Conference call season is a good time to catch up on pricing trends in the insurance industry. Judging by the latest round of calls, there are tentative signs that the current "soft market" in insurance will harden in 2009.

A soft insurance market is one where prices are cheap due to lax policy writing standards and high competition. As the market hardens, and the cycle turns, we can expect to see insurance prices increase.

Low Prices Won't Last for The Travelers Companies
During a recent conference call, Brian MacLean, president of insurance giant The Travelers Companies (NYSE:TRV), said, "pricing on new business continues to gradually deteriorate." He noted, however, that the insurer is still retaining customers at historically high levels and at close to expiring price, but retention was down slightly in the international segment to 79% compared to all other segments which were between 82% and 86%. Pricing on the company's entire book of business was also fairly stable and ranged from flat to -4%.

Jay Gelb, an analyst at Barclays Capital, asked management if a hardening in the reinsurance market was possible in 2009 due to capital leaving the market, partly as a result of dislocations at American International Group (NYSE:AIG). Jay Benet, the CFO said that it was hard to predict the future, but implied that pricing might firm up. "We're approaching the world as a riskier place than it was 12 months ago," Benet said. "If you recognize that, you try and bring that philosophy to your pricing decisions."

Optimism from Platinum Underwriters
Platinum Underwriters Holdings
(NYSE:PTP) reported weak pricing in its casualty segment, where the company wrote only $64 million of the $78 million in expiring business, an 18% decrease. "The reduction reflects the fact that pricing on many renewal treaties fell below our minimum standards," said aptly named CEO Michael Price.

However, Price was optimistic on future conditions in the reinsurance markets citing difficulty in accessing capital and caution by the industry. "Our outlook for reinsurance market conditions is cautiously optimistic," Price said. "At current equity market valuations for insurance and reinsurance companies, accessing new capital would be a very expensive proposition. Since reinsurance is a substitute for equity capital, we expect demand for reinsurance to go up." He said the company expected the reinsurance market to improve because reinsurers may be feeling cautious about their own capital adequacy and therefore reluctant to deploy capacity without getting appropriate rate increases.

Everest Expects Quick Turnaround
Everest Re Group
(NYSE:RE) was also positive on the future. Joseph Taranto, the chairman and CEO, indicated that a typical cycle would take years to work through but that current events had shortened that correction period. "I see that time frame dramatically reduced and expect the portions of the reinsurance and insurance market to improve by the one-month renewal season," Taranto said, citing several reasons for his belief:

  • Customers responding to turmoil in the financial markets by not doing business with financially weaker companies.
  • Much of the new capacity coming into the market, primarily from Hedge Funds, is "drying up".
  • There are early signs that the soft market may become a hard market in 2009, helping to offset some of the losses from insurers' investment portfolio.

Bottom Line
Although tentative, these signs of a hardening market are evident. Insurance companies rely on investment income to generate profits and contribute to the payment of claims. With the current economic conditions, insurance companies are feeling more cautious about the risks involved with underwriting.

For a comprehensive guide to this industry, check out The Industry Handbook: The Insurance Industry.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Fundamental Analysis

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Investing Basics

    Bill Ackman's 2 Best Investments (GGP, CP)

    Learn about the two best investments Ackman ever made. Ackman has demonstrated a consistent track record of success in all types of market environments.
  8. Investing

    George Soros: 3 Best Investments Ever

    Learn about some of the most successful trades famed investor George Soros has made during his career, including a billion dollar profit against the pound.
  9. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  10. Saving and Spending

    Where Does Bill Ackman Keep His Money?

    Learn about where prominent hedge fund manager Bill Ackman keeps his money. See how his short position in Herbalife has not been successful so far.
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  3. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  6. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center