Premium volumes could be even lower than expected as competitive pressures worsen and buyer budgets remain tight, according to KBW. Loss ratios could deteriorate as weather normalizes, reserve releases decline and soft rates flow into results. Expense ratios may rise as premium volumes fall and management teams invest in new platforms. Investment yields are falling and, as a result, KBW believes income will be weak in 2010. The bank also expects that share buybacks may disappoint. Additionally, balance sheet risks include weakening reserve positions and the potential of a “double dip” recession hitting investment portfolios.
The report goes on to note that the chance of P&C insurers meeting the 9% to 11% ROE expectation is low, and while the odds of disappointment are high—in either case—KBW believes valuation expansion is unlikely. On the positive side, valuations are near all-time lows, well below book value, and barring a major catastrophe, another round of credit market losses or a spike in loss cost inflation, book values are unlikely to decline.