First-quarter earnings season has already witnessed 130 elite S&P 500 index members having reported quarterly results so far.
Let’s see, how the quarter pans out for the life and non-life or the property and casualty (P&C) insurance space.
The insurance industry is likely to deliver solid earnings in the first quarter, riding on the strength of an improving rate environment, tax cuts, favorable operating environment and a better domestic growth scenario.
An Improving Rate Environment
Reflecting economic stability, the Fed has hiked interest rate for the sixth time since December 2015, the recent being in March this year. The rate environment has improved to 1.75% from the near-zero level.
The first quarter thus continues to enjoy the positive impact of a favorable rate environment, driving the insurer’s investment results and the performance of life insurers.
Although insurers have lowered their exposure to interest-sensitive product lines to weather the low rate environment, they stand to benefit from the increasing rates as investment yield improves.
A Benign Catastrophe Environment
Though the first quarter encountered the California mudslide and the northeast winter storms, the insurers escaped a severe magnitude of catastrophe loss. A Morgan Stanley analyst estimates global insured cat loss in the first quarter between $5 billion and $10 billion.
Insurers having already suffered the extremities of cat loss last year could manage to brave its first-quarter damages as well. Nonetheless, first-quarter earnings are burdened by catastrophe loss. Underwriting profitability is affected, albeit to a lesser degree. Recently, Chubb Limited (CBÂ -Â Free Report) reported a drag of 64 cents on its bottom line attributable to cat loss.
Prudent underwriting standards and cost control measures will likely support profitability.
Impact of Tax Reforms
The new tax rate has been implemented effective first-quarter 2018. The overhaul of the tax system slashed the tax rate to 21% from 35%. A lower tax incidence is expected to boost net income, the bottom line as well as the scope for more capital deployment.
