The U.S. insurance industry entered 2013 facing the ravages of
Hurricane Sandy, which resulted in billions of insured losses.
Though insurers were better prepared to withstand significant
losses this time, the after-effect of the 2012 hurricane season was
much more than expected.
The impediments related to the Superstorm Sandy aside, the
industry continues to reel under economic unrest that thwarts every
attempt it makes toward growth. A dearth of positive catalysts is
naturally making it harder for insurers to recover fast. Among the
fundamental challenges, weak underwriting gains and low investment
yields stand out.
The events outside the country such as the European debt crisis
will further limit the industry’s growth prospects.
However, stepping into 2013, it can be said that the overall
health of the industry has shown some improvement in the recent
past, after enduring pricing pressures and reduced insured exposure
for quite some time. The market turmoil resulting from the latest
recession forced many companies to take immense write-downs, but
such an outcome is gradually becoming a thing of the past.
Lately, the industry has been witnessing pricing increases which
should ultimately translate into margin expansion. Further,
increasing awareness on the risk of catastrophe, strong
underwriting discipline, on-track price and volume growth as well
as favorable reserve development in the recent quarters should
place the industry at least one step ahead.
That said, though the market condition doesn’t remain soft
anymore, reasonable hardening is not expected at least until the
end of 2013. Moreover, a stressed balance sheet, a still-high
unemployment rate and legislative challenges are threatening
insurers’ ability to rebound to the historical growth rate.
Also, structural economies of scale and the new capital
requirements have pushed the industry toward consolidation. While
this will help insurers meet minimum regulatory requirements and
enhance awareness, inter-segment competition within the industry
will alleviate. So, maintaining profitability after complying and
meeting the challenges of climate change could be a difficult
task.
Life Insurers
A reduction in underwriting expenses and a modest increase in
premiums have been helping life insurers increase net income in the
last few quarters. But downward pressures on investment yields,
higher hedging costs, lower income from the variable annuity
business and more burdensome capital requirements will continue to
mar profitability going forward. Most life insurers have
substantial exposure to commercial real estate-backed loans and
securities, which will lead to further losses in the coming
quarters.
As the industry’s statutory capital level fell sharply during
the recession, life insurance companies will need to optimize their
capital levels to address the ensuing challenges. In the short
term, traditional sources of capital are expected to fulfill most
of what life insurers need in order to stay in good shape. However,
non-traditional sources of capital will take years to strengthen
financials.
Moreover, regulatory changes under the Dodd-Frank Wall Street
Reform are still troubling life insurers. In order to address such
concerns, life insurers may have to burn some of their financial
energy.
The underlying trends amid a recovering economy indicate
stability in the sector over the medium term with respect to credit
profile and financial prospects. However, higher-than-average asset
losses, primarily resulting from their real estate exposure, will
remain a major concern.
The economic uncertainty is making it difficult for life
insurers to expand their customer base. In fact, insurers are
struggling to even retain their existing clientele. Narrowed
disposable income owing to high unemployment and huge credit card
debt has made it difficult for Americans to invest in retirement
products such as life insurance.
Moreover, the low interest rate environment is one of the major
risks for life insurers at this point. Investment income remains
weak as life insurers are experiencing low returns on fixed-income
instruments. Also, low rates are spoiling life insurers’ efforts to
grow fixed annuities and universal life insurance sales.
In December, Fitch Ratings has affirmed the credit outlook for
the U.S. life insurance industry at stable for 2013. This action
was primarily based on the expectation of insurers’ improved
liquidity and balance sheet strength. Further, the rating agency
expects the nagging low interest rate environment to restrict
earnings growth of the sector.
On the other hand, interest in cheaper products to cover only
basic risks has increased. As a result some life insurers have
already gone back to the basics in order to escape financial and
regulatory difficulties.
Currently, the life insurers with favorable Zacks Ranks worth
considering are Aviva plc (AV) with a Zacks Rank
#1 (Strong Buy); Genworth Financial Inc. (GNW) and
ING Groep NV (ING) with Zacks Rank #2 (Buy).
Health Insurers
The U.S. health care system is significantly dependent on
private health insurance, which is the primary source of coverage
for most Americans. More than half of the U.S. citizens are covered
under private health insurers such as WellPoint
Inc. (WLP) and UnitedHealth Group, Inc.
(UNH).
Unfortunately, these insurance companies utilize a pre-existing
condition exemption clause to control costs and maximize profits.
In 2010, the historic healthcare reform legislation -- The Patient
Protection and Affordable Care Act (PPACA) -- was passed by the
Congress with the intension of making health care facilities more
affordable, preventing private insurance companies from continuing
with the pre-existing condition clause and at the same time
bringing in 32 million more people under coverage by 2019.
However, the legislation has had many detractors who contested
several of its stated benefits and considered it another
entitlement program that the country can ill afford. Finally, in
June 2012, the U.S. Supreme Court ruled in favor of the reform,
rejuvenating the industry by removing major uncertainties. Obama's
re-election further ensures a certain future to the law.
With respect to the individual mandate, which drew the most
attention as it requires all uninsured Americans to purchase a
minimum level of health insurance coverage, the Supreme Court ruled
that individuals failing to buy health insurance will have to pay a
tax fine, but forcing them to buy insurance will be illegal.
Employers will also be fined if they fail to provide insurance
coverage to their workers.
While the legislative overhaul brings more regulatory scrutiny
for private insurance companies, the net negative effect is far
softer than was initially feared. Also, the removal of this
uncertainty is a net positive in its own right.
Though the reform will provide more cross-selling opportunities
for health insurers, their overall profitability will be marred
over the long run as the negative impact of Medicare Advantage
payment cuts, industry taxes and restrictions on underwriting
practices will more than offset the benefits of adding the extra 32
million people into the system.
Consequently, growth in industry revenue is expected to decline
until 2015 as insurers will be forced to adjust the benefits to
comply with the health care legislation. Among others, providing
coverage to everyone regardless of whether they had an expensive
pre-existing condition would put their top lines at stake.
(Want to know more about the future prospects of health
insurers? Read Health Insurance Stock Outlook)
http://www.zacks.com/stock/news/87564/health-insurance-stock-outlook-nov-2012
Property & Casualty Insurers
Property-casualty insurers are still feeling the pressure on
their investment portfolios due to the prevailing low interest rate
environment. This, along with the inability to raise rates, has
been continuously reducing the capital adequacy of most
carriers.
As property-casualty insurers hold about two-thirds of the
invested assets in the form of bonds, their capacity is highly
sensitive to changes in credit market conditions. The seizure of
credit markets and rising concerns over defaults have pushed down
bond prices sharply since the latest recession, causing significant
realized and unrealized capital losses on these insurers’
portfolios. However, an expected improvement in casualty rates will
partially offset the negatives.
Moreover, catastrophe losses continue to keep the balance sheets
of a number of carriers under pressure. This, combined with stiff
competition and lower reinvestment yields, is expected to depress
profits for property-casualty insurers going forward.
While the ongoing recovery in the credit and equity markets is
leading to a reduction in unrealized investment losses, the premium
rates continue to decline, though at a slower pace. This declining
trend in premium rates is expected to persist through 2013,
adversely affecting insurer profitability. The key positive trend
visible as of now is a slight improvement in some insurance pricing
after persistent deterioration for the last three years.
However, the property-casualty industry endured the latest
financial crisis better than the other financial service sectors.
Once the economic recovery gains momentum, insurance volume will
grow rapidly. With growing employment in the private sector and
recovery in the housing markets, a number of carriers have already
started seeing growth in insurance sales.
The recent quarters have been increasingly witnessing a rebound
in claims-paying capacity (as measured by policyholders’
surpluses), which reflects the industry’s resilience over the prior
years. Conservative investment strategies and capital restructuring
efforts will continue to help property-casualty insurers improve
their financial footing in the upcoming quarters.
Currently, The Allstate Corporation (ALL),
Fidelity National Financial Inc. (FNF) and
Cincinnati Financial Corp. (CINF) with a Zacks
Rank #1 are worth a look in the property-casualty industry.
Reinsurers
Losses from the investment portfolios of reinsurance companies
have gotten worse during the last few quarters. The deterioration
resulted from the supply-demand imbalance in reinsurance coverage
due to intense competition that kept pricing soft. Also,
catastrophic events were the major culprits that put underwriting
profits under pressure.
However, reinsurers have been seeing capital growth over the
last few quarters and this trend is expected to continue. Despite
the losses from Sandy, the capital generation, though slowed down,
is not clogged. Actually, reinsurers now have the capacity to meet
the demand for coverage and keep loss ratios within their budgets
despite catastrophe losses. In addition, reinsurance prices have
also been gradually increasing.
With signs of recovery in the capital markets (though still weak
by any standard), concerns related to reinsurers' ability to access
capital markets on reasonable terms have sufficiently eased.
However, excess supply due to the lack of coverage expansion and
rising expense ratios is the major concern for reinsurers at this
point. An increased level of price competition may also hurt top
lines in the upcoming quarters.
Moreover, reinsurance market capital levels are expected to be
down for reinsurers with huge exposure to the European sovereign
debt crisis.
OPPORTUNITIES
Insurance companies are suffering from the ongoing economic
uncertainty and challenges related to natural disasters. However,
this tough period brings opportunities for many large industry
participants to grow by attracting new customers and taking market
share away from weak rivals. The industry has been undertaking
several structural changes that will make underwriting and pricing
schemes even more attractive to consumers.
Recently, Hurricane Sandy, which affected portions of the
Caribbean and the Mid-Atlantic and Northeastern United States, will
increase the demand for primary non-life insurance and
reinsurance.
We remain positive on Selective Insurance Group
Inc. (SIGI), Hallmark Financial Services
Inc. (HALL), Stewart Information Services
Corporation (STC), Ageas SA/NV (AGESY)
and CNO Financial Group Inc. (CNO) with a Zacks
Rank #1 (Strong Buy).
Other insurers that we like with a Zacks Rank #2 (Buy) include
AmTrust Financial Services Inc. (AFSI),
Berkshire Hathaway Inc. (BRK.A), PartnerRe
Ltd. (PRE), The Travelers Companies, Inc.
(TRV), Manulife Financial Corporation (MFC),
Lincoln National Corporation (LNC),
Employers Holdings, Inc. (EIG), FBL
Financial Group Inc. (FFG), Fortegra Financial
Corporation (FRF) and Prudential plc
(PUK).
WEAKNESSES
We expect continued pressure on investment portfolios and lower
income from the variable annuity business to restrict the earnings
growth rate of life insurers. Also, reduced financial flexibility
and weak underwriting will hurt the earnings of many
property-casualty insurers. Moreover, the overall industry is
vulnerable to the ever-increasing threat of natural disasters.
Among the Zacks covered U.S. insurers, we prefer to stay away
from the Zacks Rank #5 (Strong Sell) companies –– American
Safety Insurance Holdings Ltd. (ASI), Greenlight
Capital Re Ltd. (GLRE), China Life Insurance Co.
Ltd. (LFC), Kemper Corporation (KMPR),
Meadowbrook Insurance Group Inc. (MIG),
MetLife Inc. (MET) and Principal Financial
Group Inc. (PFG).
AMTRUST FIN SVC (AFSI): Free Stock Analysis Report
AMTRUST FIN SVC (AFSI): Free Stock Analysis Report
(AGESY): ETF Research Reports
(AGESY): ETF Research Reports
AMER SAFETY INS (ASI): Free Stock Analysis Report
AMER SAFETY INS (ASI): Free Stock Analysis Report
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
BERKSHIRE HTH-A (BRK.A): Free Stock Analysis Report
CNO FINL GRP (CNO): Free Stock Analysis Report
CNO FINL GRP (CNO): Free Stock Analysis Report
EMPLOYERS HLDGS (EIG): Free Stock Analysis Report
EMPLOYERS HLDGS (EIG): Free Stock Analysis Report
FBL FINL GRP-A (FFG): Free Stock Analysis Report
FBL FINL GRP-A (FFG): Free Stock Analysis Report
FORTEGA FIN CP (FRF): Free Stock Analysis Report
FORTEGA FIN CP (FRF): Free Stock Analysis Report
GREENLIGHT CAP (GLRE): Free Stock Analysis Report
GREENLIGHT CAP (GLRE): Free Stock Analysis Report
HALLMARK FINL (HALL): Free Stock Analysis Report
HALLMARK FINL (HALL): Free Stock Analysis Report
KEMPER CORP (KMPR): Free Stock Analysis Report
KEMPER CORP (KMPR): Free Stock Analysis Report
CHINA LIFE INS (LFC): Free Stock Analysis Report
CHINA LIFE INS (LFC): Free Stock Analysis Report
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
MANULIFE FINL (MFC): Free Stock Analysis Report
MANULIFE FINL (MFC): Free Stock Analysis Report
MEADOWBROOK INS (MIG): Free Stock Analysis Report
MEADOWBROOK INS (MIG): Free Stock Analysis Report
PRINCIPAL FINL (PFG): Free Stock Analysis Report
PRINCIPAL FINL (PFG): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
PRUDENTIAL PLC (PUK): Free Stock Analysis Report
PRUDENTIAL PLC (PUK): Free Stock Analysis Report
SELECT INS GRP (SIGI): Free Stock Analysis Report
SELECT INS GRP (SIGI): Free Stock Analysis Report
STEWART INFO SV (STC): Free Stock Analysis Report
STEWART INFO SV (STC): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
To read this article on Zacks.com click here.
Ageas (PK) (USOTC:AGESY)
Historical Stock Chart
From Sep 2024 to Oct 2024
Ageas (PK) (USOTC:AGESY)
Historical Stock Chart
From Oct 2023 to Oct 2024