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Property Insurers Finding Higher Ground

7 September 2013 in Trading Ideas

It probably wouldn’t surprise you to know that an outsized number of natural catastrophes and an extended period of low interest rates during the past five years weren’t exactly a recipe for success for property and casualty insurance companies.

But their subsequent plans to raise prices seem to have the industry headed in the right direction – especially with fewer natural disasters dovetailing with an interest-rate environment that appears to be picking up.

property casualty insuranceThe possibility of this continued turnaround in the industry is the thesis behind our latest Property & Casualty Insurance motif, a portfolio of stocks of insurance providers, brokers and reinsurance firms.

Chief among the positive data points is a report earlier this summer that US property-casualty insurers posted their first quarterly underwriting profit since 2009 in the first quarter of this year. The industry racked up an underwriting profit of $4.64 billion in the quarter ended March 31, a huge boost over last year’s loss of $144 million.1

According to analytics firm ISO, the underwriting profit reflected a combination of premium growth, increases in reserve releases, and a decline in weather-related catastrophe losses.

The rise in underwriting profit contributed to the $14.4 billion in net income after taxes that private US property and casualty insurance firms recorded in the first quarter, up from $10.2 billion a year earlier.

While underwriting profit helped, so did investment gains, which rose to $12.8 billion as write-downs on impaired investments dropped. Investments have been a key fulcrum for insurance companies in recent years, as companies have looked to boost profit in the wake of longstanding underwriting losses. But that’s proven difficult in recent years as low interest rates pressured income from bonds held to back policyholder obligations.

Now, however, interest rates are trending higher, suggesting investment income may once again become invigorated.

As ISO pointed out, an unusually high number of hurricanes are expected for 2013, so current profit margin levels would be impact if that forecast holds true. But investors looking for equity alternatives that could benefit from rising rates may want to take closer look this new motif.

1Megan Hickey, “US Insurers Have First Underwriting Profit Since 2009, Bloomberg.com, June 24, 2013, http://www.bloomberg.com/news/2013-06-24/u-s-insurers-have-first-underwriting-profit-since-2009.html, (accessed Sept. 4, 2013).