Property/casualty insurance rates gradually improving: KBW
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Property/casualty insurance pricing continues to improve, but only gradually, according to a note issued by Keefe, Bruyette & Woods Inc. on Friday after its annual insurance conference in New York this week.
“While we might view the general tone of management teams at our annual insurance conference to be somewhat 'uninspired,' the rate environment does continue to gradually improve, helping to offset the crushing pressures of lower investment yields,” said KBW, a New York-based investment bank.
The note says that the consensus appeared “to hover” around 5% for average rate increases for most U.S. commercial property/casualty lines, with the possible exception of workers compensation.
“This is approximately around the same level from where rates were earlier in 2012, indicating that there appears to be no momentum or acceleration of rates into a traditional hard market,” said KBW.
But the note pointed out that while there have been workers comp rate increases in states like California, Florida and New York, insurers posted a 115% workers comp combined ratio last year, “so there is much room to improve.”
The note also said while “there was much hand-wringing” over low investment yields and “the challenges of replacing attractive 2.5% 10-year securities, there seemed to be little that managers were willing to do to pursue yield, and most are focused on driving better underwriting results or buying back stock.”
KBW said that although all financial markets feel pressures from 10-year yields below 2%, property/casualty insurers “have a crucial off-setting 'release value' in the form of raising prices to improve underwriting margins.”
But the note added that for most insurers, “we expect that mid-single-digit rate increases will not be enough, particularly as reserve levels weaken, and ROEs continue to decline.”
Those insurers with good balance sheets and strong franchises still have the opportunity for double-digit returns, said KBW.
