Non-Mortgage Insurers Still Impress

We are not ready to give up on the insurance sector as a whole yet, even though those with exposure to the ongoing mortgage crisis have suffered as of late. We sat down with Zacks senior insurance industry analyst Neena Mishra for her outlook on the insurers in her coverage.

For insurance companies under your coverage, how were fourth quarter earnings results?

The results for the companies under our coverage continue to be mixed. The companies with solid product and geographical diversification reported better-than-expected results based on moderate level of incurred losses, weakness in the U.S. Dollar and strong demand for post- retirement products, somewhat offset by the ongoing softening in the property-casualty market and the losses in the investment portfolio. On the other hand, financial guarantee companies reported dismal results in continuation of the trend witnessed in the past couple quarters.

Obviously due to the credit crisis. But other events -- natural catastrophes and the like -- have been on a downswing lately, haven't they?

During the past few years, in fact, insurers have enjoyed solid profits due to impressive performance of their investment portfolios and lack of catastrophe activity. As a result, the price competition increased enormously in 2007. Ongoing margin compression will further eat into earnings of the property-casualty insurers during 2008, even if we have another year of benign hurricane activity.

Life insurance companies also currently face increased competition from new entrants trying to attract baby boomers with retirement products. Further low interest rates and exposure of the portfolios to the risky securities, especially those related to residential and commercial mortgages, will hurt the profitability in the current year. While most of the companies do not have a significant exposure to the subprime securities, the mark-to-market losses on the portfolio will continue through 2008.

So those companies may be pretty sound at this point, at least fundamentally?

Many of the well-run insurance companies accumulated capital during the past couple of years and may continue to utilize that to boost dividends and repurchase shares, thereby supporting the stock prices. We may also witness increased M&A activity in this space, particularly in the international arena.

We also have a relatively favorable outlook on insurers deriving a significant portion of earnings from outside the U.S., due to the continued weakness in the dollar and better economic growth in some of these countries as compared with that in U.S.

But for mortgage insurers, is there more bad news to come?

We remain very concerned about the mortgage insurers due to the continued deterioration in the housing markets. They will continue to incur losses from increased claim activity as the housing prices continue to fall and the defaults continue to rise.

PMI Group (PMI), which reported its earnings on March 17, 2008, after rescheduling the release several times due to delay in receipt of results from FGIC, confirmed our apprehensions about this sector. The company slashed its dividend by about 80% and, we suspect that it may need to raise capital in the coming months in order to satisfy the requirements of the rating agencies. We maintain our sell rating on the shares.

Do you have any particular buy recommendations for us at this time?

We remain bullish on PartnerRe Ltd. (PRE), which had reported 4Q07 results substantially ahead of estimates. The company has, however, witnessed some pressure on the price momentum in the recent months due to the overhangs in the industry as a whole. We anticipate the company to continue to outperform its peers due to its superior capitalization, strong underwriting results and diversified portfolio. During the quarter, both PRE and RenaissanceRe (RNR) wrote down their entire investment in ChannelRe, a privately-owned financial guaranty reinsurer which provides reinsurance services exclusively to MBIA (MBI).

Neena Mishra is a senior analyst covering the insurance sector for Zacks Equity Research.