NU Managing Editor Susanne Sclafane writes:

The chilly air in Hoboken wasnt the only reminder that October had arrived as I reached my office this morning. Reports from two investment analysts reminded me that the fourth quarter has startedand that forecasts for the industry would now begin to change–particularly about pricing trends. How much should they change?


Its a question we couldnt help wondering about as the analysts put out their initial reminders that something may be brewing in the market in the absence of storm losses.

What Hurricanes? read the subject line of a research note from David Small of Bear Stearns, who increased third-quarter earnings-per-share estimates for six insurers and reinsurers.

The teaser question brought to mind a dire prediction from Edmund Kelly, the CEO of Liberty Mutual earlier this year. Back in June, Mr. Kelly made the following remarks at the Standard & Poors annual insurance conference:

If theres a moderate hurricane season, I am concerned there will be a bloodbath in the fall in pricing, he said, noting that excess capacity might push top-line thinking to take over overnight.

He continued: Watch the October renewals in commercial [lines]. That will be the first sign of lack of discipline, I think.

Will his predictions come to pass? After all, this season was not just moderate–it may be among the best in years from an insurance loss standpoint.

Indeed, according to Bear Stearns Mr. Small, natural catastrophesin third-quarter 2006 may be among the lightest of the new century–likely somewhere between the low of $315 million in third-quarter 2000and the $3.7 billion of third-quarter 2003.

He continued: This lack of cat activity should provide a strong tailwind for underwriting income and book-value growth in the quarter and for the year.

Is the light-catastrophe quarter going to be a tailwind for competition as well? Morgan Stanleys William Wilts early-morning forecast indicated some change in the wind speed, if not direction.

What's changing? Competition seems likely to rise due to increasing capacity and confidence in strength of underwriting, he wrote.

Separately, the Insurance Services Office and Property Casualty Insurers Association of America reported that underwriting results were the strongest in decades for first-half 2006, with a combined ratio of 92–marking the lowest level since the groups starting keeping records of the measure in 1986. Still, net income fell 9.3 percent in the first half, as investment income dipped a little, realized gains took a dive, and insurers had to pay 20 percent more income taxes on the earnings they had.

Were not forecasters here in the editorial offices in Hoboken. While we must leave the climatologic and market predictions to experts, we cant resist posing the question to those of you feeling the winds of change–October Is Here. Can The Bloodbath Be Far Behind?

What are your thoughts on the direction of the market???

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