Cat losses, investment income expected to shape fourth-quarter results

Catastrophe losses will take a toll on the insurance industry’s 2018 fourth-quarter earnings, but insurers, reinsurers and brokers should see improved investment income, and most should be profitable, according to analysts.

“Most of the companies that I follow are going to have positive earnings for the quarter,” said J. Paul Newsome, managing director at Sandler O’Neill & Partners LP in Chicago.

There may, however, be some exceptions, according to Morgan Stanley analyst Kai Pan in New York.

Quarterly net losses are expected for Axis Capital Holdings Ltd., Everest Re Group Ltd., RenaissanceRe Holdings Ltd. and Third Point Reinsurance Ltd., Morgan Stanley said in a research note.

U.S. insurers will start reporting fourth-quarter 2018 results later this month.

Brokers’ results may also be blunted, according to New York-based Keefe, Bruyette & Woods Inc.

“For the (property/casualty) brokers, we expect +3.5% median organic growth versus +5.0% in 3Q18, with expected margin expansion varying,” KBW said in a research note.

The insurance industry outperformed the broader market, KBW noted.

The S&P 500 was down 14% in the 2018 fourth quarter, while stock prices for personal insurance were down 12.6%, standard commercial lost 4%, specialty commercial was down 12.2%, reinsurers lost 10.4% and brokers were down 4.5%, the analyst noted.

A slew of insurers and reinsurers including American International Group Inc. and Chubb Ltd. also put out pre-earnings catastrophe loss estimates

“There were a lot of catastrophes in the fourth quarter,” Mr. Newsome said, including wildfire losses in California and windstorms worldwide. “When you combine the fire losses with the storms, you end up with a fairly active fourth quarter,” he said.

Insured industry losses from the California wildfires are estimated at up to $20 billion and from Hurricane Michael at some $10 billion, Morgan Stanley said. “We raised 4Q cat estimates to reflect company preannouncements and industry losses, which reduced (earnings per share) by 40% for our carriers.”

“Hurricane Michael and the Camp and Woolsey wildfires were the biggest individual 4Q18 events. We expect reinsurers to bear most of Michael’s losses, while primary insurers should retain most of the fire losses,” KBW said in a research note, adding that its median fourth-quarter change in earnings per share for underwriters was a drop of 0.4%.

Offsetting some of the losses, insurers are expected to see higher investment returns, the analysts said.

Insurance company investment income should be up for the fourth quarter, Mr. Newsome said, “largely tied to the generally higher interest rates in today’s environment. That is an offset for some insurance companies, that they’re seeing improved investment results on their fixed income books.”

“We expect pretax investment yield for our coverage universe to be up slightly in 4Q, to about 3.2% from 3% in 4Q17,” Morgan Stanley said.

“With the short duration maintained by most (property/casualty) insurers of some two to four years rising interest rates should lift portfolios. As a portion of (property/casualty) bond portfolio churns each year, they are reinvested in higher new money yield. Among our coverage, shorter duration portfolios should benefit from rising yields faster,” the bank added.

Pricing appears to be a mixed bag for the industry, the analysts said.

Price increases are decelerating on a “broad basis” with some exceptions such as workers comp, where prices are actually declining, according to Mr. Newsome. “You’re seeing less price increases or smaller price increases in most lines,” he said.

“We expect modest pricing increases to sustain in 2019,” Morgan Stanley said. “Following the record roughly $140 billion in natural catastrophe losses in 2017, 2018 was another eventful year. We think the active catastrophe year in 2018 will sustain the rate increases in 2019.”