Wall Street: Too Much Capital Draining P/C ROE
Property/casualty insurers will face years of declining earnings unless a major catastrophe or other loss event hardens the market and drains excess capital, according to several Wall Street analysts.
Many carriers and reinsurers remain overcapitalized making it difficult for them to earn a return over the cost of carrying billions in cash and investments.
At the same time the market for commercial insurance and reinsurance remains soft, blocking their ability to raise rates and pushing them to expand into new lines of business in search for growth.
“Strong capital is positive, but the challenges for the P/C industry in particular include declining pricing, slack demand and reduced earnings and the risk to book values if inflation and interest rates rise,” said Jay Gelb, managing director with Barclays Capital. “I expect earnings will decline through 2011.”
Gelb and other analysts covering the P/C industry made their comments at the Standard & Poor’s Annual Insurance Conference in New York last week.
The market for commercial lines carriers and reinsurance will remain soft for several years barring major catastrophe losses and executives will find it increasingly difficult to deploy capital, Gelb said.
“It’s going to be tough for the sector to earn much above its capital. Return on equity (ROE) has one way to go, and that is down,” Gelb said, adding that the “peak” for P/C ROE was the 2009 economic recovery and that the metric will likely “compress” for the next several years.
He said that he expects an average 9 percent ROE for commercial lines and reinsurance companies over the next two years.
Too much capital — and too many companies trying to use it — is translating into executives expanding into new lines of business with which they are unfamiliar and increasing the chance of losses, said Gail Golightly, managing director of Wells Fargo Securities.
“There is a great deal of overcapacity in the market with way too many players,” Golightly said. “That is causing many companies to seek “diversification” and is pushing innocent capital in areas that they shouldn’t being playing.”
The dour outlook is being reflected in P/C stocks, Gelb added. He explained currently P/C commercial and reinsurers are trading at — or below — one times the book value of the company.
“That’s essentially pricing in that companies will never earning anything going forward,” Gelb said.
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