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Analysts differ on the effects on property/casualty insurers should the Federal Reserve increase interest rates for the first time in nearly a decade.
The Fed, which has held interest rates to near zero since the beginning of the 2008 financial crisis, appeared poised to increase rates as soon as September before the market plunged in recent weeks on worries about China's economy.
Persistent low interest rates have hurt property/casualty insurers' bottom line, but some analysts say higher rates would not have an immediate effect.
“It's going to take some time to see any significant impact,” said Mark Dwelle, director of insurance equity research at RBC Capital Markets, a unit of RBC Dominion Securities Inc. in Richmond, Virginia.
But J. Paul Newsome, managing director at Sandler O'Neill L.P. in Chicago, said higher interest rates could have a “very quick impact” on insurers' book values.
“Over time, higher rates are probably positive to the economics of the typical insurance company,” he said. “That's because the investment returns on their portfolio will increase and the result will be higher ROE over time.” Insurer stocks “are sensitive in the short term to interest rate changes, but in the long term, relatively not sensitive to rate changes.”
Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore, said the increases “should have some impact. If you're generating more investment income, that's a good thing, even if it comes at the cost of underwriting profit because inflation is picking up. It's more predictable in terms of cash flow.”
“I think the immediate impact is good,” said Cliff Gallant, an analyst at Nomura Securities International Inc. in San Francisco.
Still, “it will be a while before we see growth in investment income. There's often a worry that higher yields will lead to more pricing competition, but I think that will take a while,” Mr. Gallant said.
A single reinsurer's performance drove a cumulative 32.2% drop in net written premiums during the first half of this year to $19.28 billion among 18 U.S. property/casualty reinsurers tracked by the Reinsurance Association of America.