Morgan Stanley said Tuesday that it is raising its 2018 first-quarter earnings-per-share expectations for the property/casualty insurance sector by 5% due to lower catastrophe rates.

However, the New York-based investment bank said in a research report that rising rates and volatile equity markets could hamper book value growth.

Morgan Stanley estimated first-quarter global insured catastrophe losses to total about $5 billion to $14 billion, which is below the roughly $14 billion historical first quarter average.

The report said that notable events include a bomb cyclone in the U.S., winter storms Eleanor, Carmen and Friederike in Europe, and four consecutive nor'easters in March, but these losses were likely retained by primary insurers.

“We think the passage of U.S. tax reform gives certainty to deals,” the report said, noting that American International Group Inc.’s $5.5 billion acquisition of Validus Holdings Ltd. started the recent wave of P&C industry consolidation.

Morgan Stanley said the recent wave mirrors that of 2015 and added that “we think the passage of U.S. tax reform gives certainty to deals.”

“The somewhat ‘disappointing’ January 1 renewals could also push reinsurers to consider their long-term strategies,” the report said. “The recent deals could also alter the strategic positions in the marketplace and prompt more deals.”

Potential buyers, Morgan Stanley said, could include large European and Japanese insurers and domestic players.

Other potential participants in industry consolidation could include Bermudian reinsurers, as well as U.S. specialty-regional insurers, especially those that have worked to become pure-play property/casualty companies, which would be potentially attractive to foreign companies seeking a foothold in the U.S.

The report said that recent M&A activity in the market suggests companies are looking to deploy capital into accretive deals rather than give it back to shareholders.

“We expect incremental improvements across most primary P&C lines throughout 2018,” the report said, “reflecting large catastrophe losses in 2017 and reserve pressures.”

The report said that starting in the first quarter, unrealized gains or losses in equity investments will be included in net income, which could cause large swings in GAAP earnings, particularly for Berkshire Hathaway Inc.

“Mr. Buffett has warned about this accounting change in his annual shareholders letter,” the report said. “We estimate (a roughly) $6 billion market to market impact on its (roughly) $170 billion equity portfolio, resulting in a break-even quarter in GAAP earnings. Investors should look through the volatility and focus on underlying operating earnings.”