Tickers in this Article: HIG, PRU, LNC, PFG, ALL, AMP, MHP, ACE
Bad news for potential investors in the insurance sector: Two fundamental trends in the property/casualty insurance market may be about to collide head on. The outcome of this collision is unclear, and this is causing confusion for investors looking for an entry point into the group. The good news is that an industry survey showed that prices for commercial lines of insurance declined by the least amount in four years. The survey, conducted by Towers Perrin and involving commercial lines insurance pricing and profitability trends (CLIPS), showed a decline of less than 1%. The survey is the latest in a series that show a hardening of the insurance market for property and casualty insurance. Despite this positive trend, industry participants have recently expressed concerns about companies' current practices regarding reserving for future losses, which could put the some insurance companies on shaky ground. (Learn about P&C insurance in our Intro To Property and Casualty Insurance.)

Price Decline Slowing Down
A survey by MarketScout, which was similar to the one conducted by Towers Perrin later that same year, showed that pricing decreased by 7% in April 2009, the same level as in March 2009.

This trend was confirmed by management commentary during first-quarter conference call season. Evan Greenberg, the CEO of Ace Limited (NYSE:ACE) said that pricing was "in line or better" than anticipated, and that "in many classes of insurance, rates are flat to up and when prices are declining, they're doing so at a slower rate."

However, only a week earlier, at the Standard & Poor's 2009 Insurance Conference, participants expressed concern about industry practices regarding reserving for future losses.

Greenberg said at the conference that the industry did not reserve adequately for the 2008 accident year. Other participants noted that the industry has recently stepped up its release of reserves for prior years. In 2008, commercial line reserve releases increased to $11 billion from $5.7 billion.

Insurance Companies & TARP
The insurance industry has been hit hard by the financial crisis of the last year, but has escaped the brunt of the carnage, unlike its banking sector cousins. The industry also finally received approval to get government funds under the Troubled Asset Relief Plan (TARP). The Obama administration approved six major insurers to receive funds. (Read The 2007-2008 Financial Crisis In Review to learn more about the crisis)

Lincoln Financial (NYSE:LNC) said it would receive up to $950 million in capital, while Hartford Financial Services (NYSE:HIG) also accepted, and has indicated that it will receive up to $3.4 billion in funds.

The other four eligible insurers - Principal Financial Group (NYSE:PFG), Allstate Corp (NYSE:ALL), Prudential Financial (NYSE:PRU) and Ameriprise Financial (NYSE:AMP) have all declined the aid.

Bottom Line
The property/casualty industry has been buffeted by two opposing fundamental forces. While pricing declines are on the verge of turning into increases, this has been offset by the industry's tendency to under-reserve to cope with the current environment. Only time will tell which of these forces will win out in the end.

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