P&C execs bullish on pricing following record cat losses

After record catastrophe losses in the third quarter, P&C executives are more bullish on pricing, according to an October 24 research note by Morgan Stanley.

Morgan Stanley estimates 1 to 5 percent rate increases could lift earnings by approximately 6 to 29 percent on average.

A brighter pricing outlook should drive better investor sentiment on the group, which is yet to be fully discounted in the stocks, stated the report.

It said that following approximately $100 billion industry losses from hurricanes Harvey, Irma and Maria, two powerful earthquakes in Mexico, and the Californian wildfires, P&C re/insurers are more vocal on the need for improving pricing.

“On the 3Q earnings call, Travelers’ management set a bullish tone on commercial P&C pricing given the record losses, higher risk perceptions, and years of deteriorating fundamentals in declining pricing and investment yields. Their views are shared by an increasing list of companies,” the report said.

Morgan Stanley expects double-digit property cat reinsurance pricing increases and more gradual improvement in primary property insurance, according to the report.

Regarding the potential earnings impact, Morgan Stanley’s scenario analysis indicates that 1 to 5 percent overall pricing increases could improve core combined ratios by 1 to 5 points, which could lift earnings by approximately 6 to 29 percent on average for the companies covered by Morgan Stanley, all else being equal.

“Companies with larger property cat reinsurance exposures (AXIS, Everest Re, RenaissanceRe, and XL Group) could see higher overall pricing and greater earnings benefits,” it stated.

The report acknowledges that a brighter pricing outlook will take time to translate into earnings and could be offset by higher catastrophe loss assumptions. However, an improving pricing outlook should drive investor sentiment on the group, it said.

Morgan Stanley notes P&C brokers are also beneficiaries of higher pricing, which supports better organic growth.

Historically, P&C stocks tend to underperform immediately after major events but subsequently outperform as losses become certain/manageable and investors’ focus shifts to improving pricing. Since pre-Harvey, the price-to-book multiples on companies covered by Morgan Stanley have expanded by approximately 4 percent on average, reflecting higher earnings per share and return on equity potential.

“The higher multiples are yet to fully reflect more bullish outlook on pricing, in our view,” the analysts wrote. “We think the rising pricing tide could lift all P&C boats.”

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