Concerns about pricing, reserves, interest rates weigh on P&C sector

Concerns over pricing, reserves, and interest rate weigh on investor sentiment in the property/casualty re/insurance sector, according to Morgan Stanley.

Catastrophe losses in excess of $140 billion in 2017 boosted pricing at Jan 1 property cat reinsurance renewals by +5 percent and primary commercial line pricing was +2 percent in the first quarter of 2018, the analyst report says. However, the abundant supply of capital (including alternatives) is dampening the rate of increases, the analysts noted.

Reinsurers are expecting flat to +5 percent pricing at mid-year renewals and primary carriers also see the pricing momentum slowing, particularly in workers compensation and small commercial insurance. The investment bank’s 2017 Reserve Analysis indicated a $4.3 billion industry deficiency. Reserve releases accounted for around 20 percent of industry earnings in last 7 years. Morgan Stanley analysts think thinner reserve cushion points to lower favourable development, a headwind to earnings.

Investors are more mindful of 2018 hurricane season (starting on June 1), given the devastating impact of 2017 hurricanes, analysts noted. Colorado State predicts another busy season with 14 named storms which is above long-term average of 12 but less than last year's 17. The National Oceanic and Atmospheric Administration (NOAA) forecasts 10-16 storms. Investors will have to climb the "wall of worries", especially in reinsurance stocks, according to Morgan Stanley.

Rising interest rates represent a short-term pain for the re/insurance sector, Morgan Stanley noted. Typical P&C investment portfolios are 75 percent fixed income securities with a 2-4 year duration, the analysts explained. However, higher interest rates represent a long-term gain for the profitability of the re/insurance sector, the analysts added.

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