Q2 preview: Analysts zero in on carrier loss costs and broker growth headwinds

By David Bull

July 16 - (The Insurer) - Investor attention during the U.S. P&C earnings season will be on casualty loss cost trends, reserving and property softening at carriers and organic growth headwinds for brokers, according to analysts at BofA Securities and Morgan Stanley.

In a preview note, BofA Securities analyst Josh Shanker and his colleagues highlighted key questions on loss costs and policy growth.

“With inflation lingering higher and the possibility of additional tariff-induced inflation, investors will be keen on emerging loss cost trends,” he said.

Auto profitability is expected to improve as prior rate increases earn through, but there are concerns about the effect of competition on policy growth after “weak” figures from Progressive in both April and May.

Morgan Stanley’s Bob Jian Huang highlighted multiyear social inflation headwinds for commercial P&C insurers, which have continued to take reserve charges for other liability occurrence (OLOC) and commercial auto liability (CAL) for post-COVID accident years.

“We expect the commercial carriers to have less favorable reserve releases YoY in 2Q25, as the P&C industry will not be able to offset the OLOC and CAL reserve charges due to less reserve redundancy in workers comp and other liability claims-made going forward.

“Social inflation continues to be an issue for commercial lines, as current pricing increases in general liability and umbrella/excess are unlikely to fully offset the adverse social inflation impacts on overall loss cost trend. That said, we don’t expect any major reserve charges in 2Q for our commercial P&C coverage,” he said.

The analyst also noted growth headwinds for commercial lines from the slowdown in property pricing across the primary and reinsurance sub-sectors.

“That said, we would note the P&C industry continues to see disciplined underwriting and tight terms and conditions overall, which is key for heathy earnings growth,” he continued.

FOCUS ON REINSURANCE RENEWALS

Commenting on the mid-year reinsurance renewals, Shanker said: “Indications from 6/1 point to orderly renewals, continued discipline in terms and conditions with loss exposed accounts seeing rate increases while loss free accounts (are) seeing rate declines.

“With the significant amount of catastrophe losses in the past 12 months, we expect most accounts to be loss exposed and hence have a constructive view of property reinsurance rates going forward. Investors will be looking for commentary regarding this and upcoming renewal periods.”

Huang said the focus will be on the prospects for return on equity in the coming softer market for P&C reinsurance.

On the property side, he said early conversations have pointed to weaker mid-year renewals, but that after large cat losses in the first half of the year (including California wildfires and aviation-related events), the hurricane season and upcoming January 1 renewals will likely be the next major catalysts.

“As such, while reinsurance business remains steady, we see limited upside until then,” he suggested.

For casualty reinsurance, pricing appears to be “holding up well”, said Huang, as social inflation continues to be a headwind to overall reserving and earnings.

INSURANCE BROKER HEADWINDS?

Huang said the focus for the broker segment is likely to be on pricing, growth and margins.

“Going into (the) rest of 2025, GDP and pricing could remain volatile, which could serve as a longer-term headwind for the brokers. A key topic of focus for brokers revolves around organic growth and margin expansion,” said the note.

The analyst added that expansion into the market has been a major focus for some brokers too.

“Pricing in the middle market and specialty markets is more supportive than large markets, and the continued shift of risk into E&S markets should benefit Ryan Specialty,” he said.

“While expense savings programs are continuing, the overall margin expansion may not be as strong as previous quarters. Longer term, pricing trends in both primary and reinsurance could see continued pressure, most notably in property for 2Q25e,” the analyst continued.

He also highlighted a divergence between the views of bulls and bears when it comes to the broking segment.

He suggested that “bulls” believe a marginally more stable macro environment and increased deal activity in the second half of the year should support large market brokers.

“On the other hand, bears see less attractive valuations as growth slows down, competition in the middle market increases, and reliance on M&A for growth becomes a larger theme,” Huang said.

Shanker also pointed to macro headwinds having an effect on some clients as they delay projects because of uncertainties.

“As macro uncertainties persist, underlying weaknesses may emerge, though the resilience in the economy so far means that growth may emerge stronger vs our projections,” he said.