By David Bull

April 15 - (The Insurer) - Travelers gets the first-quarter U.S. P&C earnings season underway for carriers on Wednesday and Marsh McLennan opens broker reporting on Thursday, with the potential fallout from ongoing tariff-related developments set to dominate analyst calls along with the topics of casualty, cats – including the Los Angeles wildfires – and pricing trends.

The trade war triggered by the Trump administration and resulting financial markets volatility have driven headlines in recent weeks. The potential ramifications for the insurance industry are continuing to be assessed.

With the situation developing daily, management of carriers and brokers are unlikely to commit to a definitive read on the financial implications of shifting tariff policies.

They will expect to be probed by analysts on earnings calls, however, for insights on the potential direct impact on claims and loss costs, given the expected inflationary impact, as well as the resilience of the sector to the heightened threat of recession.

In a note previewing the earnings season, Citizens JMP Securities analyst Matt Carletti said: “We expect 1Q25 results to be highlighted by catastrophe losses (notably LA Wildfires, but also other large risk losses) and ongoing concerns around casualty loss reserves, while tariff uncertainty and the possible impact on inflation will likely also be of key focus for investors.”

Carletti suggested investors focus on “quality companies with exposure to tailwinds” as he pointed to macroeconomic headwinds including interest rate uncertainty and continued inflationary conditions.

He said inflationary conditions are sustained in certain casualty lines, “but now more in focus in property lines given tariff uncertainty."

“We recommend that investors focus on companies that have strong balance sheets (persistent inflation will likely continue to cause investors concern surrounding some companies’ casualty loss reserves, despite recent reserve additions) with EPS streams that are leveraged to both underwriting results (amidst generally strong market conditions) and investment income (those with longer-duration portfolios will benefit longer from recent interest rate rises as/if rates decline),” Carletti added.

Wells Fargo analyst Elyse Greenspan suggested that for non-life insurers there will be a focus on reserves, margins, pricing and the impact of tariffs.

“Non-life insurers will see results impacted by high cat losses, due to CA fires. We expect a focus to be on color on pricing, reserves (especially for long-tail lines), any change in capital return philosophies, and expected impact from tariffs (25% auto tariffs were not rolled back for 90 days like reciprocal tariffs),” she said.

Greenspan added that property pricing is likely to continue to slow, with casualty most likely continuing to strengthen.

For brokers, she predicted the focus of investors will be on organic growth, margins and M&A.

The analyst suggested that with brokers overall expected to continue to generate "good" organic growth, the numbers coming in from their reinsurance divisions could be a “potential surprise” after Arthur J Gallagher signalled mid-teens growth in a recent investor call.

Greenspan said she is looking for 6.9% organic growth overall on average, slowing from 7.9% in Q4 2024, excluding faster-growing Baldwin and Ryan Specialty.

“We expect a focus to be on core margin improvement (ex fiduciary interest income – FII), any change in organic growth outlooks, FII views, M&A/SPAC activity and color on expected impact of tariffs,” she continued.

Meanwhile, KBW’s Meyer Shields also pointed to similar themes he expects to be at the top of the agenda during the earnings season.

“We expect tariff-related concerns – including potential claim cost inflation, slowing premium growth, investment allocation, and capital deployment – to dominate 1Q25 conference calls, with less attention paid to reported results,” he predicted.

Reported results are expected to include solid but slowing commercial and specialty net written premiums growth; significant (mostly wildfire-related) “but manageable” cat losses; company-specific commercial casualty reserve development; and “strong” core personal auto and homeowners core underwriting results with strong and/or improving growth of policies in force, the analyst continued in a note.

He said he has left unchanged or modestly raised most underwriter EPS estimates to reflect “relatively benign” cat losses since the January wildfires, with broker estimates mostly unchanged.

“We’ve mostly lowered target prices, applying lower multiples to reflect tariff-related uncertainty,” he concluded.

CASUALTY FIRMING CONTINUES BUT MID-YEAR CAT RATES TO SOFTEN

In his note, Carletti also took a look ahead to mid-year cat renewals and commented on continued hardening pressure in casualty insurance.

He suggested investors will zero in on market conditions at June 1, the second-largest cat renewal of the year, which is weighted towards wind-exposed risks.

“Given recent strong results that are driving capital flows as well as Florida reforms that have proven very effective, we expect pricing to be down modestly despite recent hurricane activity,” said the analyst.

Carletti described the U.S. casualty market as “highly dynamic,” driven by social inflation along with rising levels of litigation financing.

“We have known for some time that reserves for the soft market years in casualty (originally thought to be 2015-2019) were questionable at best for many in the market. Now pile on a few years of high inflation and the smoke has fully turned into fire, with only the strongest and most conservatively-stated balance sheets likely to avoid a reserve charge… maybe.

“Add to this a pandemic that delivered very mixed and unclear claims trend messages and now some companies are biting their nails over their 2020-2022 accident years as well,” he observed.

The “highly dynamic” environment is why “prudent” underwriters are continuing to keep loss picks high and report reduced levels of favorable reserve development which often stems from recent property accident years rather than casualty, Carletti suggested.

“Suffice to say, we expect prior year casualty reserve additions to continue to be a theme as we progress across 2025, albeit 1Q reserve addition activity tends to be seasonally light given the recency of typical 4Q deep dives,” he added.