Skies May Darken for Insurers

The Wall Street Journal sees problems ahead for insurance stocks:

Last year’s sky-high profits were mainly driven by the soaring cost of coastal natural-catastrophe coverage after Hurricane Katrina in 2005 and the dearth of major storms in 2006. While premiums charged for that coverage are still high, competition is steadily lowering rates in other important lines of coverage, like corporate directors’ and officers’ liability policies or workers’ compensation.
Some insurers, flush with cash and hungry for growth, might charge too little for coverage to win customers. If future-year claims come in higher than expected and exceed the premiums collected, shareholders of property-casualty insurers could pay dearly. When companies report fourth-quarter results over the next two months, premium rates are worth watching.
Typically, “when the pricing cycle is starting to soften, that is a sell signal,” says William Hawkins, an insurance-stock analyst with Keefe, Bruyette & Woods Ltd. in London.
Also, the combination of high profits, low predicted sales growth and the lure of achieving global scale could be a recipe for insurers to strike deals, adding risk.
Premiums tend to rise and fall in cycles often determined as much — or more — by the supply of capital as by the actual risks insurers take on.
The last down cycle illustrates how price wars can sap earnings. Industry profits peaked in 1997 and dropped a total of 44% over the next three years, according to Insurance Services Office Inc., which provides data and services that help classify and evaluate risk. Prices fell and claims rose significantly during that period.
Partly in response to those circumstances and partly because of losses associated with the Sept. 11, 2001, terrorist attacks in the U.S. and other factors, prices climbed earlier this decade. Amid this upswing, insurers preached a new focus on disciplined underwriting to avoid the boom-to-bust cycles of the past.
“When you’ve gone through a bad period, you do behave in a more conservative fashion,” says William Berkley, chief executive of W.R. Berkley Corp., a Greenwich, Conn., insurer.

Posted by Eddy Elfenbein on January 9th, 2007 at 12:28 pm

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