As Travelers Joins the Dow, A Few Positive Signs for Insurers

As GM (GM) declared bankruptcy andis removed from the Dow Jones along with Citigroup (C), the stocks of Cisco (CSCO) and Travelers (TRV) are being added as replacements. As other authors have noted, the choice of Travelers is ironic, given that it was once part of Citigroup. There are other financials that could just as easily have replaced Citigroup. Moreover, the last insurer to be added to the Dow was AIG (AIG), and we all know how that company turned out. Being added to the Dow is not necessarily a forecast for improved earnings.

The market surge from the March lows is a much better indicator of future earnings prospects, as insurer investments typically see higher valuations as the rising tide lifts all the stocks in their portfolios, while a rising yield curve also helps insurers maintain their spreads. The market rally will thus significantly help reduce reported investment losses, and allow insurers to focus more on operating factors.

Also, government TARP money recently made available to the likes of Hartford Insurance Group (HIG) and Lincoln National Corp. (LNC), and capital raising efforts by Allstate (ALL) and Prudential Financial (PRU) will help provide capital to support operations. TARP buys time for those insurers to work out their issues through improvement in earnings and balance sheets, although such government support comes at a heavy price. Indeed, the banks must raise private capital before being allowed to exit TARP.

Besides the stock market surge, a positive sign is developing on property catastrophe pricing that should benefit the property-casualty insurers. Guy Carpenter (Marsh & McLennon) has just disclosed that Florida property catastrophe reinsurance rates rose 15% with the June 1, 2009 renewals. Reinsurance capacity was more limited than a year ago, but still adequate. The rate increase this year compares to a decline in pricing last year.

Despite these positives, we should not lose sight of the fact that economic recovery seems slow, that demand for insurance tracks closely with GDP, and that investment portfolios are far from immune to further difficulty. Fear of inflation has recently driven the longer bond yield up, even as the Fed has tried to push it down to support lower mortgages. Also, there was a story yesterday on ABC News – Good Morning America that troubling storms are forming close to the Mid-Atlantic coastline, potentially setting the stage for an active hurricane season. Hurricane season has just begun for 2009.

In addition, many insurers own stock and bonds in the auto manufacturers and will face potential losses from their bankruptcy. More difficulty might also be expected from commercial mortgage backed securities on many insurer balance sheets.

Disclosure: No positions in any of these stocks.