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Will Bond Rally Cause Insurance Rates To Increases?


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We have been in a soft market for at least 4 years now.  Not the longest soft market, but long enough for us insurance investors.  Many of us have commented strongly one way or the other about the ‘flation’ issues.  However, it would appear that the bond has answered that for us, at least over the next year, or so.


So I guess the question now is will this bond rally cause an increase in insurance rates as insurance companies surely can not stay profitable with 2.7% 10-year or a 3.7% 30-year treasury rates.  My guess is that it bodes well for the workers comp lines as it is a longer-tail business.





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As the saying goes, "It's not a question of if, it's a question of when."


We should worry only about the "if," not the "when."


As long as the saying holds true for an eventual hardening of insurance markets, I try not to waste time thinking about the "when." If the "when" takes longer, I take consolation in that it gives us opportunities to keep on buying cheap. Thinking too much about the "when" only sets us up for unnecessary disappointment and frustration.

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Insurers are currrently reporting pretty decent earnings. Underwriting income is decent (driven by reserve releases) and investment income is decent (driven by interest income and realized gains).


Bottom line is capital in insurance is at a very high level.


Having said all this, we can all see the storm clouds:

1.) accident year underwriting appears to be over 100; reserve releases should continue to trend lower

2.) interest income continues to fall as bond yields fall

3.) realized gains will likely diminish (given current bond and equity valuations)


We look to be in the slow drip phase. My guess is until a meaningful amount of capital disappears the slow drip will continue. Berkley feels we will see a turn the end of this year. He's a pretty smart guy...

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