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Insurance Outlook: Is the Worst Behind Us?


Posted on 05 Aug 2010

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After enduring stress with respect to pricing pressure and reduced insured exposure through mid-2009, the overall health of the U.S. insurance industry has improved to a great extent in 2010. Though the market turmoil forced many companies to take immense write-downs, the worst of the crisis appears to be now behind us.

The soft market conditions, along with legislative changes, remain the chief causes for concern for the overall industry at this point. The industry continues to be challenged by the regulatory uncertainties and massive health care restructuring.

Though there are signs of economic recovery, its sluggish pace is expected to continue at least through the remainder of 2010. Also, structural economies of scale have pushed the industry toward consolidation.

While enormous financial support from the government helped rescue American International Group (AIG) from collapse, many other firms remain under tremendous pressure or have fallen by the wayside. Competition within the segments of the industry has reduced, which is consolidating through mergers and acquisitions. This has increased market shares of the largest firms.

We expect static growth with persistent soft market conditions, resulting in further consolidation in the industry. However, we expect the overall condition to improve in 2011, should the economy turn to growth post-recovery.

Life Insurers

Continued losses in the investment portfolio and lower income from the variable annuity business will continue to hurt earnings of life insurers. Most life insurers have substantial exposure to commercial real estate-backed loans and securities, which will result in further losses in the coming quarters.

As the industry's statutory capital levels fell sharply, some companies were trying to raise capital through the Troubled Assets Relief Program (TARP). In May 2009, the Treasury approved six life insurers for capital infusion under TARP. Hartford Financial Services Group(HIG) and Lincoln Financial Group(LNC) received federal aid. The other four insurers, Prudential Financial(PRU), Principal Financial Group(PFG), Allstate Corporation(ALL) and Ameriprise Financial(AMP) decided against accepting bailout funds.

Both Hartford and Lincoln have already repaid the government money. Hartford has repaid the entire $3.4 billion of bailout money in April 2010, while Lincoln repaid the full $950 million of federal aid in June 2010.

In May 2010, rating agency Moody's Investors Services restored the life insurance industry's outlook at "stable," after being downgraded to "negative" in October 2008, with the onset of the financial crisis. According to the rating agency, though the economic recovery is expected to remain sluggish, the underlying trends indicate stability of U.S. life insurers over the medium-term with respect to credit profile and financial prospects. But the rating agency remains concerned about higher-than-average asset losses of life insurers in 2010-2011, particularly with respect to their exposure to real estate.

Health Insurers

The U.S. health care system is significantly dependent on private health insurance, which is the primary source of coverage for most Americans. Approximately 58% of Americans have private health insurance. Unfortunately, these insurance companies utilize a pre-existing exemption clause in order to control costs and maximize profit.

The newly passed historic healthcare legislation prevents private insurance companies from using the pre-existing condition clause, but at the same time brings in more than 30 million additional people under coverage. While the legislative overhaul brings more regulatory scrutiny into this space, the net negative effect is far more muted than was initially feared. Also, the removal of this uncertainty is a net positive in its own right.

However, the healthcare reform legislation will mar the overall profitability of the health insurance industry in the long run as the negative impact of Medicare Advantage payment cuts, industry taxes and restrictions on underwriting practices will more than offset the benefits of covering more than 30 million additional people.

Property and Casualty Insurers

Major catastrophe losses in 2008 have resulted in significant deterioration of companies' underwriting results. Steep losses in the investment portfolios since the beginning of 2008 have significantly reduced the capital adequacy of most insurers.

During 2009, the seizure of credit markets and rising concerns over defaults have pushed down bond prices sharply, causing significant realized and unrealized capital losses on insurer portfolios. Holding two-thirds of the invested assets in the form of bonds, the capacity of the Property and Casualty insurers is highly sensitive to changes in credit market conditions.

While a modest recovery of credit and equity markets may lead to a reduction in the unrealized investment losses in the upcoming quarters, the premium rates continued to decline, though at a slower pace.

Reduced financial flexibility and weak underwriting and reserves have further added to their woes. The positive trend visible as of now is a slight improvement in some insurance pricing after continued deterioration during the last couple of years.

Also, the recent quarters have been witnessing increasing rebound in claims-paying capacity (as measured by policyholders' surplus), which reflects the industry's resilience over the prior-year.


Losses from the investment portfolios of reinsurance companies have surged during the last few quarters. In the second half of 2008, the underwriting profits were severely hurt by Hurricanes Ike and Gustav. However, the pricing improved as of 2009 and is expected to remain firm going forward.

With the signs of recovery in the capital market (though still weak by any means), the concerns related to reinsurers' ability to access the capital markets on reasonable terms have sufficiently eased.

However, diminishing new business and rising expense ratios are major concerns for reinsurers at this point. The higher rate of unemployment is primarily responsible for the lower business production. Also, due to increased levels of price competition among insurers, market premium volumes continue to shrink.

We expect slightly lower favorable reserve development trends in the upcoming quarters, as there are lingering concerns about the overall economy.