Rapidly rising interest rates in the later part of the second quarter is a “net positive” for the P&C industry, according to “Interest Rates, Interest Rates, Interest Rates! (and Other 2Q13 Thoughts),” a report from Keefe, Bruyette & Woods, a securities broker/dealer and investment bank. Other themes affecting financial results for P&C insurers include the sustainably of rate increases and catastrophe losses.
Rising interest rates likely will decrease insurers’ book values by an average of 5.8 percent, the report said, adding that “while many investors value P&C insurers off book value, multiples tend to adjust for AOCI fluctuations.” Rising new money yields are a positive, according to the company, “notwithstanding evaporating unrealized bond gains that were unlikely to ever be realized.” And, because statutory accounting includes unrealized gains, insurers' deployable excess capital would be mostly unchanged, the company said.
Rates for broad commercial lines have increased and been holding steady, and whether increasing new-money yields will drive renewed rate competition is to be determined, the report said. Further, rising interest rates probably would be accompanied by rising inflation, and so even if P&C rates initially soften, deteriorating reserves and loss cost-driven margin pressure should accelerate P&C rate increases. “We think homeowners rate increases will similarly remain robust, while personal auto rate increases could decelerate as a few large auto insurers like Progressive and Allstate look to grow policy counts,” Keeke, Bruyette & Woods said.
U.S. storm counts increased 8 percent year-over-year, but were 31 percent lower compared to the average from 2000 to 2012. That indicates favorable non-catastrophe weather losses in what the company described as an “active catastrophe quarter.” The company said international catastrophe events likely would weigh on reinsurers' earnings.
“Domestic catastrophe losses in 2Q13 will likely exceed 2Q12’s $9.2 billion, but still trail 2Q11’s $19.2 billion,” the report said. “Given the prominent Midwestern storms, we think investors are bracing for catastrophe losses more in-line with 2Q11’s levels, which included much more activity than just Joplin. Internationally, there was considerable economic loss from flooding, drought, and earthquakes in Europe, South America, and China, which will probably pressure reinsurers’ results.”
Keeke, Bruyette & Woods said it is adjusting earnings estimates to reflect higher catastrophe loss assumptions.
