Quiet Hurricane Season: What’s Up with US Insurers?

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With the 2013 hurricane season, which spans form Jun 1 to Nov 30, about to end in three days’ time, this particular season can be safely tagged as one of the least intense since 1950.

As measured by Accumulated Cyclone Energy (ACE), the total destructive power of a season’s storms, 2013 ranks among the 10 weakest seasons since the dawn of the satellite era in the mid-1960s.

As per the latest data available from the Insurance Information Institute, insured losses due to natural disasters in the United States during the first half of 2013 totaled $7.9 billion, far below the 2000 to 2012 January to June average loss of $13.8 billion.

The absence of a major hurricane in the U.S. this season is a huge relief for insurers who have been saved from settling huge claims related to catastrophe losses.

Given the backdrop of an uncertain economic environment and limited investment income opportunities, a benign hurricane season has helped insurers to register better underwriting results so far this year.

While an uneventful hurricane season directly lifts up the bottom-line and strengthens balance sheets, looking at the other end of the spectrum, it creates quite a few challenges for insurers as well.

The insurance industry has been a soft market since 2006. In such a scenario, there is abundant capacity, which leads to lower premiums, easier underwriting criteria and intense competition.  Severe losses from natural catastrophes, on the other hand, are a large component of the formula that characterizes a hard market, marked by higher premiums, strict underwriting and limited competition between carriers.

Currently, the insurance industry has abundant capital with policyholders’ surplus for the first half of 2013 increasing 4.6% year over year to $614 billion as of Jun 30, 2013. As a result, insurers are experiencing soft pricing in some business lines and the downward pricing trend is likely to continue through the last month of the year and into Jan, 2014 led by absence of significant cat losses in 2013

Left with surplus capital, some insurers and reinsurers have been returning capital to shareholders. PartnerRe Ltd (PREAnalyst Report) with a Zacks Rank #1 (Strong Buy) returned approximately $700 million to shareholders through share buybacks in the first nine months of 2013 in order to use its surplus capital.

Another player Aspen Insurance Holdings Ltd. (AHLSnapshot Report), also carrying a Zacks Rank #1, increased its dividend by 5.9% in Apr 2013 and has already purchased $296 million of shares meeting its share repurchase goal for the year.

With markets not expected to harden fully in the near future, players must seek other options for growth. Acquisitions provide a significant opportunity to diversify and expand by location, product or distribution source. Expanding internationally can reduce domestic insurers’ dependence on the U.S. economy.

Premium growth opportunities in the U.S. may also be derived from extending coverage to new or emerging exposures in areas such as cyber liability, nanotechnology and energy. Finally, cross-selling products offer insurers the opportunity for both increased profitability and persistency.

Some of the stocks under our coverage which are uniquely poised to gain from the recent trends in the industry are Cincinnati Financial Corp. (CINFAnalyst Report), and Alleghany Corp. (YSnapshot Report) with Zacks Rank #1 (Strong Buy).

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