Stock Rally Boosts Insurers Earnings – US-FOREX.US
Few industries benefit from rising stock and bond markets like insurance. Firms take in premiums from customers and pay most of that out as claims eventually. But until your home burns down, or your car gets sideswiped, the insurance company invests that money to earn a profit and most of it goes into stocks and bonds. So it’s no surprise that with the S&P 500 up nearly 50% since its March low, and an accompanying rally in corporate bonds, the insurance industry is posting better results at a time when many companies are struggling to hang on to customers.Overall, non-life insurance companies have surprised Wall Street with robust earnings in the second quarter, writes Jay Gelb, analyst with Barclays Capital. These firms, and the brokers that distribute their policies, have seen earnings fall only 3% from last year, on average. Thanks largely to the stock market rally, insurance firms added 11% to their net worths in the last quarter, a huge boost from the first quarter’s 3% increase. On top of that, recent losses turned out to be well below what many firms had anticipated, allowing them to take back money they had set aside for reserves, writes Gelb.Insurance firms aren’t out of the woods yet though. Prices had risen following the financial crisis as customers sought insurance to limit their risks. Once the worst of the crisis passed, prices began falling and although they’ve recently stabilized, Gelb says they could well resume their declines. He likens the situation to the pricing for catastrophe insurance after Hurricane Katrina, when premiums shot up only to fall back down once people realized the likelihood of another Katrina happening soon was remote.Investors seem to be aware of what lies ahead. Despite the sunny second-quarter numbers, Gelb notes the group trades for less than its recently-inflated net worth. He recommends shares of commercial insurers Travelers Companies
, ACE Limited
, PartnerRe
and Arch Capital Group
. Among insurers that cover individuals, he likes The Hanover Insurance Group
. Among brokers, Gelb thinks investors could mostly do better elsewhere. He recommends selling Willis Group Holdings
, Arthur J. Gallagher & Co.
and Brown & Brown
.