ALL Allstate Corporation

The insurance industry continues to reel under significant catastrophic losses incurred earlier this year. As if these weren’t enough, threats related to the imminent hurricane season have cropped up once again.

As many as 6 to 10 hurricanes have been forecast for the year by The National Oceanic and Atmospheric Administration, 3 to 6 of which is portended as grievous and major.   

As a result, insurers could be knocked down by a huge gush of insured losses, which could come crashing down on their capital positions.  In its annual hurricane season report published on Thursday, Fitch Ratings forewarned that the insurance industry could incur as much as $10 billion insured losses in the first half of 2011.

This should ring alarm bells at major U.S. insurers including Allstate Corp (ALL), Hartford Financial Services Group Inc. (HIG), Lincoln National Corp. (LNC) and Progressive Corp. (PGR).

Fear Facts and Factors

Till now, this has been a stormy year for the insurers. Earthquakes in Japan and New Zealand, flooding in Australia and tornadoes in the Midwest and South in the United State have already wreaked havoc. Many insurers have been forced to drain their 2011 catastrophe budget even before the hurricane season, which is expected from June 1 to November 30.

The rating agency’s report said that the chance of hurricanes hitting the Gulf Coast is 80% and that of Florida and East Coast is 81%. The statistics were figured out by Colorado State University professors.

Though there were 19 storms in 2010, the damage was mild for the U.S. However, the expected average hurricane for 2011 will smash insurers’ already weak financial health.

The basic business of an insurance company is protecting its policyholders against catastrophic or unintentional losses. Insurance companies profit as a faction of its policyholders suffer losses at a particular time, while its entire customer base must necessarily pay premiums regularly. So the difference between premium income from a large number of policyholders and claim settlement only for a few of them is an insurer’s profit.

However, with atmospheric changes, including global warming and thinning of ozone layer, chances of natural catastrophes are now alarmingly high.

Braving the Storm

The general fear of natural disasters and consequent lose of property or even life has pushed people to buy more insurance policies. While this has lead to a surge in premium income, claim rate has also increased tremendously.

Moreover, realizing the opportunities and problems, the insurers are gradually increasing the prices of their products.

The fate of insurers will now depend on how well they manage to counterbalance the money outflow due to the increasing number of claims with money inflows from growing demand for insurance policies and premium hike.    

What Lies Ahead…

After enduring stress with respect to pricing pressure and reduced insured exposure through mid 2009, the overall health of the U.S. insurance industry has improved to some extent so far. Though the market turmoil forced many companies to take immense write-downs, the worst of the crisis appears to be now behind us.

However, long lasting soft market conditions, shrinking businesses, a still high unemployment rate and legislative challenges are threatening insurers’ ability to rebound to the historical growth rate. The industry will also continue to be challenged by rising catastrophes such as the expected hurricane related losses luring right around the corner.

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
HARTFORD FIN SV (HIG): Free Stock Analysis Report
 
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
 
PROGRESSIVE COR (PGR): Free Stock Analysis Report
 
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