The worst hurricane season in modern U.S. history is starting to look like a blip on the charts of insurance stocks, with investors banking on a quick restoration of capital as firms rediscover pricing power. It’s a fantasy, some analysts say.
Property-and-casualty stocks took a quick dip after Harvey and Irma hit parts of the U.S. and the Caribbean islands, but quickly bounced back and resumed their ascent after storm fears abated. Bulls appear to be convinced the industry is being thrust into something known as a “hard market,” in which there’s a cyclical increase in premiums that allows firms to replenish reserves.
These hopes, which have been fueled by enthusiastic commentary from industry executives, may not come to fruition, analysts say.
“These stocks will react to catastrophe losses the same way they have since the aftermath of 1992’s Hurricane Andrew,” Deutsche Bank AG’s Joshua Shanker wrote in a note to clients Wednesday. “There will be pricing increases in narrow places. We do not expect broad improvements in the P&C markets. Ultimately, we would expect any hard market ‘euphoria’ that may currently exist to dissipate.”
Investors may be “sorely disappointed” when reinsurers don’t see quick rebounds in book values as they did after past storms, Bloomberg Intelligence analyst Jonathan Adams said.
“The ample supply of capital, slower pace of recovery and changes in business mix will likely prolong the recovery in reinsurer book values,” he wrote Wednesday.
Below are excerpts from recent press releases and earnings-call transcripts compiled by Bloomberg, where insurance executives predicted how pricing will play out as the industry faces some of the biggest catastrophe losses in decades.
Patrick Gallagher Jr., CEO, Arthur J. Gallagher
“Australia and New Zealand are continuing to see rate increases, and it appears there could be some modest hardening on U.S. property lines.”
Albert Benchimol, CEO, Axis Capital
“We do not expect a sudden and dramatic increase in prices across the board as we observed in 2002. There may be some back and forths as the market finds a new equilibrium. And while we wouldn’t presume to project the full extent or length of any pricing correction, we disagree with the view that since pricing did not change materially across the board after 2005, 2008 or 2011, that it will not turn now.”
Christopher Henson, COO, BB&T
“You have to go through this window of short-term pain to really get pricing up over the long term. … We have the opportunity now through these storms for pricing to actually improve further.”
Powell Brown, CEO, Brown & Brown
“There continues to be a lot of capital across the insurance marketplace. However, the recent storms, fires and earthquakes may have implications on pricing in 2018. At the present time, we don’t have a clear view on the potential impact for next year, but there are a lot of discussions about rate increases for coastal properties. If there are proposed increases, which we think there will be, the question really is, will they stick?”
Evan Greenberg, CEO, Chubb
“I believe we are at the beginning of a firming price environment, driven by years of soft pricing that has resulted in inadequate rates in many classes. The magnitude of this year’s CAT losses, which on a worldwide aggregate basis was between a one-in-five and one-in-10 year industry event, simply adds to the pressure to return to pricing that produces an adequate risk-adjusted return.”
Steven Johnston, CEO, Cincinnati Financial
“The Cincinnati Re team is well positioned to participate in what we believe will be a firming reinsurance market, considering the magnitude of losses faced by the insurance industry as a whole.”
Dan Glaser, CEO, Marsh & McLennan
“While there could be some movement in pricing in catastrophe-exposed areas in certain lines of coverage, the degree and sustainability of any changes remains uncertain. From our vantage point, too much is unknown about how losses will ultimately develop, how capital will react or how client buying patterns will change. … Right now, it is just too early to tell.”
Craig Kliethermes, COO, RLI Corp.
“Whether the quarter’s events are enough to broadly impact rates on catastrophe-exposed coverages is yet to be seen, but our underwriters will be testing the market and getting rate wherever available.”
Gregory Hendrick, President of Property & Casualty, XL Group
“We believe that all lines will be impacted from a pricing and terms and conditions perspective. … We are starting to see rates on short-tail lines increasing to double-digit range, with loss impacted accounts seeing higher increases. … While there is the normal competing view amongst underwriters, brokers and clients on the breadth and magnitude of the market change, we fully expect there to be more favorable trading conditions in 2018.”