Rely on earnings for profit rather than investments, Guy Carp cautions

Asset-driven losses and market volatility are putting increasing pressure on carrier earnings, with profitability increasingly reliant on technical earnings rather than investment gains, Guy Carpenter & Company LLC published in its recent report, Bag Profits Early: Investment Gains under Pressure.
“With net income declining steeply from the first half of 2007 to the first half of 2008, asset-driven losses have been on the rise,” Chris Klein, Guy Carpenter’s global head of business intelligence, said in a press release.
“Though there have not been any mega-catastrophes, disasters across several continents have impacted insurers’ and reinsurers’ profits,” Klein said. “Taken together with the effects of the subprime mortgage market collapse, which has pushed equity values lower, earnings are increasingly at risk.”
Guy Carpenter’s study includes information gathered from “seven prominent risk-bearers.”
For the first half of 2008, the group showed an aggregate investment loss of US$566.2 million, compared to an aggregate gain of US$98 million for the first half of 2007.
The briefing suggests that in order to maximize profitability over the coming months, risk-bearers should reconsider their risk management strategies, since “investment gains are unlikely to provide the buffer on which some have relied over the past few years.”
The report further recommends that carriers consider protecting underwriting earnings booked year-to-date by “seeking reinsurance cover in the form of a ‘stop-loss,’ or other instruments such as ILWs, enabling them to lock in underwriting profits against potential future catastrophe losses.”