By KATIE KUEHNER-HEBERT, a freelance writer based in San Diego with more than two decades of journalism experience with expertise in financial writing
The U.S. property/casualty insurance industry may have had a strong first quarter, but some recent headwinds on Wall Street and pressure on premiums were likely to put a dent in second-quarter revenues for many insurers, analysts said.
One of the wild cards for second-quarter earnings season is whether insurers will continue to release their reserves, said Michael R. Murray, ISO's assistant vice president for financial analysis.
While insurers lowered their reserves in the first quarter due to better underwriting results, analysts remain curious as to whether carriers will continue to do so.
"Each time reserves are released, there's that much less of a cushion--you just can't keep releasing reserves forever," Murray said.
Still, overall bottom lines may fare well due to a drop in weather-related catastrophes and improvements in underwriting results.
"I think with the three drivers combined--rates, investment performance and catastrophic losses--overall, it will probably be a fairly decent quarter," said Paul Bauer, a vice president and senior credit offer at Moody's Investors Service.
The P/C insurance industry's tripling of its net investment gains in the first quarter was the primary reason the industry's net income swung to $8.9 billion, compared with a loss of $1.3 billion in the first quarter of 2009, according to ISO and the Property Casualty Insurers Association of America (PCI).
However, the drop in the stock market over the past three months and the decline in bond yields will make it hard for insurers to repeat that performance, Murray added.
"The decline in investment yields will make it a bit more challenging to earn a decent rate of return on insurers' investments," he explained.
The S&P index fell 11.9 percent in the second quarter and is down 7.6 percent year-to-date. The Nasdaq composite suffered similar declines, as did the New York Stock exchange composite and the Dow Jones Industrial Average. Yields on 10-year Treasury notes fell also and were at 2.97 percent on June 29, compared with 3.84 percent on March 31 and 3.51 percent on June 29, 2009.
Still, insurers may be able to realize gains on specific investments, which would flow to their income statement, even though they may have unrealized losses for their overall portfolio, Murray said.
Premiums are still declining, but there are signs that rates are stabilizing. For 2009, the industry's net premium fell by 4.9 percent, but the drop was less steep in the first quarter, falling by just 1.2 percent.
"Part of the reason for the stabilization is that rates on the personal lines are starting to rise, having an overall impact on industry rates," Ed Keane, a senior financial analyst at the A.M. Best Co. said. Homeowner policy rates are rising within specific local markets, while rates on personal auto policies have been increasing nationwide.
IT'S THE ECONOMY, SMARTY
On the commercial side, however, there are indications that the market continues to soften, Murray said. According to MarketScout's market barometer report for May, rates for commercial lines of business fell 3 percent, with declines being fairly broad-based.
"We're still having ongoing problems in the economy, which has a fairly direct effect on commercial lines," Murray said.
Ken Crerar, president of the Council of Insurance Agents & Brokers, said there's no real incentive for commercial insurers to raise rates, because the demand isn't there.
"The economy continues to be weak and so businesses can't expand, which means decreases in exposures for insurers," Crerar said. "Moreover, with unemployment remaining high, there's less demand for insurance."
A bright spot for the second quarter should be the decrease in weather-related catastrophic losses, analysts said.
There were about $3.2 billion in direct-insured losses due to catastrophes striking the United States in the second quarter, according to ISO's Property Claims Services unit. That's down about $1.3 billion, from $4.5 billion in the second quarter of 2009.
Keane agreed that catastrophic losses should be lower than the first quarter, during which time A.M. Best estimated there were $4.3 billion in losses.
As a result, the combined ratio for the industry should still be around 101 percent, Keane said.
"I think we're going to see around the same level of underwriting productivity in the second quarter," he added.
Those insurers that carry policies on BP, Halliburton, Transocean or other oil-drilling companies with direct losses from the April explosion on the Deepwater Horizon rig, will of course have exposures, Bauer said. However, the dollar amount on those losses at this point should be relatively small from a historical perspective.
July 6, 2010
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