First American Vs. RenaissanceRe Holdings: Which Is Better?

A buoyant economy — reflected by accelerated interest rate hikes, a growing gross domestic product (GDP), lower tax rate and more-than-decent underwriting performance — has given the property and casualty (P&C) insurers enough reasons to stay upbeat about the soon-to-be-reported quarter.

However, the fourth quarter of 2018 could not escape the onslaughts of catastrophic events (Hurricane Michael and California wildfires) and this will bear a considerable impact on the P&C insurers’ results in the yet-to-be-reported quarter. In November, catastrophe modeling firm Risk Management Solutions Inc. projected losses from the wildfires to be in the range of $9-$13 billion.

In comparison to 2017, which proved to be the costliest year in terms of catastrophe loss with the insurers’ underwriting profitability taking a major hit, so far this year, the P&C insurance industry has not faced a wrath to that extent/of that magnitude. Although insurers will bear the brunt of such catastrophic events through their quarterly performances, the same is not expected to create a huge dent in their underwriting capabilities.

With respect to pricing environment, after experiencing 19 back-to-back quarters of soft pricing market, insurers began to increase prices from the fourth quarter of 2017. Per excerpts from Insurance Marketplace Realities by Willis Towers Watson, property insurance rates in 2018 are estimated to rise 20-25% for catastrophe-exposed risks with recent losses.

Moreover, the insurers also built capital reserves owing to a not-so-active catastrophe in the past, which has been helping companies meet insurance claims. Also, the insurance industry boasts an all-time high capital level that will not only back the players to counter their near-term volatility and offset the impact of hostile occurrences but also sustain the industry’s growth momentum.

With respect to interest rates, the regulatory body has chosen an aggressive path of rate hikes signifying the economic strength. With an FOMC meeting around the corner, the investors’ interest is at its peak as a fourth interest rate increase is highly anticipated. In fact, the Central Bank has also hinted at a line-up of three more rate raises in 2019 and a couple of more in 2020.

This increase in interest rates has been a boon to insurers and we are hopeful that an improving rate environment will aid investment income, an important component of insurers’ revenues.

Several factors like a decrease in unemployment rate (estimated at 3.7% in 2018), better GDP (likely to grow 3.1% in 2018) and inflation (anticipated to remain slightly above the targeted 2% through 2020) represent a bullish economic outlook.

Hence, the aforementioned factors will play a crucial role in maintaining this optimistic sentiment for the insurers in the near future in comparison to the tumultuous journey suffered by the insurers in 2017.

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The Property and Casualty Insurance industry is ranked at #181 (representing the bottom 30% of the Zacks Investment Research

Written By: Zacks Investment Research