Improved pricing conditions in the wake of record second-half catastrophe losses have prompted equity analysts to take a more optimistic view of the property-casualty sector.
P-C analysts Jay Gelb of Lehman Brothers and Brian Meredith of Bank of America have raised their outlooks for the industry this week.
Last week, the Insurance Services Office said that insurers paid a record $40.8 billion in the third quarter to homeowners and businesses for insured property losses in 14 states, making 2005 the costliest year for catastrophe damage in history.
"We have increased conviction that the property-casualty insurance sector has substantially improved pricing power in the wake of devastating hurricane losses due to increased demand and reduced capacity for coverage," Mr. Gelb wrote.
Lehman is upgrading both Everest Re and Renaissance Re "reflecting our view that reinsurers should have among the highest leverage to improving pricing trends."
Commercial insurers such as St. Paul Travelers, Chubb and American International Grade now have the 1-Overweight status, thanks to improving market conditions.
Personal lines insurers such as Allstate and Safeco should face increasing competition in personal auto. "But underlying profits remain strong, and we expect these companies to deliver above consensus earnings and return substantial capital to shareholders," Mr. Gelb wrote.
Outlook for insurance brokerages remains mixed due to margin pressures, Mr. Gelb said.
Mr. Meredith agrees with the stronger p-c industry outlook, but questions its staying power. "While we expect the rise in property insurance and reinsurance pricing to be short-lived, lasting only a year, fundamentals and earnings visibility going into 2006 is very strong," he wrote.
Mr. Meredith said the equity markets have begun to catch up with favorable fundamentals, noting Bank of America's index of reinsurance companies has traded down .3 percent since Katrina from a trough of 12.7 percent, while commercial line insurers have traded up 8.5 percent.
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