WIN Magazine - Summer 2012 - (Page 19)
THE ECONOMY AND THE INSURANCE PRICING CYCLE
When Good News is Bad News
BY WILLIAM WILT
OST ANALYSTS REMEMBER the first time they got “it.” “It” in this case refers to the idea that bad news often begets good news for property/casualty insurance stocks and their owners. Put simply, mega-catastrophes (gut wrenching though they may be) soak up excess capital; against a fixed demand (often times one that grows following a megacat) market clearing insurance rates move higher and so do stocks. Our question: If bad news (for normal people) is good news for insurance investors, is the reverse also true? That is, might an improving economy and a rising interest rate environment (good news for most people1) be bad news for insurance stocks? Today’s nascent, hardening market is being driven by years of rate decreases, an accumulation of catastrophe losses and low investment yields. Bullish commentators note that rates have to continue moving higher given the low levels of operating and investment leverage at most insurers as well as the prospect of Federal Reserve Chairman Benjamin Bernanke-suppressed interest rates for years to come. We sense most optimists would also cite an improving economy as a tailwind for insurance stocks. They have a friend in the Insurance Information Institute. BULLISH ANALYSTS… BULLISH ECONOMISTS We re cently attended the New York Society of Security Analysts’ Insurance Conference, where Robert Hartwig presented his optimistic views to the audience. Relative to his peers, Dr. Hartwig has been uniquely bullish
on the economy going back to the dark days when ng b to t rk d k whe h “double-dip” was on everyone’s tongue. He also generously shared his data-rich slides with the attendees; slides that portray a hockey stick-like shape to exposure bases that drive insurance premiums – payrolls, auto sales, manufacturing activity and more. In response to a question, Dr. Hartwig also commented that the Federal Reserve could be expected to defend its role of guarding against inflation (read – raise interest rates) should the economic rebound surprise notably to the upside All the talk of good news – an improving economy, rising exposure bases, gradually rising interest rates, firming prices – got us to thinking: This is property/ casualty insurance, it can’t be this easy! What if good news (for normal people) is actually bad news for insurance investors? First, to state the obvious, in this bullish scenario insurer’s earnings should improve as operating leverage rises and investment income improves (albeit with a lag). Moreover, on day two of the conference, the always-insightful Stephen Way forcefully shared his perspective that brokers will be much more willing to sell rate increases to businesses that are enjoying an economic upswing – not fighting for their survival. We can’t disagree with that perspective, but we still can’t help but wonder… …if an economic upswing becomes a rising tide for all, might that breed complacency about the need to aggressively raise rates? Better to get a smaller rate increase, retain the policyholder and manage capital down (to improve ROE), or so we imagine the executive suite discussion. If insurers can expect their customers to add commercial vehicles,
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Table of Contents for the Digital Edition of WIN Magazine - Summer 2012
Another Liability Catastrophe in the Making?
The Economy and the Insurance Pricing Cycle 2012: When Good News is Bad News
Capitalizing on Supplementary Coverages: MPL & Excess/Umbrella Policies
Are Your Technology Solutions Enabling Your Business?
NRRA Implementation: What Lies Ahead for Wholesalers and Producers
State Taxation of Non-U.S. Risk Premium
Rick Transfer Techniques for the American Wheat Farmer
Cyber & Reputational Risk Insurance: Past, Present, & Future
In the WIN-ner’s Circle
INDEX TO ADVERTISERS/ ADVERTISERS.COM
WIN Magazine - Summer 2012
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