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.
ACE LIMITED (ACE): Free Stock Analysis Report
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MONTPELIER RE (MRH): Free Stock Analysis
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XL GROUP PLC (XL): Free Stock Analysis Report
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Property and casualty insurance and reinsurance companies under
our coverage, such as
The Travelers Companies Inc.
Montpelier Re Holdings Ltd.
), XL Group plc (
), 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