The prolonged low interest rate environment has taken a toll on (re)insurers results, according to a note by JMP Securities analyst Matt Carletti.
The analyst said long-tail lines - including workers compensation and medical malpractice – require some of the most combined ratio improvement to offset lost investment yield.
Carletti said recent results have highlighted the heavy reliance on investment income as a driver of profitability, which he said was typical of the industry.
With investment returns declining since the financial collapse of 2008, Carlietti said some carriers had dubbed the “anemic investment environment the unnamed catastrophe” given its dampening impact on return on equity in the industry.
He said the typical solution to persistent low yields was to increase the duration of the investment portfolio to capture the higher interest rates on the longer-end of the yield curve.
But Carletti noted that most carriers had tolerated lower current yields in exchange for protecting their book in the expectation that rates would eventually increase.
Some insurers increased allocations to equities and alternative investments, Carletti said.
To the backdrop of prolonged low interest rates, the analyst said the companies within its universe that are best positioned are Atlas, Argo, HCI Group and Renaissance Re.
Carletti explained that those carriers were among the best positioned in the near term for such an environment due to the combination of low duration and low investment leverage results in a portfolio that he said is well insulated from book value headwinds in a rising interest rate environment, having the flexibility to quickly reinvest at higher rates.