S&P webinar: Insurers at post-COVID crossroads as inflation bites

➤ Climate change issues loom large over the property and casualty (P&C) sector amid pullbacks from catastrophe-prone markets.

➤ Inflation is trending downward, but some recessionary indicators linger.

➤ High interest rates are compounding commercial real estate's post-COVID woes.

The insurance industry is at a crossroads as it deals with a post-COVID economy and changing inflationary trends, experts said during an Aug. 1 S&P Global Market Intelligence webinar.

While these are happy days from a macro perspective, the financial headwinds and tailwinds vary widely from insurer to insurer, and even between company divisions, according to Tim Zawacki, principal research US insurance analyst at Market Intelligence.

"[P&C] companies are still attempting to escape the economic circumstances left behind in the pandemic's wake," Zawacki said.

There has been cautious optimism about private auto lines, Zawacki said, an industry the pandemic most arguably impacted. Second-quarter 2023 earnings have shown, however, that this optimism has not translated to results, according to Zawacki.

Climate change has particularly impacted the insurance industry this year, Zawacki said, and there have been notable pullbacks from catastrophe-prone markets as reinsurance costs rise.

The life and annuity sector, meanwhile, posted record individual annuity sales during the first half of 2023 even as difficulties loom, Zawacki added.

Rate hike impacts mixed

The 25-basis-point interest rate hike the US Federal Reserve implemented on July 26 pushed rates to their highest level in 22 years, according to Anu R. Ganti, senior director for Index Investment Strategy at S&P Dow Jones Indices — but the impacts remain mixed.

When overlaying the Fed fund's target rate with the US Consumer Price Index, the latter is trending downward, Ganti said.

"US inflation has decelerated but still persists, and time will tell whether we're out of the woods yet," Ganti said.

However, we are currently seeing the largest inversion of the yield curve in over four decades, a classic recessionary indicator, Ganti said.

Access a replay of the webinar

Credit conditions and inflationary trends

The US Federal Reserve's efforts to combat inflation by raising interest rates poses some issues from a credit conditions perspective and could contribute to the likelihood of a recession, according to David Tesher, head of North American Credit Research for S&P Global Ratings.

"A long, drawn-out economic slowdown overlaid with a higher-for-longer interest rate backdrop is more problematic for low-rated borrowers and lenders versus a short and sharp US recession," Tesher said.

Commercial real estate has suffered in the last couple of years as the dislocation of regional malls spreads and commercial offices continue to feel the impacts of the pandemic, according to Gregg Lemos-Stein, chief analytical officer for corporate ratings at S&P Global Ratings.

Due to the long leases for commercial offices, the impacts can take a while to show up, as even under-utilized offices can have strong tenants who will not go delinquent on their rent, Lemos-Stein said.

However, as sectors more conducive to virtual work have their leases expire, they are presumably going to look for less space when they renew, an issue compounded by rising interest rates.

"The double whammy, if you will, is that these real estate entities are facing much higher borrowing costs," Lemos-Stein said.