Modest core underwriting margin expansion expected in domestic P&C insurance industry: KBW analysis
Modest core underwriting margin expansion is expected in the domestic P&C insurance industry according to Keefe, Bruyette & Woods (KBW) analysts’ newly released 2Q19 P&C Industry Results report. They have updated their domestic P&C insurance industry earnings model with ISO’s recently published 2Q19 results.
They expect modest core underwriting margin expansion in 2020 and 2021, assuming that workers’ compensation rate decreases slow down and that most other commercial lines' recent strong rate increases stay above loss trends. They also project essentially flat investment yields, driving mid single-digit industry returns on policyholder surplus (ROPS) in 2019 through 2021.
They recommend Mercury General Corporation on near-term personal auto margin expansion; they expect Chubb Limited's premium and underwriting profit growth to steadily improve into 2020; Donegal Group, The Hartford Financial Services Group, and The Hanover Insurance Group should benefit from improving overall commercial pricing; and they think AIG's upgraded management and underwriting talent will drive steady year on year margin improvement.
The analysts recommended broker Willis Towers Watson, whose revenues should reflect faster industry-wide growth (stemming from both economic growth and mostly rising commercial rates) and whose margin expansion should also reflect company-specific initiatives.
The report states that investment returns were down about 8.6 percent year on year, and the industry's pretax 2Q19 in the past 12 consecutive months (TTM) ROPS from investment income was 7.2 percent, roughly in line with 2Q18's 7.1 percent but 50 bps below 1Q19's pace, marking the first sequential decline since 1Q18.
Despite pressured investment returns, the industry's total 2Q19 pretax TTM ROPS (trailing 12 months return on sales) was 7.3 percent, above both 2Q18's 5.4 percent and its 10-year average of 6.9 percent.
“In the very near term, investment yield and underwriting margin trends are probably independent, but over the medium and longer term, we believe investment and underwriting returns are inversely related,” states the report. “For the rest of 2019, we expect deteriorating personal auto and workers compensation loss ratios - partly offset by slightly lower expense ratios - to constrain the industry's 2019 ROPS.”
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