Property and casualty insurers have witnessed a rise in catastrophe losses during the second quarter, while reinsurers have experienced a decrease as they move away from frequency risks, according to analysts at BMO Capital Markets.
“… reinsurers are incrementally further away from risk vs. a few years ago, meaning primary insurers have more skin in the game,” said analysts.
According to BMO Capital Markets’ analysis, there’s been a shift in the nat cat experience among primary insurers and traditional reinsurers during the second quarter of 2023.
“We estimate primary insurers experience levels ~40% above “normal” while reinsurers are ~20% below “normal” given the nature of 2Q’s catastrophes were more frequency vs. severity driven,” say analysts.
The analysts have highlighted the additional pressures faced by insurance carriers, including higher reinsurance costs and rising property replacement values.
Reinsurance costs have contributed to increased ongoing expenses for carriers, with BMO Capital Markets estimating an impact of 50-60 basis points on the combined ratio forecast for Chubb, one of the leading carriers.
This adjustment reflects the evolving landscape of the insurance market, characterised by flattening or decelerating pricing power levels, particularly for AIG and Chubb in the large employer segment.
Despite the potential for core profit margin misses due to these challenges, BMO Capital Markets suggests that investors should consider the current valuation levels of insurance carrier stocks. Many insurance carriers, excluding reinsurers, have underperformed the broader market this year, resulting in more reasonable valuations.
Insurance brokerage 2024 EV/EBITDA multiples have seen a YTD expansion of approximately 19%, accompanied by a 16% increase in the group’s share prices. On the other hand, insurance carrier 2024 P/E multiples have declined by an average of 8% YTD, with the group’s share prices decreasing by 3%.
The second quarter’s catastrophes have been characterised by higher frequency rather than severity, indicating that reinsurers are now further removed from risk compared to previous years. As a result, primary insurers bear more responsibility and potential financial exposure.
Fortunately, insurance carriers may find some relief in higher interest rates. Despite the forward interest rate curve predicting a significant drop-off in rates by 2025, near-term rate levels are currently around 65 basis points higher than the EPS season levels of the first quarter of 2023.
This increase offsets some of the pressure resulting from higher inflationary forces affecting the property and casualty sides of the insurance portfolio.
Additionally, insurance brokerage estimates also benefit from a slightly improved short-term interest rate outlook, particularly in Europe.
However, the gains from higher interest rates may be tempered by rising wage inflation in regions such as the United Kingdom.
