Thursday, August 7, 2008

Your Climateer Early Warning System: Insurance (AIG; ALL; CB; HIG; TRV)

Back on May 9 we posted "Shop for Property/Casualty Insurance Savings NOW! Then Short Their Stocks With the Savings":
I don't have time to go into a lot of detail right now, maybe next week. The current overcapacity in P&C, which has led to a bit of a price war, will be ending soon, maybe three to six weeks.
A back of the envelope calculation says insurers would be mis-pricing weather risk vs. "average" conditions.

The recent flip of the Pacific Decadal Oscillation to it's cold phase will, if past history repeats, lead to higher insured losses in everything from hail damage to landfalling hurricanes.

I really should develop this further, unfortunately there is time enough to do anything, not enough to do everything.
That was a month before the June 12 Iowa floods.
Since then we've had these headlines (all from Bloomberg):

July 22
Natural Disasters In U.S. Cost Insurers $6 Billion In Quarter

July 23
Allstate Profit Falls on Tornadoes, Investment Loss

July 24
Chubb Earnings Decline on Natural Disaster Costs

July 28
United Fire Falls Most in Seven Years on Catastrophes

The price war we were referencing has lasted longer than we expected three months ago. Research Recap had some commentary on insurance pricing last week:

US Home Insurers Set to Report Underwriting Loss This Year
The US homeowners insurance industry will report a modest underwriting loss in 2008 as rates fall due to excess capacity, an abundance of reinsurance options as well as regulatory and political pressures, Fitch Ratings says. In a new report on the industry, Fitch notes that although insurers have experienced improved underwriting results over the past six years, market fundamentals have deteriorated recently.

The industry failed to produce an underwriting profit for 15 years prior to 2003. Fitch believes that poor underwriting results in the homeowners business originated from the line serving more as a “loss leader” to attract automobile insurance business for many insurers. Other explanations for underperformance include artificially low prices to increase market share and a lack of sophistication regarding catastrophe management....MORE

We'll come back to this over the next few months. For now, use the "Search Blog" box, keyword Pacific Decadal Oscillation or PDO.