Analyst predicts “dramatic decline” in p&c earnings power

“Property and casualty insurers will see dramatic declines in core earnings power beginning as early as this summer and extending into 2006,” predicts a new study by insurance industry investment banking firm Cochran, Caronia Securities LLC.
The study forecasts a shortening of p&c cycles, from the historical eight years to two or three years. The firm also says reduced ability to use finite reinsurance as a result of regulatory probes into the practice, along with the overall emphasis on transparency, will “hasten the shift from pricing peak to trough”.
Commercial insurance and reinsurance sectors should produce earnings well below expectations in 2006, with insurance company cash flow declining in 2006 to US$40-$45 billion from US$75 million. The industry will again “show a surprising over reliance on investment income”, the study adds.
“During good times, the industry has a cushion in which cash flow exceeds earnings by a wide margin. That cushion will shrink and you will see an industry shake-out over the next 12 to 18 months,” says Adam Klauber, CFA and director of investment research for Cochran, Caronia & Co. “The firms to bet on will be those that have high cash flow and lower than average exposure to claims losses.”