Ahead of the Bell: KBW downgrades insurers

NEW YORK (AP) — An improving financial outlook for property and casualty insurers means they may not be able to raise rates on customers and may have to drop prices, said Keefe Bruyette&Woods, downgrading shares of Travelers Cos. and two other insurers.

A rebound in investment portfolios and a weak hurricane season in the U.S. mean third quarter results will likely be strong, said analyst Cliff Gallant in a note to investors Thursday.

The downside of that is the insurers will have plenty of capital on hand to cover claims from clients and will not be able to raise rates, he wrote.

When insurers' investment income drops, they may have to raise rates to pay off clients' claims. An abundance of capital means there's less pressure on pricing.

Gallant downgraded Travelers, Employers Holdings Inc. and Navigators Group Inc. to "Market Perform" from "Outperform," despite the companies' "strong fundamental outlooks.

He also removed Hanover Insurance Group Inc. from a "Best Ideas" stock list.

"We expect this combination of low growth, low investment yields and depleting reserves to lead to lackluster mid-single-digit returns for the industry," Gallant wrote.

Travelers shares dropped 73 cents to $47.93 inpremarket trading, while Navigators Group fell 90 cents to $56.68.