Lower Premiums and Stocks Likely as P/C Insurers Buy Back Stocks
Members of the U.S. P/C industry are buying back shares of their own stock at rates not seen in 20 or more years, signaling the beginning of a soft market and a sign that the competition is pushing premiums low enough to threaten increases in profits. “Insurance companies know they’re going into a softer cycle, and they’re pleading with their shareholders not to lower valuations on their stocks,” according to Stuart Quint of Nationwide Funds Group.
Liberty Mutual Group CEO Edmund Kelly says the trend is “disturbing. . . We are beginning to see behaviors we haven’t seen since the late ‘90s in the commercial market.” New York-based industry leader AIG reported its shares declined 7% this year, essentially eliminating all of the gains reported after the insurer announced in March a record $5 billion in buybacks it has made thus far this year. Credit Suisse Group analysts tracked 25 insurers and found 19 of them repurchased $4 billion of their stock in the first quarter of 2007 alone, following $7.1 billion (a 20-year high) repurchased in all of 2006. When premiums were near a record low relative to their net worth, the companies repurchased $5.3 billion.
The property/casualty industry generally seesaws back and forth into boom or bust behavior. When profits are up, insurers slash prices to increase their market share, and continue to do so until such time that premiums no longer cover the cost of claims payments – i.e., underwriting losses, which in turn cause insurers to increase prices once again until they are back in the black.
The Council of Insurance Agents and Brokers in Washington notes that the average rate on commercial insurance fell 12% in the second quarter, representing the largest decline since three years earlier when the downturn began, slowing briefly in 2005 only when record hurricane claims resulted in increases on catastrophe coverage.
Published on July 27, 2007
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