Quick return to P&C price increases not likely any time soon: KBW

Keefe, Bruyette & Woods (KBW) analysts caution that a return to the 2020-2024 pricing increases is not expected for several years for the property and casualty (P&C) market.

The new KBW Industry Update, “More Room for Pricing Deterioration in U.S. Small and Mid-Sized Accounts,” underscores the historical trend that hard markets – characterised by significant rate increases – are typically brief, while soft markets – marked by modest, compounding rate decreases -tend to be more prolonged.

KBW’s outlook for the brokerage sub-sector was split based on region and client size.

Analysts expressed relative pessimism for domestic insurance brokerage, particularly for several years.

They stated: “Within the brokerage world, we’re more pessimistic about domestic U.S. small/mid-sized account pricing, which will probably deteriorate, and more optimistic about non-U.S. and large-account brokerage, where pricing appears to be near a cyclical bottom.”

Although pricing for smaller US accounts is currently solidly positive, KBW explained, it is projected to slow toward zero due to increasing competition from large carriers leveraging their scale and skill advantages, and from consolidating brokers pursuing lower prices for clients.

The firm is more optimistic about non-US and large-account brokerage, as it believes current pricing in these segments is near a cyclical bottom, with headwinds likely to moderate by mid-2016.

“Comparing current pricing to historical ranges by region and/or segment, we think the revenue growth headwinds stemming from non-U.S. and large-account pricing are at or close to the biggest decreases that are likely to emerge. In contrast, we see significant room for worse pricing for domestic small and mid-sized accounts,” the report stated.

This has implications for brokers, with analysts suggesting a strategic preference for those with greater exposure to international and large-account markets over those focused on the domestic small/mid-sized market, anticipating more intense revenue growth headwinds, for the latter group.

KBW stated: “Amongst the publicly-traded large-cap brokers, our sense is that MMC, AON, and WTW are relatively over-exposed to the international and/or large-account segments, while BRO and AJG (in that order) are more exposed to domestic small and mid-sized accounts, putting us a little more positive on the former group than the latter.”

Despite recent underperformance, broker EV/EBITDA multiples are still well above prior soft-market levels, likely justified by increased broker scale, lower corporate tax rates, and currently positive blended US pricing.