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Member, Beacon International Group, Ltd.
The impact of rising interest rates, the sustainably of property/casualty insurance rate increases and catastrophe losses are likely to dominate the property/casualty insurance industry’s second-quarter results, according to an analysis that Keefe, Bruyette & Woods Inc. released Thursday.
In its report, Interest Rates, Interest Rates, Interest Rates! (and Other 2Q13 Thoughts), KBW said rising interest rates likely would pressure insurers’ book values by about 5.8% on average.
“Nevertheless, we see rising new money yields as a positive, notwithstanding evaporating unrealized bond gains that were unlikely to ever be realized. Also, statutory accounting looks through unrealized gains, so the impact to insurers’ deployable excess capital is mostly unchanged.”
The report noted that commercial lines rates have been holding steady, so a key question is whether rising interest income will drive rate competition. The KBW report said that would be unlikely because rising interest rates “will probably be accompanied by rising inflation, so even if (property/casualty) rates initially soften, deteriorating reserves and loss cost-driven margin pressure should accelerate (property/casualty) rate increases.”
KBW also said insurers should enjoy favorable noncatastrophe losses in what was an active catastrophe quarter. Although U.S. storm counts were up 8% year-over-year, they were down 31% from the 2000-2012 average, said KBW.