Insurance

The turmoil in the financial markets resulted in a highly challenging environment for the U.S. insurance industry, a trend that is expected to continue through the end of the current year, though some signs of improvement can be seen now. We also expect further consolidation in the industry.

Life Insurers

Continued losses in the investment portfolio and lower income from the variable annuity business will continue to hurt earnings. Most life insurers have substantial exposure to commercial-real-estate-backed loans and securities, which will result in further losses in the coming quarters.

The Industry’s statutory capital levels have fallen sharply and some companies are trying to raise capital through the Troubled Assets Relief Program (TARP). The Treasury has already approved six life insurers for capital infusion under TARP.

Property & Casualty Insurers

Insurers' losses from natural disasters surged in 2008, with maximum losses resulting from Hurricane Ike (insured losses of approximately $15 billion). Six named storms -- Dolly, Edouard, Fay, Gustav, Hanna and Ike hit the U.S. coast last year, after two years of benign activity.

Major catastrophe losses of 2008 resulted in significant deterioration of the underwriting results and steep losses in the investment portfolios since the beginning of 2008 significantly reduced the capital adequacy of most insurers. While a modest recovery of credit and equity markets may lead to a reduction in the unrealized investment losses for the first half of 2009, the premium rates continued to declines, though at a slower pace now.

Reduced financial flexibility and weak underwriting and reserves have further added to the woes. The only positive trend visible as of now is slight improvement in some insurance pricing after continued deterioration during the last couple of years.

Reinsurers

Losses from the investment portfolios of reinsurance companies have surged during the last few quarters. Further, during 2H08, the underwriting profits were severely hurt by the Hurricanes Ike and Gustav. However, the pricing has improved, as was evident from the January renewals, and is expected to remain firm during the year.

Also, one of the reasons to hit profits was the increased tendency by the clients for risk retention. With insurers’ balance sheets constrained and reduced financial flexibility in the current capital markets, risk retention by primary insurers is less likely to impact growth during the current year. Most reinsurers have maintained the core capital required to underwrite risk.

OPPORTUNITIES

We remain positive on reinsurer PartnerRe Ltd. (PRE - Analyst Report) due to its excellent underwriting abilities, strong capitalization, solid ratings and reputation in the market, which will enable it to take advantage of the stronger demand and better pricing being witnessed currently. We also have a Buy rating on Amerisafe, Inc. (AMSF - Analyst Report) in view of its strong capital position and sustained improvement in the results.

WEAKNESSES

Currently we do not have any Sell recommendations on insurance stocks under our coverage, in view of the limited downside potential now. In past couple of months, we upgraded our Sell recommendations on Hartford Financial Services Group (HIG - Analyst Report), Primus Guaranty (PRS - Analyst Report) and PMI Group (PMI - Analyst Report), after substantial short returns.