If you’ve scrolled down the Insurance Journal’s Web page recently and noticed a new feature with company names and numbers, you are looking at a daily update on industry stocks, courtesy of SNL Financial.
Insurance Journal recently chatted with John Leonard, research analyst for SNL, and got his thoughts on industry stocks, some surprises, and where things might be headed in 2005.
IJ: Give us a brief description of the chart and how it will serve those in the industry.
John Leonard: The charts give industry professionals a snapshot of market performance for the biggest one-day price gainers and losers on a percentage basis. Readers should keep in mind that this pricing data is very short term in nature and not necessarily indicative of future performance or intrinsic value.
IJ: Give us a little feedback on what you currently see going on with industry stocks.
Leonard: Obviously the biggest industry concern right now is the numerous investigations into contingent commissions, bid rigging and non-traditional insurance products. Until there is some closure to these issues (probably in the form of severe penalties, fines and a change in business practices) any additional upside is limited.
We’re seeing increased competition, especially in the P/C market, since the industry is sitting on huge surpluses as a result of the hard market over the past few years and wants to put that capital to work. However, the market seems to be more rational this time around. Instead of writing unprofitable policies for the sake of growing or maintaining market share, everyone is maintaining pricing discipline and instead focusing on increased marketing initiatives as a way to reach out to consumers.
The theme in the managed care sector continues to be consolidation and economies of scale. We’ve seen two huge deals with Anthem/WellPoint and Coventry/FirstHealth. After years of double digit premium increases, employers are starting to shop around and demand better rates. This has led to increased M&A activity. These newly merged companies are able to offer extensive networks and a variety of services at competitive prices. If the industry can keep a lid on costs and keep raising rates at a modest pace, they’re in a good position to be one of the better performing insurance plays next year. However, all bets are off if Spitzer targets HMOs or losses from uninsured patients continue to escalate.
IJ: What have been some surprises for you this year as far as insurer stocks – companies that have done better than you thought they would, worse, etc?
Leonard: One of the biggest surprises was the Spitzer investigation into contingent commissions. Everyone has known about them for years and it was a standard industry practice. What’s really surprising is how powerful a state attorney general can be. He’s brought entire industries to their knees while the SEC and state regulatory agencies did almost nothing. It will definitely be interesting to see who he goes after next.
Title, mortgage and financial guaranty companies have done a lot better than expected because of the continuing low interest rate environment. With the fed funds rate at 1% and the economy starting to pick up steam, everyone bet that rates would go up. When rates stayed low the housing market got a new lease on life (excuse the pun) which helped prop up the strong level of home sales and refinancings.
The under performance of the P/C market is not as surprising. The industry is facing a “perfect storm” with huge catastrophe losses, increased competitive pressures and investigations into commonly accepted business practices. The first two could be predicted to a certain extent. Management even warned of higher catastrophe losses due to the fact that there haven’t been that many for a long time now. As hard markets turn soft, companies usually begin to lose pricing power as excess capital is deployed. This happens every market cycle. The rational move would be to refuse to keep lowering prices until you’re writing bad business but the insurance market, like any other, is rarely rational. Even though the industry is showing some improvement in this area it’s still early.
For more information on SNL Financial, visit www.snlfinancial.com .