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The turmoil in the financial markets has created a highly challenging environment for the U.S. insurance industry, forcing many companies to take immense write-downs. This trend is expected to continue at least through the first half of 2010, though there are some early signs of an economic recovery. Also, structural economies of scale have pushed the industry toward consolidation.
While enormous financial support from the government rescued AIG ([url=http://www.zacks.com/stock/quote/aig]AIG[/url]) from collapse, many other firms remain under tremendous pressure or have fallen by the wayside. Competition within the segments of the industry has reduced, which is consolidating through mergers and acquisitions. This has increased the market shares of the largest firms.
We expect static growth with persistent soft market conditions and an ongoing market crisis, resulting in further consolidation in the industry. However, we expect the overall condition to improve in the second half of 2010, should the economic recovery accelerate.
Continued losses in the investment portfolio and lower income from the variable annuity business will continue to hurt earnings of life insurers. Most life insurers have substantial exposure to commercial-real-estate-backed loans and securities, which will result in further losses in the coming quarters.
As the industry’s statutory capital levels fell sharply, some companies were trying to raise capital through the Troubled Assets Relief Program (TARP). In May 2009, the Treasury approved six life insurers for capital infusion under TARP. Hartford Financial Services Group Inc. ([url=http://www.zacks.com/stock/quote/hig]HIG[/url]) and Lincoln Financial Group ([url=http://www.zacks.com/stock/quote/lnc]LNC[/url]) received federal aid. The other four insurers, Prudential Financial ([url=http://www.zacks.com/stock/quote/pru]PRU[/url]), Principal Financial Group ([url=http://www.zacks.com/stock/quote/pfg]PFG[/url]), Allstate Corporation ([url=http://www.zacks.com/stock/quote/all]ALL[/url]) and Ameriprise Financial ([url=http://www.zacks.com/stock/quote/amp]AMP[/url]) decided not to accept bailout funds.
The U.S. health care system is significantly dependent on private health insurance, which is the primary source of coverage for most Americans. Approximately 58% of Americans have private health insurance. Unfortunately, these insurance companies utilize a pre-existing exemption clause in order to control costs and maximize profit.
On Nov 7, 2009, the House of Representatives passed a sweeping health care bill. The legislation includes changes that would prevent private insurance companies from using the pre-existing condition clause. Additionally, it would provide the government the power to negotiate policy premiums for those who opt to participate in the public option. If enacted, the move would mean greater federal involvement in the industry.
On Dec 24, 2009, the Senate approved historic legislation that promises to provide health insurance coverage to approximately 31 million people. The Senate proposal prohibits insurance companies from denying coverage because of pre-existing medical conditions. It also prohibits companies from hiking insurance prices based on an applicant’s health or gender. On Jan 20, 2010, President Barack Obama and the allies of congress indicated that they will try to reduce the sweeping health care renovation in an effort to keep it alive, at least partly.
Property & Casualty Insurers
Major catastrophe losses in 2008 resulted in significant deterioration of companies' underwriting results, and steep losses in the investment portfolios since the beginning of 2008 significantly reduced the capital adequacy of most insurers.
During 2009, the seizure of credit markets and rising concerns over defaults pushed bond prices down sharply, causing significant realized and unrealized capital losses on insurer portfolios. Holding two-thirds of the invested assets in the form of bonds, the capacity of the Property & Casualty insurers is highly sensitive to changes in credit market conditions.
While a modest recovery of credit and equity markets may lead to a reduction in the unrealized investment losses in the upcoming quarters, the premium rates continued to decline, though at a slower pace.
Reduced financial flexibility and weak underwriting and reserves have further added to their woes. The only positive trend visible as of now is a slight improvement in some insurance pricing after continued deterioration during the last couple of years.
Losses from the investment portfolios of reinsurance companies have surged during the last few quarters. In the second half of 2008, the underwriting profits were severely hurt by Hurricanes Ike and Gustav. However, the pricing improved during 2009 and is expected to remain firm going forward.
With the signs of recovery in the capital market (though still weak by any means), the concerns related to reinsurers' ability to access the capital markets on reasonable terms has sufficiently mellowed. Considering this fact, along with the relative improvement in macroeconomic conditions and better financial performance of reinsurance companies, Fitch Ratings revised its outlook on the global reinsurance industry to stable from negative in Nov 2009.
The rating agency has also cited that the reinsurance sector's credit quality is less sensitive to macroeconomic factors than that of many other financial services sectors. The agency noted that asset values of reinsurers have been improving markedly. However, we expect slightly lower favorable reserve development trends in the upcoming quarters as there are lingering concerns about the overall economy.
We remain positive on reinsurer PartnerRe Ltd. ([url=http://www.zacks.com/stock/quote/pre]PRE[/url]) 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.
Specific insurers that we like with a Zacks Rank #1 (Strong Buy) include Manulife Financial Corporation ([url=http://www.zacks.com/stock/quote/mfc]MFC[/url]), Phoenix Companies Inc. ([url=http://www.zacks.com/stock/quote/pnx]PNX[/url]), Universal American Corp. ([url=http://www.zacks.com/stock/quote/uam]UAM[/url]), American International Group, Inc. ([url=http://www.zacks.com/stock/quote/aig]AIG[/url]), Hartford Financial Services Group Inc. ([url=http://www.zacks.com/stock/quote/hig]HIG[/url]), Max Capital Group Ltd. ([url=http://www.zacks.com/stock/quote/mxgl]MXGL[/url]), EMC Insurance Group Inc. ([url=http://www.zacks.com/stock/quote/emci]EMCI[/url]) and Infinity Property and Casualty Corp. ([url=http://www.zacks.com/stock/quote/ipcc]IPCC[/url]).
There are currently a number of stocks in the U.S. banking universe with a Zacks Rank #2 (Buy) including Enstar Group Limited ([url=http://www.zacks.com/stock/quote/esgr]ESGR[/url]), FBL Financial Group Inc. ([url=http://www.zacks.com/stock/quote/ffg]FFG[/url]), Unitrin Inc. ([url=http://www.zacks.com/stock/quote/utr]UTR[/url]), Allied World Assurance Company Holdings Ltd. ([url=http://www.zacks.com/stock/quote/awh]AWH[/url]), Aspen Insurance Holdings Ltd. ([url=http://www.zacks.com/stock/quote/ahl]AHL[/url]), Everest Re Group Ltd. ([url=http://www.zacks.com/stock/quote/re]RE[/url]), Greenlight Capital Re, Ltd. ([url=http://www.zacks.com/stock/quote/glre]GLRE[/url]), Mercer Insurance Group Inc. ([url=http://www.zacks.com/stock/quote/migp]MIGP[/url]) and RenaissanceRe Holdings Ltd. ([url=http://www.zacks.com/stock/quote/rnr]RNR[/url]).
We expect continued pressure on investment portfolios and lower income from the variable annuity business will restrict earnings growth rate of life insurers. Also, reduced financial flexibility and weak underwriting will hurt earnings of Property & Casualty Insurers.
However, in view of the limited downside potential at this time, there are currently a small number of stocks with a Zacks Rank #5 (Strong Sell) including AXA ([url=http://www.zacks.com/stock/quote/axa]AXA[/url]), Conseco Inc. ([url=http://www.zacks.com/stock/quote/cno]CNO[/url]) and Prudential plc ([url=http://www.zacks.com/stock/quote/puk]PUK[/url]).
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