Thursday, 3 January 2013

Insurance industry forecast 2013

Best Insurance stock - Insurance industry forecast 2013 : be depressed in the near term as a result of downward pressures on investment yields. Overall, the industry remains well capitalized whereby policyholder surplus for the P&C sector stood at $567.8 billion at June 30, 2012, an increase of $17.5 billion from yearend 2011. Policyholder surplus for life and accident & health sector was $318.4 billion June 30, 2012, compared to $310.4 billion at Dec. 31, 2011. In spite of this, both the P&C and life sectors continue to trade below book  value. The NASDAQ Insurance Index was up 4.52 percent for the first nine months of 2012 compared to 11.28 percent for the S&P 500. To counter this lackluster stock market performance, insurance companies are expected to create shareholder value by aggressively relying on share repurchases. Several carriers have recently announced their intention of doing this, and we expect this trend to continue well into 2013.

On the investment side, the Federal Open Markets Committee has announced its intention to keep interest rates low until mid- 2015. While this is a universal challenge for all insurance companies, it�s a distinct concern for P&C carriers. Their assets must be invested in short-term to medium-term maturities, which have been in a continuous decline (the average five-year and 10-year Treasury yields were 0.6 percent and 1.5 percent, respectively, in July 2012, compared to 1.4 percent and 2.75 percent in July 2011.) On top of this, in recent years, underwriting operations have also been less profitable.
Fitch Ratings expects combined ratios for 2012 and 2013 to be 101.1 percent and 100.3 percent, respectively. And while this is a marked improvement over 2011, we expect the P&C industry to see continued challenges. In the 1990s, insurance companies saw returns in excess of 7 percent through fixed income securities; today these yields have declined to roughly 5.5 percent. Therefore, we�ve seen a number of insurers exit or re-price unprofitable business lines and revisit their investment allocation and risk tolerance strategies to maintain or enhance the investment yields. In particular, a number of life and annuity

carriers have made these moves: Hartford, Sun Life and Manulife announced plans to exit the life and annuity business, and AXA and Aegon have offered lump-sum payments to their variable annuity contract holders with rich living benefit guarantees to remove the associated risks from their balance sheets. We expect this trend to continue.

To bolster investment yields, insurance companies are changing their asset allocation strategy, shifting to distressed asset classes, longer duration bonds, commercial mortgage loans and equities. But this means some companies, according to AM Best, are �deploying cash and short-term investments into lower-quality, high-risk investments� which could negatively impact their capital adequacy ratios and, therefore, their ratings. Yet, one positive impact of the continued lowinterest rate environment for some insurers, at least in the short-term, has been significant unrealized gains on older bond portfolios. But although this has a positive impact on surplus, it has not had much impact from an earnings perspective. Some insurers have opportunistically realized some of these gains, but it comes at the expense of earning lower yields in the future, as well as dealing with asset liability mismatch issues going forward. Download full articel
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