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P&C industry pricing and profits to remain mixed through 2018: KBW

7th June 2018 - Author: Luke Gallin

The domestic property and casualty (P&C) industry experienced direct written premium growth (DWP) of almost 6% in Q1 2018, while the aggregated industry’s loss ratio improved by more than 270bps. However, analysts at Keefe, Bruyette & Woods (KBW) expect pricing and profits to be mixed throughout the year.

During the quarter, growth rates varied by individual line of business, ranging from Workers’ Compensation’s +0.8% to Commercial Auto Liability’s +13%, reports KBW, in a recent North America Q1 2018 P&C industry note.

In response to 2017 catastrophe events, homeowners’ rate increases have accelerated modestly in recent times, although KBW warns that along with property reinsurance market pricing, this could fade.

KBW notes that private passenger auto liability rate increases look to have peaked and are expected to subside in the coming quarters, while auto physical damage rate increases appear to have peaked also.

“We expected divergent pricing throughout 2018, reflecting line-specific outlooks. Personal Auto and Workers Compensation competition should intensify given improved profitability, while loss ratio deterioration should sustain or accelerate Commercial Auto, Medical Professional Liability, and Other and Professional Liability rate increases,” says KBW.

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Reserve releases in the first-quarter of 2018 were strong at $6.7 billion, an increase of almost 20% on Q1 2017’s $5.6 billion. KBW explains that this, alongside improved personal auto rates saw the aggregated industry’s loss ratio (excluding AIG to mitigate the distortion in y/y direct loss ratios stemming from its mid-year 2017 true-up of its accident-year 2017 loss picks) decline from 58.6% in Q1 2017 to 55.9% in Q1 2018.

“We suspect that several commercial liability lines’ sequentially improving loss ratios owe more to reserve releases than to improving core underwriting results, and we expect most insurers’ core commercial margins to (at best) stabilize in the balance of 2018, with rate-driven margin improvement more likely in 2019,” says KBW.

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