry’s year-to-date combined ratio (through September) at 103.9 percent, “significantly below recent years, but still inadequate.”

The standard commercial lines market has fragmented in recent years, according to the report. This trend abated during the last hard market, but no similar consolidation has emerged during the recent rising-rate period. KBW said larger insurers’ soft-market discipline explains the fragmentation, but unlike past hard markets, smaller (generally less sophisticated) insurers haven’t yet been hurt by underpriced business.

And, in specialty commercial, the outlook is similar to that of standard commercial lines writers, as KBW contends slowing upward rate momentum and the still-weak investment environment should hinder insurers’ ability to generate acceptable returns in 2014, assuming normal catastrophe losses.

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