BMO Capital Markets reports unfavourable inflation and reserving trends

In a recent report from BMO Capital Markets, analysts suggest that companies are coming to the realisation that more recent 2020-2023 vintages are also slightly under-reserved, similar to older 2019 and prior vintages.

The report highlights that recent vintages also require a higher inflationary trendline factor; similar to business written during pre-pandemic times when inflationary and insurance pricing-power levels were significantly lower.

Analysts comment, “So, while the pig appears to be further through the python in terms of topping-off older ‘19 & prior vintages, our analysis continues to point towards potential reserving potholes (meaning slightly worse loss ratios vs. consensus expectations) amongst a large swath of our coverage universe.”

“Further potholes are possible given that many insurers’ are reliant on highly profitable workers’ compensation related reserve releases, which likely will be less of a buoy in ’24-’25, given decelerating wage inflation benefits, incrementally higher health inflation, and negative pricing-power,” analysts add.

BMO Capital Markets notes that within the last two years, its reserving analyses have revealed an increasing insurance-inflation trendline, notably for insurance policies which indemnify insureds against lawsuits.

Following findings from its March report paired with the recent updated analysis, BMO Capital Markets continue to expect incremental pressure on loss ratios amongst a majority of insurance carrier stocks.

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