Keefe, Bruyette & Woods (KBW), an investment bank specifically specializing in the financial services sector, expects P&C stocks to be flat in 2010. “We see risk of weak book value growth and return on equity (ROE), and expect valuations to remain low,” the firm says in its research report, “2010 Outlook: The Market Is Right—P&C Valuations Following Fundamentals.” Every line on the income statement, KBW writes, is more likely to disappoint than positively surprise. The upside is that perhaps significant disappointment will lead the industry to the eventual hard market turn that much quicker.

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.

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