RBC Capital Markets, the investment banking and capital markets business of Royal Bank of Canada, expects the US property and casualty (P&C) insurance sector to remain competitive, with softer primary property pricing and potentially elevated catastrophe losses likely to shape earnings across both insurers and insurance brokers.
According to RBC Capital Markets, the property market continues to face competitive pricing conditions, particularly during the second quarter, which represents the busiest period for US property insurance renewals and accounts for approximately 30% of annual premiums.
The firm believes that primary property pricing headwinds and the recent 1 June reinsurance renewals, which delivered property catastrophe rate reductions of between 15% and 20%, suggests a continuation of aggressive competition,
RBC Capital Markets said these market conditions have already been widely recognised as a challenge for insurance brokers, although they may also create downside risk for insurance carriers if premium growth weakens more than investors currently anticipate.
Despite the difficult operating environment, the firm noted there are tentative signs that investor sentiment towards the sector is beginning to improve following a prolonged period of pessimism. Looking ahead to second-quarter earnings, RBC Capital Markets expects management teams to continue reporting unfavourable trends in property pricing.
Against this backdrop, RBC Capital Markets expects modest revenue growth among insurance brokers, while suggesting insurers themselves may be more vulnerable to disappointing growth figures.
Analysts also expects catastrophe losses to play a more prominent role in second-quarter financial results than they did a year earlier. Although the period is not typically associated with the largest US catastrophe events, the firm noted that it coincides with the peak season for Severe Convective Storms, including tornadoes, hail and damaging wind events, which can generate substantial insured losses.
Using data published by the National Oceanic and Atmospheric Administration (NOAA) and the National Weather Service, RBC Capital Markets observed that the overall number of Severe Convective Storm events was lower than in the comparable period last year.
However, the firm argued that the location of these events is often more significant than their overall frequency in determining insured losses. It highlighted particularly severe tornado and hail activity across the Great Lakes and surrounding Midwestern states during April and June, which it believes could result in elevated claims despite the lower event count.
In addition to severe weather, RBC Capital Markets identified the continuing conflict involving Iran and the effects of Tropical Storm Arthur as potential contributors to catastrophe claims during the quarter.
RBC Capital Markets added that further attacks on vessels in the Strait of Hormuz during the closing stages of the quarter could also prompt companies to provide early indications of possible third-quarter impacts during their earnings calls.
