Insurance News

Despite Underwriting Weakness, Insurance Execs Look To Equity

Posted on: September 24, 2009

CHICAGO (Dow Jones)–Insurance industry executives expect weak pricing and demand to restrain growth in underwriting profits in the next three years.

Still, many of the executives, who were surveyed at a KPMG insurance conference in New York Tuesday, expect their companies to be able to raise capital, particularly equity, in the next 18 months.

The survey of 271 insurance industry executives found 22% would choose an equity issue if they felt the need to raise new capital in the next 18 months, compared to 31.4% who said they do not see their company needing capital. Equity beat out debt, which 17% said they would consider, and reinsurance, another form of capital raising, which 12.6% called an option.

The least favorable option for raising capital was turning to the government, which just 1.9% said they would consider.

Rising share prices could entice property/casualty insurers in particular to issue stock in coming months, said Scott Marcello, U.S. leader for KPMG’s insurance practice, in an interview.

Property/casualty insurers “have done better throughout the cycle and so are in a stronger position if the market becomes more responsive to equity,” he said. “They did not go into the market after catastrophe losses in 2008,” mostly because weak share prices would have made it too dilutive to raise money by issuing new shares.

Genworth Financial Inc.’s (GNW) successful issuance in recent weeks of 48 million shares of common stock could be a harbinger of more equity raises to come, Marcello said.

The surveyed executives don’t see themselves in a good position to improve underwriting profit much in the coming three years. Nearly two-thirds see only “moderate” ability to increase underwriting profit, while 27% rated their ability “weak.” Only about 9% put the industry in a strong position for the coming years.

Marcello said a variety of factors, from weak market pricing to customers cutting back on insurance purchases are behind the pessimism around underwriting profit growth.

The majority of those surveyed said they see merger and acquisition activity rising “moderately” in the coming year over the previous year, which Marcello called an acknowledgment of insurers’ desire to be conservative with capital, rather than stretching to make big acquisitions.

The biggest risk to the industry over the next three to five years is weak pricing, with almost 30% choosing that option over credit risk, which nearly 23% picked as the top threat. Around 16% called the risk of new regulation or market conduct changes the biggest risk.

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