Morgan Stanley: P&C sector ‘will hold up well' in recession

By David Bull

April 11 - (The Insurer) - Amid ongoing equity market turmoil and talk of the economic impact of the tariff war, analysts from Morgan Stanley have said that the P&C sector is “defensively positioned” and should “hold up well” in the event of a recession.

In a note, Bob Jian Huang said: “Historical recession scenarios lead us to believe P&C will hold up well. Recent market volatilities led us to revisit historical P&C insurance performance through various recession periods starting from 1980.

“In most cases, P&C insurers and brokers outperformed the S&P 500. Brokers outperformed the market more often than carriers. This is likely due to the nature of P&C product offerings, relatively balance sheet light, and relatively conservative portfolios.”

He added that elevated weather-related cat losses, “ever ominous” fear of social inflation, and conservative investment portfolios should continue to support P&C premium growth and protect earnings in difficult times.

The analyst described the P&C sector as “defensively positioned” because of its conservative investment portfolios and the strength of its product offerings, along with other factors.

The note also highlighted the potential impact of changes in the interest rate environment.

When interest rates are rising, P&C stocks have tended to outperform the market, although brokers were less affected.

But in a declining interest rate environment, brokers typically underperformed the market. Meanwhile, the personal lines sector tends to be less affected by interest rate movements, which is likely due to the short-tailed nature of their investment portfolios, said Huang.

The note looked back at the last seven market recessions and found that P&C insurers generally outperformed, except for the 1980 and 2020 years, the former when the recession was driven by inflation which led to interest rate increases, the latter when the COVID-19 lockdowns introduced uncertainties at insurers and brokers.

The analysts reported that on average P&C carriers outperformed the S&P 500 by 5.7 percentage points over the past seven recessions, with brokers outperforming by around 8.4 percentage points.

They noted that during difficult equity market conditions, premium growth in the P&C sector generally held up well, especially for commercial lines.

“This is likely due to the resilient nature of the commercial insurance products. For commercial lines, given the rising risk of weather related catastrophes and social inflation uncertainties, we expect premiums to remain durable.

“For personal lines, we believe the market is entering a more competitive phase. While tariffs are likely to slowdown the pace of competition, premium growth is likely to decelerate from 2024,” the analysts continued.

The note said that pricing in the broader P&C sector is unlikely to be significantly affected by a mild recession scenario, but tariffs may help support pricing in property markets if losses ramp up.

PERSONAL LINES PREFERRED, BROKERS 'MORE EXPENSIVE NOW'

In the note, the analyst said he and his Morgan Stanley colleagues continue to prefer personal lines stocks such as Allstate and Progressive because of the top-line growth potential and a “manageable” competitive environment in the segment.

They added that while they remain “long term optimistic” about the brokers, the recent run up in valuations is viewed as “a bit too much."

“Looking at current valuations, commercial lines and brokers appear to be more expensive than historical bull and bear markets going back to 2001.

“As such, we expect this to normalize somewhat despite the strong performance that brokers historically had during prior recessions,” said Huang.

He said that reinsurers appear to be undervalued, however.