Earnings Outlook Positive; 'No Major Increase' In Rates
With the past year's premium rate hikes now being fully factored into the earnings picture, many insurers are expected to see good results in the second quarter and the latter half of 2003. And the long-awaited upturn for stock markets is also lifting the industry, especially for the hard-bitten insurers and reinsurers in Europe, according to some insurance analysts on Wall Street.
Additionally, the New York-based investment bank Morgan Stanley argued that the pricing has "peaked in most lines," and that some areas, namely property, are even seeing declining rates.
Granted, there are several wild cards on the table that no one can predict, such as uncertainties involving further potential reserve boosts by carriers. But Morgan Stanley insurance analyst Vinay Saqi said, "There has been much talk in the marketplace about pricing and that the end of the cycle might be nearing."
In his research report reviewing the first half of 2003, Mr. Saqi observed that, for the most part, property prices look as if they had already peaked in early January. "The outlook doesn't call for another major increase," he predicted, "unless catastrophe losses mount to a meaningful level in the second half of the year."
He noted that insurance brokers are now saying that conditions have become more competitive in property, with rates falling in many instances. "Areas such as primary property, property-catastrophe and aviation seem most affected at this time," he said.
And in personal lines, the move to "chase growth" has already begun, Mr. Saqi added. The Progressive Corporation in Mayfield Village, Ohio, for instance, pointed out during its annual analyst meeting in late May that the competition is heating up in the agency market.
"Other players have begun to slow the pace of rate increases, given regulatory concerns and decent combined ratios," Mr. Saqi wrote in his research report.
Jay Cohen, analyst at New York-based Merrill Lynch & Co. Inc., painted a positive picture for the 2003 earnings outlook. "We expect bottom-line earnings to gain on the momentum that was evident in the first quarter. Earned premiums are now fully reflecting the price increases put in place over the past year," said Mr. Cohen in his earnings preview report.
Another investment bank, Fox-Pitt, Kelton Inc., argued in its report this month that the growth should be "exceptionally strong" for Bermuda start-ups. On pricing, the New York-based firm commented: "It is apparent that property pricing has peaked and certain segments of the casualty market are slowing. Thus, while margins and profitability continue to improve, the pricing momentum is behind us."
On the down side for the earnings picture, catastrophe losses from the spring weather in the Midwest and Texas were higher than losses from the prior period. But, Mr. Cohen added, these will "impact carriers selectively" in homeowners line of business, for insurers that concentrate on that part of the country.
"SAFECO, Travelers, Ohio Casualty and Chubb have already pre-announced catastrophe losses. We expect most of the catastrophe losses to stay within the catastrophe retentions of the primary carriers," he said.
Mr. Saqi also commented that, despite these storm losses, overall claims activity has been "relatively benign" so far this year. "The result has been a gradual increase in capacity, thanks to price increases, with not such a large change in demand.
Ultimately, that is likely to pressure rates somewhat," he said. "That is what's happening at this time, we believe, and this could continue if losses remain below normal."
Morgan Stanley also weighed in on casualty-lines pricing, observing that tighter terms and conditions are continuing, with higher retentions and exclusions of certain coverage from umbrella policies.
But, the firm pointed out, "The level of rate increases has stopped accelerating."
One area that is still going strong is directors and officers coverage, where signs of more claims costs are coming out and rates are still climbing at a "rapid pace." But even in D&O, Mr. Saqi said, "We expect rates to moderate as we head into 2004."
Figures from MarketScout, an online insurance exchange based in Dallas, also support the claim that the current cycle is losing its steam. The commercial-lines rate hikes in May and June were only 18 percent, the lowest level since October 2001 and a full 10 percent lower than the increase from this past March.
"We believe we are now in the latter stages of the cycle, where premium rates no longer go up meaningfully"–and perhaps stay flat, Mr. Saqi predicted.
Another significant factor in all this is the successful capital-raising activities in 2003. In the second quarter, the p-c industry raised some $15 billion in new capital, the most since the fourth quarter of 2001, according to Morgan Stanleys research. To be sure, many industry experts say this is not enough to influence the cycle, Mr. Saqi noted.
"We don't quibble with that point," he said. "At the same time, any incremental capital is likely limiting price increases."
Such strong capital-raising activities can play an important role, he argued. One concern he expressed is the ease with which "capital constrained" companies have raised money this way. "As long as some of these players are given a lifeline, it could affect pricing," he said.
Morgan Stanley predicts there will be more capital coming into the market during the remainder of 2003 and well into next year.
Another factor affecting the p-c industry is the return of the bull in stock markets. With equity markets turning bullish, this long-awaited upturn will help insurers' investment portfolios.
This is especially helpful for European companies, since most of them allocate more of their invested assets to equities compared to their U.S. counterparts, Morgan Stanley reported. Last year, many European insurers suffered ratings downgrades, which acknowledged their often-massive investment write-downs. These downgrades prompted a "shift of premiums" from Europe to the United States and Bermuda-based companies, reflecting the flight to quality.
But worldwide stock markets are finally improving this year. In the second quarter, for example, the Standard & Poor's 500 Index rose some 15 percent, while London's FTSE 100 gained more than 10 percent and Germany's DAX jumped a whopping 30 percent, according to figures presented in the Morgan Stanley research report.
If this trend continues, many European companies will see their capital levels replenished, the report said. But ironically, as Europeans catch their breaths, U.S. competitors could start to lose their advantage and the shift of premiums, Morgan Stanley predicted.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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