The slowdown in the insurance industry's pricing momentum is not surprising to financial-analyst firm Keefe, Bruyette & Woods, but it is concerning, as a return to normalized levels of both catastrophes and loss-cost inflation could cause problems for the industry when combined with rate deceleration/decreases, the firm says.
KBW expects strong fourth-quarter underwriting results for the property and casualty industry in light of below-average catastrophe losses. But that positive news for the industry "will be accompanied, and in some cases overshadowed" by "disappointing pricing rhetoric," KBW says. The firm notes that it is not surprised about the statements on pricing given insurers' "superficially acceptable" 2013 results.
According to an ISO and Property Casualty Insurers Association of America review, the U.S. P&C sector saw its net income after taxes rise to $43 billion in the first nine months of 2013, compared to $27.8 billion for the same period in 2012. The results were driven in part by $10.5 billion in net gains on underwriting for the period, a reversal from $6.2 billion in net losses on underwriting in nine-months 2012.
The results led Insurance Information Institute President Robert Hartwig to comment that the P&C industry appears to be on a "firm trajectory" for what will "assuredly be its best year in the post-crisis era."
But KBW says it is discouraged by indications that rate increases are either moderating, or in some cases reversing entirely, because the firm attributes "much or most of the industry's acceptable 2013 returns to lower-than-expected claim-cost inflation and below-average catastrophe and weather losses." Any change in this loss environment, KBW says, could lead to "further disappointment" for the industry.
In light of KBW's concerns, the firm says it is downgrading Chubb and RLI to "Underperform" from "Market Perform," despite its opinion that the two insurers are "excellent companies."
KBW says, "Our underwriter downgrades are basically a valuation call on what we view as two excellent companies whose valuations nevertheless imply more downside than upside in a deteriorating environment."
Ratings agencies have generally shared the concerns about moderating rate increases in 2014. Standard & Poor's recently said it expects rate increases to lose steam throughout the year, and also noted challenges and uncertainties for the year, such as possibly heightened regulatory hurdles and the potential for greater inflation that could inflate claims costs.
S&P said the "stable credit quality in the P&C sector hinges on insurers' efforts and commitment to improve underlying underwriting profitability against the headwinds of weather-related volatility, a sluggish economy, reinvestment risk resulting from low investment yields and potentially inadequate reserve levels."
Fitch Ratings and Moody's Investors Service, while giving the P&C industry a "stable" outlook, also both recently noted that pricing momentum is expected to ease in 2014.
A.M. Best recently said it is maintaining a negative outlook on the commercial-lines insurance sector, an outlook it has held since 2011, due in large part to concerns over the sector's reserve position.
A.M. Best gave a "stable" outlook to the personal-lines and reinsurance sectors.
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