An investment analyst said homeowner insurers should benefit from the drop in new home construction by lowering the cost for building replacement homes, but the economic slowdown could increase losses in other areas.
In an analyst's note, Meyer Shields with Stifel Nicolaus said the economic slowdown in the housing market will lead to some increases in areas of loss, but home insurers are "more able and more willing to maintain underwriting profitability for the line of business than in the past."
According to what he termed as rough analysis of trends affecting the housing market, prices for nonpetroleum construction products are in decline.
For instance, the drop in housing demand has led to the price of lumber falling 22 percent since July. The decline in the cost of materials is lowering construction costs. That, coupled with the drop in demand for housing, will probably drive costs down further, benefiting insurers replacement cost loss.
A weaker economy, he continued, could lead to an increase in crime and arson.
Crime would increase from more burglaries, but that, he said, would amount to a very small proportion of loss.
Arson may see an increase because of the rise in foreclosures as homeowners, desperate to remain out of foreclosure, take extreme measures to raise the money to pay off the mortgage.
However, new investigative techniques and the attention insurers are paying to such crimes should control losses. Insurers may also be adversely affected by policy cancellations for nonpayment of premiums with mortgage delinquencies and home foreclosures.
He said insurers, such as Chubb and Fireman's Fund, which write a lot of high-end homeowners insurance, would be less exposed to this loss in business. Others who write the lower end of the housing market would be more exposed to losses.
He noted that Allstate should "succeed in navigating through this process," with their focus on long-term, high-value customers.
Steve Weisbart, vice president and chief economist for the Insurance Information Institute, said the overall analysis of the industry follows a logical pattern that is hard to dispute.
However, there is scant amount of past data available to support the conclusions. This is particularly true on the foreclosure issue because the nation is gripped by an "unprecedented" housing market crisis and there is little data available to go on.
"The analysis follows very logically and systematically," said Mr. Weisbart, but some specific concrete data would be helpful to back up his conclusions.
Mr. Weisbart noted that it is the association's policy not to comment on specific companies, and declined to discussion any conclusions on that aspect of the analysis.
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