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Fewer catastrophe losses to lead to better Q3 results for US P&C insurers

Industry analysts expect U.S. property and casualty insurance companies to post positive earnings results in the third quarter as catastrophe losses are set to come in far lighter than a year ago.

All 18 publicly traded U.S. property and casualty insurers are projected to see earnings per share rise year over year, according to estimates compiled by S&P Global Market Intelligence. Among the five largest P&C insurers, only Chubb Ltd. is expected to post a sequential earnings decrease for the third quarter.

Ahead of its peers, Progressive Corp. posted third-quarter results Oct. 16. The company saw its combined ratio improve significantly year over year, falling to 90.3% from 97.4% a year ago. Catastrophe losses for the quarter were about $45 million, down from $155 million in the third quarter of 2017.

More than half of Progressive's losses reported in this year's period were due to Hurricane Florence, which struck the Carolinas and Georgia in mid-September. The insurer expects losses from Hurricane Michael, which struck at the start of the fourth quarter, to be about $60 million.

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Despite the impact of Florence, losses from tropical systems will fall dramatically year over year, said Keefe Bruyette & Woods analyst Meyer Shields. The third quarter of 2017 saw the Caribbean and mainland U.S. hit by three powerful storms: hurricanes Harvey, Irma and Maria.

A series of smaller events, including Florence and U.S. hailstorms, will cause sizable, but manageable, catastrophe and weather losses, Shields said. The analyst expects most commercial casualty lines rate increases to strengthen over the second half of the year; commercial property and personal auto increases may fade and reinsurance pricing should range from flat-to-down to up modestly for most casualty lines, he added.

Similarly, B. Riley analyst Randy Binner said Florence–related losses generally fell within budgets. However, he remained cautious on catastrophe loss estimates, writing that they have tended to run high in recent quarters.

In an Oct. 8 research note, Binner said he continues to see casualty line reserve adequacy "in decline across the industry" and believes that overall soft commercial lines pricing conditions will lead to margin compression throughout the industry.

Anticipating the third quarter to be a positive one, Sandler O'Neill analyst Paul Newsome also said Florence will not result in a very large insured loss for the industry. "The wild card with respect to catastrophe losses in the third quarter appears to be the level of catastrophe losses excluding Hurricane Florence, particularly in September," he wrote in an Oct. 5 note to clients.

Although Newsome expects pricing trends to be good, he warned that they may not be "as positive as some would desire."

The auto insurance industry continues to experience pricing tailwinds as premiums increase at a mid-single-digit pace. But Newsome also cautioned that pricing may have peaked as several large insurers have now achieved price adequacy for their auto books.

CFRA analyst Cathy Seifert expressed a similar sentiment.

"The viability of the auto insurance pricing model against the backdrop of continued adoption of semi-autonomous and autonomous vehicles would be another big issue," she said in an interview.

The main catalyst for P&C stocks is the pricing environment, according to Seifert, who said investors should pay attention to management guidance on that front during this quarter's conference calls. For her part, Seifert does not expect the market to harden in the coming months.

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