Look for the insurance industry to produce returns on equity of between 10- and 12 percent, said one investment bank analyst this week. Morgan Stanley property-casualty analyst William Wilt said that performance of those numbers will depend on careful stock selection.
“Macro themes may hold more sway over performance in 2007, and on balance, non-life insurers offer some defensive attributes versus other financials including less sensitivity to the low, flat yield curve or credit cycle,” Mr. Wilt said.
Personal lines look like the least attractive sector, he said. For several years pricing sophistication was the key to success in this sector, but that has been replaced by what Mr. Wilt calls “presence,” with the media blitz by GEICO as an example of how that is achieved.
“Looking ahead, the successful personal insurer will have to simultaneously balance brand management, presence and margins,” Mr. Wilt said. “That does not sound easy to us.”
For primary commercial insurers, growth could be the surprise factor. “Because no one is expecting it,” he continued.
“We know that land-locked U.S. insurers such as St. Paul Travelers and Chubb will be hard-pressed to find growth outside of market share gains,” Mr. Wilt observed.
As for reinsurers, the expected Jan. 1 renewal season boom could disappoint if the capital market alternative proves too alluring for primary companies. Mr. Wilt said that such a “relief valve” appears to be opening wider each week.
And if the U.S. economy should take a turn for the worse next year, the reinsurance sector “could perform relatively better than we now envision,” he said.
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