Better Than Feared

It’s been four years now since what some were calling the Great Scare in October 2008, tying in the Halloween season with the ugly economic events unfolding during a time in which it appeared the U.S. could be heading into another Great Depression.

And while a great deal of economic news continues to be bit “scary” at times, at least one report is out on the insurance industry that seems to deliver mostly upbeat news.

Analysts at financial services firm Keefe, Bruyette & Woods offered a third quarter earnings preview in October 2012, based on earnings per share that are largely positive, under the title “Better Than Feared.”

“We are not revising many of our EPS estimates for 3Q12, although we point out that we tend to be on the high side of Street estimates,” the report’s authors state. “The quarter will reflect initial crop losses from the U.S. drought for which we have already reduced EPS estimates. In addition, there could be $1-2 billion of losses from Hurricane Isaac. All in all, for a third quarter, the world appears to have had good luck.”

Some key points in the report:

Prices are rising, and the report’s authors expect pricing pressures to remain modestly upward, with U.S. commercial lines likely up in the 6 to 7 percent range. In reinsurance, the expectation for Jan. 1 is generally flat, including catastrophe lines, “despite what is shaping up to be a cat-free year,” the report states.

“One potentially bullish point for the sector could be signs that the pricing improvements have outpaced loss trends with the benefit falling to the bottom line,” the report states.

Reserve pressures are growing, and the analysts expect reserve releases to continue to slow. “A year ago in 3Q11, we saw 5.3 percent of reserve release benefit and we expect at least a point of deterioration from that level,” the report states. “We also remain generally cautious on the companies that have already reported some reserve leakage in 2012 as managements attempt to put issues fully behind them.”

The macro picture for the brokerage business is bright, according to the report.

“We expect mid- to upper-single-digit revenue growth driven by gradually improving organic trends as well as robust (merger and acquisition) activity, particularly for the middle-market brokers,” according to the report.

So overall things don’t look too scary, or as the report states:

“With good EPS and potentially favorable news on capital management activity ahead of us, we expect the P&C sector to have a good 3Q12 earnings season.”