U.S. Insurers Turn A Major Corner

By Aaron Levitt | June 25, 2013 AAA

Insuring oneself from disaster is financially prudent, whether you're a corporation or individual. To that end, the global insurance market has grown to be a $4.3 trillion dollar industry. However, things haven’t been going so swimmingly for the providers of that critical financial back-stop. Robust damage from catastrophic natural disasters- like hurricane Sandy in the Northeast and the recent tornado destruction affecting the Midwest- the insurance industry has suffered on the underwriting front. That’s caused declines in profitability and share prices for some of the largest insurers in the U.S. However, according to a new report, things may have finally turned a corner for the beleaguered industry and could make the sector a big buy for the second half of the year.     The First Time Since 2009   The property-casualty insurance industry may finally be riding high as they posted their first quarterly underwriting profit since 2009. According to a new report by the Property Casualty Insurers Association of America and Verisk Analytics (NASDAQ:VRSK) insurers swung to a $4.64 billion profit in their underwriting for the first quarter. Underwriting profit measures collected premium revenues minus any expenses and claims cost. A year earlier period, the industry suffered a loss of $144 million. Perhaps more striking is that the industry has had underwriting losses in 92 of the last 109 quarters. SEE: Intro To InsuranceThe swing to net gains on the critical metric reflects a combination of premium growth, increases in reserve releases, and a decline in weather-related catastrophe losses. Direct catastrophe losses during the first quarter fell just $1 billion and insurers continue to release reserves as claims from super-storm Sandy have been much lower than first predicted.  All in all, that’s a huge win for the industry. As underwriting has suffered, insurance companies have had to rely on investment gains to keep the profits following. However, with the Federal Reserve’s zero interest policies continuing to persist, those profits are becoming harder to come by.  Annualized yields on insurers’ investments have fallen to 3.3% in first-quarter of 2013. That’s down from 3.5% for the first-quarter 2012.  With the Fed potentially raising rates/ending its quantitative easing programs here in the near future, along with returning underwriting profitability, the property and causality insurers are in a unique position to profit. Already, the Standard & Poor’s 500 Property & Casualty Insurance Index gained 17% in the first quarter of this year. However, that could be a drop in the bucket has underwriting profits continue to grow and the sector earns more money on their reserves.  Playing The Rebound   Given the potential tailwinds pushing the insurance sector forward, investors may want to tilt their portfolios towards the sector. The SPDR S&P Insurance ETF (NYSE:KIE) is a good place start. The fund tracks 49 different insurers- such as Allstate (NYSE:ALL) and Lincoln National (NYSE:LNC) –and offers a broad play on the industry. Likewise, the iShares Dow Jones US Insurance (NYSE:IAK) could be used as well.  However, despite the fact that property-casualty insurers do make up the bulk of the funds, their broad scope does include other insurance types- health, life reinsurance etc. All of these insurance types are affected by different outside forces.  .For those looking to play the potential underwriting and investment gains, the PowerShares KBW Prop & Casualty Insurance ETF (NASDAQ:KBWP) may be a better bet. The fund tracks strictly 24 insurers in the property/casualty sector and has managed to outperform the previously mentioned S&P index by roughly 3%. However, the PowerShares fund isn’t without its drawbacks either. Poor trading volume and a lack of assets could derail investment.    That means individual picks maybe a better choice. Perhaps, the best choice could be Travelers (NYSE:TRV). Despite facing two seriously damaging hurricanes over the last two years, has managed to increase premiums and produce stellar earnings. Management at the Dow component attributed this performance strictly to the “continued improvement in underlying underwriting margins across in all segments.” That strong performance helped Travelers also raise its quarterly dividend to 50 cents per share- up from 46 cents per share. Any continued improvement in underwriting will only strengthen TRV shares even more.  The Bottom Line After suffering, the property and casualty insurance industry is back. The group has reported their first underwriting profit since 2009. That’s an important milestone. Given the potential for more profits ahead, investors may want to add the sector to a portfolio. The previous picks, along with AXIS Capital Holdings (NYSE:AXS) make ideal selections.

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