CHICAGO, May 6, 2011 /PRNewswire/ -- Today, Zacks Equity
Research discusses the Insurance Industry, including RLI
Corp. (NYSE: RLI), AXA (OTC: AXAHY), American
Financial Group Inc. (NYSE: AFG), CNA Financial
Corporation (NYSE: CNA), and CNO Financial Group, Inc.
(NYSE: CNO).
(Logo: http://photos.prnewswire.com/prnh/20101027/ZIRLOGO)
A synopsis of today's Industry Outlook is presented below. The
full article can be read at
http://www.zacks.com/stock/news/52746/Insurance+Industry+Stock+Update+-+May+2011.
After enduring stress with respect to pricing pressure and
reduced insured exposure through mid-2009, the overall health of
the U.S. insurance industry has improved to some extent in recent
quarters. Though the market turmoil forced many companies to take
immense write-downs, the worst of the crisis appears to be now
behind us.
However, long-lasting soft market conditions, shrinking
businesses, a still-high unemployment rate and legislative
challenges are threatening insurers' ability to rebound to the
historical growth rate. The industry continues to be challenged by
subdued pricing and premium volume growth in a perked up economy as
well as a massive health care restructuring.
Though there are signs of economic recovery, its sluggish pace
is expected to continue at least through 2011. Also, structural
economies of scale have pushed the industry toward consolidation.
As a result, inter-segment competition within the industry has
reduced. Moving forward, maintaining profitability after complying
with regulatory requirements could be a painful task.
We expect static growth with persistent soft market conditions
to result in further consolidation in the industry. Though there
are near-term opportunities for insurers, braced by some rapidly
growing sectors such as health care and technology, overall
industry condition is expected to improve beyond 2011, should the
economy turn to growth post-recovery.
Life Insurers
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 during
the recession, life insurance companies will need to optimize their
capital levels to address continuing challenges. In the short term,
traditional sources of capital are expected to fulfill most of what
life insurers need to stay in good shape. However, non-traditional
sources of capital will take years to help these strengthen
financials.
The underlying trends amid sluggish economic recovery indicate
stability of U.S. life insurers over the medium term with respect
to credit profile and financial prospects. However,
higher-than-average asset losses of life insurers, primarily a
result of real estate exposure, will remain a major concern in
2011.
Most importantly, narrowed disposable income owing to high
unemployment and huge credit card debt has reduced the ability of
Americans to invest in retirement products such as life insurance.
On the other hand, interest in cheaper products to cover only their
basic risks has increased. So returning to providing basic services
should be the primary course of action for life insurers to realize
some profit in the near term.
Some life insurers have already gone back to the basics in order
to meet demand and escape financial and regulatory difficulties,
but taking shelter from the icy winds will not be adequate for
thriving. Life insurance companies have to be more proactive to
weather the situation.
Health Insurers
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 U.S. citizens are covered
under private health insurance. Unfortunately, these insurance
companies utilize a pre-existing exemption clause to control costs
and maximize profit.
The historic health care legislation, which was passed by the
Congress last year, prevents private insurance companies from using
the pre-existing clause, but at the same time brings in 32 million
more people under coverage. In total, the health care reform packs
95% Americans under health insurance coverage. Further, according
to a new Commonwealth Fund report, 90% of American families live
above the federal poverty level and are able to afford health
insurance premiums.
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 in
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 the 32 million added
coverage.
Property & Casualty Insurers
Steep losses in the investment portfolios since the beginning of
2008 have significantly reduced the capital adequacy of most
Property & Casualty insurers. The seizure of credit markets and
rising concerns over defaults have pushed down bond prices sharply
since then, causing significant realized and unrealized capital
losses on insurer portfolios. 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.
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.
Reduced financial flexibility and weak underwriting and reserves
have further added to insurer woes. The only positive trend visible
as of now is a slight improvement in some insurance pricing after
continued deterioration for two years since 2008.
However, the Property & Casualty industry endured the recent
financial crisis better than the other financial service sectors.
Once the economic recovery gains momentum, insurance volume will
grow rapidly.
The recent quarters have been witnessing increasing rebound in
claims-paying capacity (as measured by policyholders' surplus),
which reflects the industry's resilience over the prior-years.
Reinsurers
Losses from the investment portfolios of reinsurance companies
have gotten worse during the last few quarters. In the second half
of 2008, the underwriting profits were severely hurt by Hurricanes
Ike and Gustav. However, pricing improved in 2009 and 2010. We
expect pricing to remain firm going forward.
With the signs of recovery in the capital market (though still
weak by any means), concerns related to reinsurers' ability to
access capital markets on reasonable terms have sufficiently
eased.
However, diminishing new business and rising expense ratios are
major concerns for reinsurers at this point. According to a survey
by the Washington-based
Reinsurance Association of America (RAA), U.S. reinsurers' premiums
decreased and combined ratio deteriorated on a year-over-year basis
in 2010. An increased level of price competition among insurers
explains the decline in premiums.
For the upcoming quarters, we expect slightly lower favorable
reserve development trends, due to lingering concerns about the
overall economy.
OPPORTUNITIES
We remain positive on RLI Corp. (NYSE: RLI) and
AXA (OTC: AXAHY) with a Zacks #1 Rank (short-term Strong
Buy).
Other insurers that we like with a Zacks #2 Rank (short-term
Buy) include American Financial Group Inc. (NYSE: AFG),
CNA Financial Corporation (NYSE: CNA), CNO Financial
Group, Inc. (NYSE: CNO), among others.
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