Zombies devour insurers' profits
AIG tamps down any recovery in insurance premiums; industry operating at a loss.
It's like some insurance industry version of “Night of the Living Dead.”
Zombies keep eating rate increases.
The crippled insurer, saved from collapse by a huge infusion of taxpayer cash, is hanging onto market share in the businesses that it hasn't sold off by cutting rates.
That has had the effect of delaying -- no one knows for how long -- the recovery in premiums predicted by healthy, conservative insurers such as W.R. Berkley.
On October 26th, W.R. Berkeley reported third-quarter earnings of 67 cents a share, 2 cents above Wall Street projections. Revenues came in $20 million short of analyst expectations, but still showed a 7.6% increase from the third quarter of 2008.
But here's the big problem: “At current pricing levels with existing low interest rates, we believe the industry is operating at a net loss on an accident-year basis,” the company said.
That leaves W.R. Berkley with an unpleasant choice -- write business at a loss to keep revenues from falling, putting the company's future at risk in case of a big payout; or continue its traditional emphasis on writing policies only when the premium makes sense and seeing volumes fall.
I think this situation will eventually resolve itself in favor of W.R. Berkley and other conservative insurers. I was willing to wait for that “eventually” when it looked it would arrive in the first half of 2010.
Now, I can't predict when “eventually” will come, except that it's not likely in the first half of 2010. I don't see a quick solution to the zombie problem -- Where is Woody Harrelson when you need him? -- so I'm going to sell W.R. Berkley out of Jubak's Picks with this post.
I have a 5.2% loss in this position since I added W.R. Berkley to the Jubak's Picks portfolio on October 7, 2009.
(I know that by selling now, before the December 14th record date, I'll miss the 6 cents-a-share dividend payable on January 5th, but the dividend is so small that I don't think it is a good reason for holding onto the shares for another two weeks. Your opinion may differ. Your call.)
I wouldn't buy anything with this cash right now. Put it aside for the next dip, drop, or whatever. When that comes, think about following the asset allocation strategy I outlined in this post .
At the time of this writing, Jim Jubak dis not own shares in any stock mentioned in this post.
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