According to financial analyst Keefe, Bruyette & Woods (KBW), the property and casualty insurance industry will continue to see rate increases due to increasing interest rates along with other economic factors. KBW said there are three financial realities which will impact the industry, increasing interest rates, the sustainability of increasing premium rates, and catastrophic losses. Currently, property rates have increased between 10 to 15 percent.
The firm pointed out that across all lines in the commercial segment, rates have steadily increased. KBW was asked whether the increase in investment yields will increase rate competition. KBW doesn’t think so.
According to KBW, the increase in interest rates coincides with an increase in inflation. Even if the market softens, dwindling reserves and loss cost-driven margin pressure will accelerate rate increase. The homeowners market will continue to see substantial increases while the personal auto market will see decreases as a result of Progressive and Allstate trying to increase their policy counts.
As it pertains to catastrophic losses, KBW will adjust its loss assumptions: the analyst is expecting higher catastrophic losses. The report states that international catastrophic events will weigh on reinsurers earnings. On a year-over-year basis, the number of US storm counts increased 8 percent in the second quarter. However, when compared to the 12 your average, the storm count is down by 31 percent.
With the recent catastrophes beginning with Super Storm Sandy – to the sinkhole in Florida that swallowed a man who was never found – to the current wildfires, and the fact that this report couldn’t account for the current tornado losses which are still being assessed in Oklahoma and the wild fire damage in Colorado, it makes sense that KBW is preparing its loss assumptions to include higher catastrophic losses.
A few of the companies that KBW highlighted in its outperform rating include: Axis and XL Group for improving their core loss ratios. Out of the five publicly traded insurance brokerage firms, the analyst expects Aon, Arthur J Gallagher & Company, and Brown and Brown, Inc. to outperform.
KBW is a full-service investment bank and broker-dealer specializing in the financial services sector. The company operates in North America and Europe and provides institutional and private investors and financial services companies with research, equity sales and trading, capital raising, and strategic advisory services. The company has built its reputation with its research platform, senior-level professionals, market innovations, and execution capabilities.