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P&C firms covered cost of capital despite 2020 challenges: analysts

3rd December 2020 - Author: Charlie Wood

Despite 2020 having proved itself a challenging year to date for the re/insurance industry, analysts at investment banking firm Stonybrook Capital say most US property and casualty firms managed to cover their cost of capital.

StonybrookThe S&P 500 returned 18.1% over the 12 months through November 13, while bonds did well.

However, perceptions of credit risk in non-government debt held prices down relative to treasuries.

Returns averaged ~9% for 5-year investment grade bonds and about 2 points less for high yield bonds.

Analysts note how US insurer asset portfolios had total returns in the low double digits, including unrealized gains before an accounting change.

Looking ahead to 2021, Stonybrook says the key economic factor will depend on the length and depth of continuing lockdowns following what appears to be a growing second wave of infections in the cooler weather.

While there is “real progress” toward vaccines and more effective courses of therapies, analysts say that over a quarter of all Americans, and well over 40% of the employed would have had the coronavirus by next spring and many of them will gain some level of resistance.

With more outdoor activity and brighter sunlight come next spring, Stonybrook expects to see a much lower spread of the virus and greater herd immunity, perhaps even before the vaccines are widely available

The US election results may also be a positive factor, debt and equity markets successfully managed the uncertainty before and after November 3 and Biden’s platform included significant tax increases on high earners, capital gains and corporations, and also proposed to tighten regulations.

Overall, analysts expect the latter half of 2021 to improve as the year goes on, but remain overall below 2019 levels, and 2022 to be above 2019.

In regards to the P&C Industry, the timing on premium volumes is expected to be similar, although boosted by rate increases in most commercial lines, but also lagging by the timing of renewals and audits. Workers’ Compensation will rebound slower than other lines.

Classes of business will have their own response to specific lockdown and recovery issues.

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