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Little immediate 'Brexit' fallout for insurers, report says

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Though the United Kingdom's withdrawal from the European Union won't be complete for some time, there should be “relatively little disruption to the insurance market” after the so-called Brexit, according to an analysis by investment firm Keefe Bruyette & Woods Inc.

“We don't see a legitimate or credible alternative to the London specialty marketplace, so politically motivated obstacles could hurt European insureds along with U.K. insurers,” said KBW in “2Q16 P&C Preview: The Cat Comes Back,” released last week.

The report noted that the U.K. government hasn't filed Article 50 to officially begin the process of leaving the E.U., “so speculation on the long-term implications of, say, London insurers losing access to their European customers and/or their European underwriting talent is still very early.”

Looking to a more immediate issue — property/casualty insurers' second quarter 2016 earnings, KBW said the Brexit implications include lower interest rates, which should boost book values at the expense of future earnings, and significant currency swings that will most significantly lower the dollar values of U.K. and European revenue, expenses and loss reserves. “To the extent that Brexit lowers GDP growth in U.K. or the eurozone that may also have a dampening impact on P&C brokers' organic growth expectations over future periods,” said the report.

Cat losses inevitable

In addition, the report said that underwriters can expect to feel “some sting of losses” in the second quarter regardless of Brexit.

KBW noted that after almost three years of “quite limited catastrophe loss activity, we expect (second quarter) results to include some sting of losses.” The last major catastrophe to affect global reinsurers was October 2012's Superstorm Sandy, which resulted in about $36 billion in insured losses, said KBW. Second quarter losses this year, which included the Fort McMurray wildfires in Alberta, Texas hailstorms and flooding in April, and April earthquakes in Kumamoto, Japan, will likely “pierce reinsurance layers” and total global insured catastrophe losses will likely exceed $12 billion, according to the report.

Merger and acquisition activity among insurers may also tick up this year, said KBW in the report.

KBW says this could happen after hurricane season as “expenses factor into competition, but the recent slowdown in deals, declining fixed maturity yields and limited organic growth opportunities suggest that most insurers will return earnings-generated capital to investors through dividends and share repurchases.”

The report said that overall, insurance pricing was higher than KBW had previously expected. Commercial and personal lines automobile insurance rates are up “in response to widespread rate inadequacy, but several other insurance and reinsurance (particularly property catastrophe reinsurance) lines' rate decreases slowed as the quarter progressed.”