Commercial insurance and reinsurance financial results are forecast to deteriorate for the fourth quarter of 2016, according to investment bank Keefe, Bruyette & Woods Inc.

New York-based KBW said in a research paper Thursday that it was lowering its property/casualty sector outlook for U.S. and Bermuda-based insurers and reinsurers to underweight from market weight to reflect underwriting margin contraction expected from sustained or intensifying rate competition, likely normalizing claim cost inflation and "normalized" catastrophe loss ratios.

The firm said the estimated costs of known fourth-quarter loses range relatively widely from $8.3 billion to $16.7 billion, reflecting the uncertainty surrounding Hurricane Matthew and the New Zealand earthquake, along with other smaller events.

“We expect sustained — or modestly intensifying — price competition in 2017,” the company said. In addition to recent adequate (albeit superficially, in our view) underwriting results, we expect the combination of higher interest rates and potentially lower U.S. corporate tax rates to drive P&C rates down.”

KBW said it was a little more optimistic about investment income both within and beyond the fourth quarter, “but that's largely offset by less effective share repurchases following strong post-election share-price performance.”

“Interest rates,” KBW said, “which many executives cited as a pushback against price decreases, could pressure P&C rates and underwriting margins if recent increases persist.”

KBW also said that recent corporate mergers explicitly focused on growth and relevance point to sustained premium pursuit, and “insurers who have recruited underwriting talent from competitors that are either consolidating or reducing headcounts will likely try to validate these hires with premium volumes.”

“We expect M&A activity to persist for the foreseeable future as pressured returns make it harder for some smaller insurers to convince their owners that the ‘go-it-alone’ strategy is in everyone’s best interest,” KBW said.

The firm also said it expected several tax-related topics to coming during this year’s fourth quarter earnings calls. 

This would include, KBW said, the implications of higher after-tax U.S. returns on price competition; a potential reintroduction by Rep. Richard Neal, D-Mass., of a bill that eliminates insurers’ ability to lower tax burdens by ceding U.S. business to offshore affiliates; potentially decreasing attractiveness of Bermudian acquisitions; the possible elimination of the net interest expense deduction on underwriters and brokers; and how reinsurance would fare if border provisions change.