Welcome back!
We are in the home stretch of 2024! In case you live under a rock, the Fed cut interest rates by a BOLD 50 bps in late September, lowering the Fed Funds rate to 4.75-5.00%. This was the first cut since 2020, signaling a pivot from tackling runaway inflation to rescuing a cooling job market, with unemployment creeping up to 4.2%. Inflation is finally behaving, nearing the Fed’s 2% target, so J. Powell and the gang decided to “ease off the brakes” with a hefty cut. Check out our Derivative Guru, Jeff Smith’s, take below on rates and where we’re headed.
Also in the 3rd Quarter, P&C insurers, especially personal auto and homeowners’ lines, faced continued pressure from inflation and rising claims, while worker’s comp remained profitable despite premium declines due to competition. The life and annuity sectors saw strong premium growth driven by higher interest rates, though increased annuity surrenders have started to outpace recent sales. Health insurers remained stable, though Medicare Advantage margins were squeezed by rising healthcare costs.
Given the current economic conditions and regulatory environment, how do you foresee key trends like inflation, interest rates, and climate risks impacting the industry, and how are you positioning your business to adapt and thrive in 2025? If you’re willing to share, we would love to HEAR FROM YOU.
In the Banking sector, commercial loan growth continued to decline through August, primarily driven by three key factors:
- Low business confidence.
- The perception that the economy is underperforming, despite ongoing growth.
- The upcoming U.S. presidential election.
ELECTION REGULATORY IMPACT
As is always the case, the 2024 presidential election is expected to have a major impact on the insurance markets and reshape the overall economy. According to a recent Gallagher survey, 63% of 1,000 business owners expressed concerns regarding the outcome and effects from the 2024 elections.2
This makes sense as elections typically bring new administrations with different priorities – investor confidence in the insurance market is often tied to political stability.1 Deregulations in the insurance market may lower operational costs for insurers, while administrations focused on consumer protection could have the opposite effect. Economic shifts on taxation, spending and monetary policies may also drive market volatility, which in return affect insurer investment strategies, premium rates and coverage availability. The P&C and Health Insurance markets are both affected, but differently:
For Health Insurers, a candidate favoring expansion of programs like the Affordable Care Act (ACA) may increase government-subsidized coverage and regulation of private insurers, broadening access but potentially raising costs. In contrast, a more market-driven approach could reduce regulations, offering insurers more flexibility and lower costs but limiting consumer protections and coverage options. The election’s outcome shapes key factors like Medicaid expansion, subsidies, and coverage mandates, driving changes in the overall market.
For Auto and Home Insurers – another key factor to look out for is state-level Insurance Commissioner races, since these companies are regulated at a state level. State Insurance Commissioners have a significant impact over the insurance industry; they keep tabs on rates and determine best practices for the industry alongside legislators. Ten states may be going through changes in November: Delaware, North Carolina, North Dakota, and Washington are holding elections for Insurance Commissioner. Gubernatorial races are being held in Indiana, Missouri, New Hampshire, Utah, Vermont, and West Virginia.3
Government Industry Update
North Avenue Capital
Government-Guaranteed Lending Expert Expands into SBA7(a) Lending
Long recognized for its deft, hands-on approach to the complex and nuanced world of government-backed programs, NAC has honed its specialty lending expertise over the last decade closing USDA-backed loans to rural businesses, becoming one the nation’s top lenders in the space.
Today, what was once a rural specialty is a national one. NAC is now applying its specialty lending expertise to the intricate underwriting and application processes associated with SBA lending. Through close partnership with Veritex, NAC can now empower rural and urban insurance agencies alike with specialty lending in amounts ranging from $500,000 to $25 million.
Each of these government-guaranteed loan programs can be used for agency acquisitions, rollups, and expansions nationwide in both rural and urban parts of America. These acquisitions typically involve Independent Insurance Agent A acquiring Independent Insurance Agent B but can also involve multiple acquisition targets in a rollup. NAC’s knowledge in lending to rural businesses, many of which are insurance carriers and agencies, uniquely positions it to serve both sides of the insurance market. Thanks to Veritex’s status as a preferred SBA 7(a) lender, NAC borrowers stand to benefit from an expedited underwriting process.
Recent closings include:
USDA OneRD Loan Program
Rural Businesses
Loan Amounts: $2MM – $25MM
SBA 7(a) Loan Program
No Rural Constraint
Loan Amounts: $500,000 – $5MM
Also accelerating borrowers’ closing times are intentional synergies brought to the forefront by the two brands’ collaboration. Simply put, specialized experience plus preferred lender status equals speed of execution. As for Veritex’s existing SBA lending division, the service many have come to know and trust remains.
NAC’s expanded lending options give insurance businesses of most any size access to capital regardless of location. Whether small and urban or large and rural, NAC and Veritex will work hand-in-hand to provide affordable capital and connect businesses to the programs that best suit their unique needs – USDA, SBA, or both.
New Agency Focused Affiliation
Veritex Insurance Banking alliance w/ AgencyEquity
Last quarter, the Veritex Insurance Banking team expanded its reach by partnering with AgencyEquity.com. This partnership has enabled Veritex to support a broader array of agencies in enhancing the firm’s value and optimizing cash flow efficiency. Agencies with strategic acquisition strategies can leverage their hard-earned commissions with a banking partner who embodies deep insurance expertise and delivers an expedited loan process.
The FOMC’s interest rate cut on Sept. 18 may be the first of many to come. While we do not have a crystal ball, we do know that falling rates tend to create a favorable environment for M&A, increasing deal volumes, especially for debt-finance transactions. However, it also creates more competition and higher valuations.
Veritex offers agency financing options of up to $30 million for conventional debt and up to $5 million through our SBA channel. Both options provide up to 100% financing, 10-year repayment terms, and competitive pricing. Syndication solutions are available for transactions >$30 million.
Interest Rate Update
The Sept. 18, 2024 Fed meeting broke new ground in several important ways. First, we had a somewhat unexpected 50 bps rate cut to begin reversal of tight monetary policy that began in March of 2023 and has been at current levels since August of 2023, a little more than one year. Most economists expected the Fed to ease into rate cuts with a 25 bps cut, letting the market know that it would do what was necessary to maintain the balance of risks going forward. Interestingly, until Chair Powell’s speech on Sept. 30, 2024, the market had been pricing in a full additional 3-25 bps rate cuts this year (for a total of 1.25% or 125 bps in 2024) despite the fact that the Fed’s updated dot plot (as seen here), released concurrently with the 50 bps rate cut, shows only two additional 25 bps rate cuts in 2024.
Second, we had the first dissenting vote in a Fed meeting since 2005, nearly 20 years ago. Fed Governor Michelle Bowman voted against the 50 bps rate cut, stating that she would have preferred a cut of 25 bps. Chair Powell indicated the Fed is built on differing opinions and values disagreement and discussion, reducing concern over the dissenting vote.
Finally, and perhaps most importantly, the Fed asserted a material change in the balance of risks. While it didn’t exactly declare victory over inflation, the Fed is clearly moving away from fighting inflation and instead focusing on protecting economic growth and maintaining strong employment. In the statement released by the Fed along with the 50 bps rate cut, it stated; “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2% objective.” This new language addressing maximum employment was not included in any of the previous Fed statements in the current cycle.
Following the Fed meeting and announcement, and perhaps as a result of the 50 bps rate cut and the Fed seeming to favor supporting maximum employment, the market has been aggressively pricing in 3-25 bps rate cuts during the remaining two meetings in 2024, and an additional 5-25 bps rate cuts spread between the six or seven meetings by September/October of 2025. On Sept. 30, 2024 in a speech in Nashville at the annual meeting of the National Association for Business Economics, Powell made the following statements, perhaps trying to “adjust” the forward curve or at least create some additional flexibility going forward:
“But we are not on any preset course,” and; “this is not a committee that feels like it’s in a hurry to cut rates quickly.” He also stated, “ultimately, we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”
The primary message is that the Fed doesn’t have a pre-planned course, it is continuing to rely on and follow economic results and developments. In response, rate markets saw increased rates of 8-10 bps, nearly 50% of one Fed cut pulled out of the forward curve (see the chart of the two-year Treasury reaction to Powell’s speech below).
As economic releases inform the future path of Fed action, I’m sure we will see many similar market corrections to bring the forward curve in line with updated Fed cuts (or lack thereof). Just as interest rates went higher through this cycle than most of us expected and stayed high longer than most of expected, I suspect that rates will come down more gradually than is currently anticipated or predicted by the forward curve and the resulting final rates may not be as low as many people expect. Dealing with ongoing uncertainty in the interest rate markets will likely be part of the picture well into if not through 2025, and possibly beyond.
all things golf
For many businesses, fourth-quarter results set the tone for 2025 outcomes. This is especially the case for Team Veritex players, each operating as their own business entity, seeking defined Tour status for next year.
On the PGA Tour, five players (Mac Meissner, Sam Stevens, Chandler Phillips, Pierceson Coody and Hayden Springer) are within the top 125 to keep their ‘Cards’ for next year, while four (Parker Coody, Tyson Alexander, Austin Smotherman – pictured below, and Blaine Hale, Jr.) are on the outside looking in.
They’ll play eight events from September to December to determine final point standings and whether they continue with status or are relegated back to the Korn Ferry Tour.
One player that knows his fate is Noah Goodwin. The former U.S. Junior Amateur Champion and SMU standout lived on the bubble through four Korn Ferry Tour playoff events. Needing to finish in the top-30, he birdied his final hole of the final event, and got some help from others in the field to be the last player on the KFT to earn a promotion in 2025.
On the women’s side, Cheyenne Knight and Kristen Gillman are both in solid standing to keep their LPGA Cards, while Michelle Zhang has LPGA Qualifying School ahead in October.
As the final putts are sunk and the year’s scores tallied, the pursuit of excellence on the golf course mirrors the strategic plays in the business world. Just as our players strive for precision and consistency to maintain their Tour status, your personal and business finances require a partner who understands the importance of stability and foresight. At Veritex, we’re not just fans of the game; we’re experts in navigating the financial fairways.
Our full roster is always listed on the Veritex Bank website. Follow all our Team Veritex players as ‘Favorites’ on the PGA Tour App.
Veritex On the Road Again
Insurance Agents of Dallas “IIAD”
In August, our team hosted an exhibitor booth at the All-Industry Day event hosted by IIAD. We enjoyed tuning into the Fed’s 2024-25 forecast for the Texas economy, MarshBerry’s 2025 outlook for the P&C segment, and meeting with industry professionals.
On Veteran’s Day, our team will join our agency friends for the annual IIAD Golf Tournament at Brookhaven Country Club. Veritex will sponsor a hole where refreshments will be available. We ARE the proud Golf Bank of Texas, so we had to include something special… Korn Ferry pro, Mitchell Meissner will be joining us as at our tee box as “guest driver” for all teams during the tournament!
Other Events…
In addition to IIAD, we will be attending and/or sponsoring several upcoming industry events and look forward to networking with everyone.
Texas Association of Life & Health Insurers Annual Round-up
- IASA Texas Fall Meeting
- Forvis Insurance Insight Conference
- S.S.A.P. Chat Live Insurance Update
dig in with Doug
Consistent themes across the industry remain broadly in place for the P&C and L&H sectors, with both positive and negative implications. Most notably, the surplus lines market remains resilient having reached a milestone of $100 billion in premiums. This is contrasted with insurers facing further downgrades, which in the prior year exceeded the number of upgrades. At the core, there remains a challenging social and economic backdrop on top of persistent losses. Amid hurricane season, we have already had Beryl, Debby, Francine, and, most recently, Helene make U.S. landfall with an expected above-normal year. Initial insured loss estimates for Beryl and Debby range from $3.5 billion to $6.5 billion. Francine and Helene are too early to tell with estimates varying widely.
With the hard market cycle dating back to 2019, there is recent data supporting a softening wherein average rate increases across major lines where 5.6% in Q2 2024 vs. 5.8% the prior period, according to the Council of Insurance Agents and Brokers. Interestingly, supportive of this insight is also highlighted by recent strong performances in the reinsurance market. On top of improved profitability that contributes naturally to more capital in the market, the recent trend will likely attract new entrants and capacity.
According to Moody’s, catastrophe bond issuances and sidecar demand are likely to see the biggest demand increase over the next year. Perhaps the Jan. 1 renewal date will be telling for capacity.
Shifting gears to L&H, according to a recent statutory data gathered by S&P, annuity growth hit yet another all-time high. Contrastingly, across the entire segment, premium growth declined.
With anticipated downward adjustments to interest rates in the coming months, it will be interesting to track credit rates and the demand for annuities going forward.
Thanks for reading, and we’ll see you in 2025!