Investor focus on pricing and loss costs outlook after mixed Q4

With the Q4 and full-year 2021 earnings season due to kick off next week, analysts expect underlying underwriting results to improve for carriers with a mixed outcome on a reported basis because of geography-specific cat losses, while broker organic growth should reflect persistent rate increases.

Q4 earnings preview

But the focus of investors is likely to be on outlook commentary relating to pricing, the impact of inflation on loss costs and expectations for margins.

In a note this morning, JMP Securities analyst Matt Carletti said geographically isolated weather and cat losses and a low level of mark-to-market gains on the back of strong equity markets will likely have an uneven impact on reported earnings per share and book value growth across the carriers he covers.

“Strong top-line growth and improving underlying core accident year loss ratios from the favourable pricing environment may be more uniform,” he added.

Carletti noted that cat activity in the fourth quarter wasn’t far from historical norms as measured by industry losses in the aggregate.

But losses that did occur were “atypical” for the time of year and highly geographically concentrated, as he highlighted the Kentucky-focused tornadoes and Colorado wildfire. This will likely lead to a wide dispersion of cat losses by carrier in Q4 underwriting results.

Historical commercial lines pricing changes – by survey

The analyst noted that interest rates and credit spreads stayed relatively flat while equity markets were strong, which should lead to modest mark-to-market improvements in book values.

KBW analyst Meyer Shields said his earnings per share estimates for the quarter are generally a little above consensus for both carriers and brokers.

He tweaked carrier estimates to reflect lower cat losses but higher personal auto losses, while his broker estimate changes factor in an expectation of higher expenses.

“Notwithstanding slowly decelerating rate increases, most reinsurers’ and commercial underwriters’ core combined ratios should improve on earned rate increases, while personal auto insurers’ results should include mostly flat earned rate changes and rapidly rising claim costs,” Shields suggested.

Meanwhile, organic revenue growth at brokers should be driven to at least the upper-single-digit range by persistent commercial P&C rate increases and steady year-on-year exposure unit growth.

That should “generally outpace otherwise difficult prior-year margin comparables”, the analyst added.

Focus on pricing and loss costs key

After what looks to have been a relatively stable quarter despite more leftfield weather losses, the focus of investors is likely to be on forward-looking commentary from management at carriers and brokers.

Pricing and loss costs – including the impact of inflation – are set to be hot topics during earnings calls.

“We expect investor focus to remain squarely upon the pricing cycle,” said Carletti, “specifically any material signs of deceleration in the pace of rate increases – and continued pandemic-related economic uncertainty.”

Shields added that while written and earned rate increases for commercial lines are likely slowing sequentially, they should remain above loss trends. “Deceleration – slowing increases that should still exceed or match loss trends – is likely to persist,” he said.

Carletti described the pricing cycle as “approaching the seventh-inning stretch”.

“While recent loss activity across a number of lines/exposures will likely keep pricing elevated, we struggle to envision a material improvement in conditions, but rather foresee pricing largely holding serve in the near/intermediate term.

“Despite some slowing/stabilisation in the pace of price increases in recent periods, pricing increases in many lines remain at levels in excess of loss cost trend, which bodes well for continued margin improvement,” the analyst suggested.