While property and casualty (P&C) insurers can expect to see higher operating income year-on-year in 2019, adverse reserve development is likely to drive profits down in 2020, according to analysts at Keefe, Bruyette & Woods.
The firm said that operating income for the remainder of 2019 is likely to be boosted by rising net investment income and lower catastrophe losses, partly offset by higher core loss ratios.
In 2020, however, income will be weighed down by reserve development, despite the positive effects of lower core loss ratios and continued investment income growth.
Looking ahead to 2021, KBW forecasts slower premium growth in the P&C sector, as well as modestly lower core loss ratios and very modest investment income growth.
Analysts expect the industry’s combined ratio to improve modestly in 2019 due to lower catastrophe losses, then modestly compress in 2020 in response to rising loss cost inflation and fading reserve releases, driven by recent inadequate pricing.
In 2021, the combined ratio is likely to improve again due to the earn-in of 2019 and 2020 rate increases, KBW said.
Sustained low industry operating leverage and stable investment leverage should also persistently push down returns on surplus, absent surplus reductions driven by significant share repurchases, regular and special dividends, large catastrophes, and/or industry consolidation.
KBW’s predictions came alongside analysis of the market’s performance in the first quarter of 2019, which showed positive results for reserve releases and core loss ratios, but some disappointment in terms of net investment income, expense ratios, and premium growth.
Overall net written premiums declined by 1.2% year-on-year, well bellow the 15.7% premium growth reported in the first quarter of 2018.
The P&C sector’s core loss ratio was 30 bps below KBW’s expectations in Q1 2019, which it attributed to some margin improvement in personal auto and workers’ compensation lines and more optimistic loss picks on other lines.
The firm believes that the combination of soft workers’ compensation pricing, fading auto rate increase, and slowly increasing pricing in most other commercial lines should drive some core loss ratio deterioration in 2019.