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While the U.S. property and casualty insurers had reported favorable earnings in the first nine months of 2012, superstorm Sandy will alter the picture in the final quarter of the year. Although the ultimate estimates of the loss caused by Sandy are yet to come out, catastrophe loss modeling companies project the amount to be approximately $20 billion.

Property and casualty insurance and reinsurance companies under our coverage, such as Chubb Corp. (CB - Analyst Report), Allstate Corporation (ALL - Analyst Report), The Travelers Companies Inc. (TRV - Analyst Report), ACE Ltd. (ACE - Analyst Report), Montpelier Re Holdings Ltd. (MRH - Analyst Report), Progressive Corp. (PGR - Analyst Report), RLI Corporation (RLI - Analyst Report), XL Group plc (XL - Analyst Report), all posted stronger underwriting results owing to lower catastrophe losses during the most recently concluded third quarter of 2012. Some of these companies also increased their fiscal 2012 earnings guidance.

However, at the current level, we are concerned over the immediate impact of Sandy on the fourth quarter results of these insurers. Reduced share buybacks may also be witnessed at these companies, as these will need cash to meet the catastrophe claims. The insurers do not expect even their major source of earnings i.e. investment income to provide any aid since the continuing low interest rate environment will keep the investment income pressurized, resulting in overall margin compression.

Most of the insurer/reinsurers had posted earnings ahead of the Zacks Consensus estimates for the first half of 2012, compared with the 2011 period, primarily due to milder catastrophe losses. Insured catastrophes losses in the U.S. totaled $9.3 billion during the period, substantially below $24.4 billion recorded in the first half of 2011.

On the other end of the spectrum, these kinds of huge catastrophe losses are imperative for bringing a change in the insurance pricing cycle. Insurance pricing, which remained soft (low) for almost six years now, can only notice a rebound once the surplus capital available in the industry drains down to a level forcing insurers to increase their quotes.

Record catastrophe losses during 2011, has improved prices in the commercial and property lines of business. During the third quarter conference call, senior management of major insurers spoke about improving market pricing across the U.S. commercial books. However, a broad-based pricing improvement across all the business lines remains something that is yet to be seen.

Despite huge losses during the last one and a half years, a surplus capital is still available in the industry. For a classic hard market, which is quite a distant proposition, it requires sustained industry losses causing a decline in the industry’s capacity and a subsequent increase in underwriting discipline among insurers.
 

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