The 2014 outlook for the global P&C industry is stable thanks to expected premium growth from the economic recovery and stable-to-rising penetration rates, Moody's Investors Service says.
Moody's says it expects premiums to grow at low-to-mid-single digits in North America and Europe in 2014, and at high-single digits or double digits in Asia and Latin America.
A key strength for P&C, Moody's notes, is the mandatory nature of major lines, insulating performance from economic-cycle volatility. Manmade and natural catastrophes remain key challenges, as does pricing and reserving long-tail lines.
In North America, Moody's says rate increases are moderating, “but the cumulative benefit of past increases is still rolling through earnings, notably in U.S. commercial-liability lines.” Moody's expects those lines to achieve combined ratio in the mid-90s by 2014.
While low-interest rates will continue to hurt investment income, Moody's says underwriting discipline is improved in such an environment.
Moody's also says it expects reserves to remain slightly redundant, but with a declining cushion to support earnings.
Meanwhile, Fitch Ratings says the U.S. insurance-broker industry also has a stable ratings outlook for 2014, as well as a positive sector outlook due, again, to economic improvement as well as a continuing trend of commercial price increases, albeit at a slower rate than this past year.
Fitch tracks broker performance through its industry index consisting of five publicly traded commercial brokers: Marsh & McLennan Companies, Aon, Willis Group Holdings, Arthur J. Gallagher & Co. and Brown & Brown.
Fitch says, “A continued but moderating trend of pricing improvement in many commercial-insurance-business classes should provide a tailwind for organic growth at least through the first half of 2014.” Fitch also expects new-business opportunities to arise due to economic improvement as well as—for employee benefits brokers and consulting businesses—the evolving U.S. healthcare environment.
Fitch expects mergers & acquisitions activity to remain relatively active due to “the historically low cost of debt and improved equity valuations of potential buyers” to fund purchasers. Fitch adds that it expects brokers to “continue to supplement modest organic-growth revenue through selective acquisitions.”
While the ratings agency notes that M&A activity slowed by roughly 9% in 2013 compared to 2012, driven partially by a decline in inventory after the active prior year, Fitch says the 2013 second half still saw some larger acquisitions, including Hub International's agreement to be acquired by private-equity firm Hellman & Friedman for $4.4 billion, Arthur J. Gallagher's $277 million acquisition of Bollinger and Jardine Lloyd Thompson's $250 million acquisition of Towers Watson's reinsurance-brokerage business.
Fitch says its outlook could change if brokers were to see a “material increase in financial leverage and corresponding weaker cash-based interest coverage ratios,” if the economy were to dip back into a recession or if pricing was to fall significantly, or if the industry were to experience an unanticipated earnings decline. On this last point, Fitch says the stable demand for services provided by brokers makes such a scenario unlikely.
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