A hard insurance market has given insurers and brokerages pricing power that is bolstering their bottom lines, experts said, as the first quarter earnings season comes to a close.
Within the last few weeks, WTW, Aon and Marsh McLennan all reported strong first quarter year-over-year increases in revenue, while Arthur J. Gallagher & Co. enjoyed a big uptick in net earnings.
Carriers and reinsurers also did well. Allstate Corp. recorded $1.4 billion in adjusted net income compared to a $342 million loss in the first quarter of 2023. Liberty Mutual Insurance achieved consolidated net income of $1.5 billion compared to a $67 million loss last year. Munich Re also recently reported strong first quarter results. The insurance arm of Berkshire Hathaway contributed substantially to the conglomerate’s revenue and profitability.
The broader financial sector is outperforming the S&P 500 index, and that’s in large part attributable to insurance, said Cathy Seifert (pictured above, left), senior vice president and equity analyst at CFRA.
“A lot of it’s being driven by strong performance in the insurance space, largely because the property/casualty marketplace is considered hard, meaning that the insurers have pricing power,” Seifert said. “You’ve got this industry that’s in the driver’s seat in terms of pricing.”
Another analyst also noted the insurance industry’s bullish posture.
“A lot of companies had good results on an absolute basis,” said Paul Newsome (pictured above, middle), managing director at Piper Sandler.
Since 2016, the insurance industry has seen the costs of claims increase thanks to litigation losses, climate-related disasters, such as wildfires and hurricanes, and the increasing prices of insured assets, such as cars and homes.
Premium rates have gone up to respond to those factors. As the market has hardened, it also has been disciplined. Insurers are more “unified in the need to raise rates,” Seifert said. They are not undercutting each other by lowering rates.
“There is a more constrained marketplace, a more disciplined marketplace,” Seifert said. “As a result, it’s given greater longevity to this pricing cycle, which remains in an upturn, which is providing a catalyst for property/casualty insurers and reinsurers.”
The insurance uptick has been particularly prominent in commercial lines, Seifert said.
Results for personal lines also are on an upward trajectory, as was demonstrated by Allstate and Liberty Mutual with their sharp year-over-year turnarounds. That was seen as a natural outcome for a line where premiums for auto insurance have zoomed upward.
“This was very much a confirmation quarter,” Newsome said. “Personal lines, after several years of losses, are finally turning profitable.”
The quarter has been more of a mixed outcome from other lines of insurance. The “secondary lines”, such as excess and surplus and cybersecurity, are losing some of their ability to command the market after previously having “a significant amount of pricing strength,” Seifert said.
The decline in E&S is a result of claim trends that “haven’t justified the price increases coupled with a fair amount of underwriting supply in the marketplace as some of the alternative carriers increased their allocation to that line,” Seifert said. “So, supply flowed in and some of the prices kind of eased a bit.”
Although E&S performance isn’t as strong as it once was, that doesn’t mean it can’t be a winning line for insurers.
“It seems as if the growth has slowed, but it’s still extremely profitable,” Newsome said. “E&S lines are a good place to write insurance. If you’re thoughtful about how you price and create your terms and conditions, you can do very well.”
A high-interest-rate environment has produced benefits for insurers’ balance sheets, said Joe Pursley (pictured above, right), head of insurance Americas at Nuveen. Their assets have grown while they’re waiting to pay claims thanks to the better returns they can get on safe, fixed-income investments since the Federal Reserve began raising interest rates.
Insurers couldn’t make much of a return on balance sheet assets when they were only getting a 2.5% coupon on two- three- and four-year bonds, Pursley said. Now, they can buy Treasurys that yield 5% or more.
“This is the first time in a long time that what’s rolling off of their portfolio is being reinvested at a higher interest rate,” Pursley said. “Whereas if you go back to 10 years prior, every single bond that rolled off their portfolio was reinvested at a lower interest rate. That’s giving these property and casualty insurers a real opportunity to start to think about…what do we want to do with our portfolio?”
A recent Nuveen survey showed that at the margin, insurance companies move up in the quality of their investments as the market becomes more traditional in terms of interest rates and returns.
“The insurance industry kinds of feels OK from a macroeconomic standpoint about where we are,” Pursley said.
Not only is the industry benefiting from overall economic trends, it’s also likely to continue to reap revenue and profits from the hardening of the insurance market.
|
|
2021 |
2022 |
2023 |
|---|---|---|---|
|
Annual Revenue |
12,193 |
12,479 |
13,376 |
|
Annual Net Income |
1,255 |
2,589 |
2,564 |
From Aon Financial Release 2023
|
|
2021 |
2022 |
2023 |
|---|---|---|---|
|
Annual Revenue |
8,209 |
8,551 |
10,072 |
|
Annual Net Income |
907 |
1,114 |
970 |
From Gallagher Financial Release 2023
|
|
2021 |
2022 |
2023 |
|---|---|---|---|
|
Annual Revenue |
19,820 |
20,720 |
22,736 |
|
Annual Net Income |
3,143 |
3,050 |
3,756 |
From Marsh Financial Release 2023
|
|
2021 |
2022 |
2023 |
|---|---|---|---|
|
Annual Revenue |
8,998 |
8,866 |
9,483 |
|
Annual Net Income |
4,236 |
1,024 |
1,064 |
|
|
2021 |
2022 |
2023 |
|---|---|---|---|
|
Annual Revenue |
50,601 |
51,411 |
57,094 |
|
Annual Net Income |
1,500 |
-1,394 |
-316 |
From Allstate Financial Release 2023
--data visualization by Jazaj Reyes
