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
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
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
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
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
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
Currently, the life insurers with favorable Zacks Ranks worth
) with a Zacks Rank #1 (Strong Buy);
Genworth Financial Inc.
ING Groep NV
) with Zacks Rank #2 (Buy).
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
UnitedHealth Group, Inc.
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
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
(Want to know more about the future prospects of health
insurers? Read Health Insurance Stock Outlook)
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
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
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
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
The Allstate Corporation
Fidelity National Financial Inc.
Cincinnati Financial Corp.
) with a Zacks Rank #1 are worth a look in the property-casualty
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
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
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
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
We remain positive on
Selective Insurance Group Inc.
Hallmark Financial Services Inc.
Stewart Information Services Corporation
CNO Financial Group Inc.
) with a Zacks Rank #1 (Strong Buy).
Other insurers that we like with a Zacks Rank #2 (Buy) include
AmTrust Financial Services Inc.
Berkshire Hathaway Inc.
The Travelers Companies, Inc.
Manulife Financial Corporation
Lincoln National Corporation
Employers Holdings, Inc.
FBL Financial Group Inc.
Fortegra Financial Corporation
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
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.
Greenlight Capital Re Ltd.
China Life Insurance Co. Ltd.
Meadowbrook Insurance Group Inc.
Principal Financial Group Inc.
AMTRUST FIN SVC (AFSI): Free Stock Analysis
(AGESY): ETF Research Reports
ALLSTATE CORP (ALL): Free Stock Analysis
CNO FINL GRP (CNO): Free Stock Analysis
EMPLOYERS HLDGS (EIG): Free Stock Analysis
FBL FINL GRP-A (FFG): Free Stock Analysis
FORTEGA FIN CP (FRF): Free Stock Analysis
GENWORTH FINL (GNW): Free Stock Analysis
HALLMARK FINL (HALL): Free Stock Analysis
LINCOLN NATL-IN (LNC): Free Stock Analysis
MANULIFE FINL (MFC): Free Stock Analysis
PARTNERRE LTD (PRE): Free Stock Analysis
PRUDENTIAL PLC (PUK): Free Stock Analysis
SELECT INS GRP (SIGI): Free Stock Analysis
TRAVELERS COS (TRV): Free Stock Analysis
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