P&C Insurance Feeling the Squeeze

With a four-star rating (out of five) in The Motley Fool's CAPS community, the property and casualty insurance sector is an industry that Fools have been fairly bullish on. CAPS players have been even more bullish on some of the top companies in the industry, including Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) , XL Capital (NYSE: XL ) , and White Mountains Insurance (NYSE: WTM ) , all of which currently carry a five-star rating.

One of the very attractive features of the stocks in the P&C sector right now is that they are trading at very low P/E multiples. XL Capital, for example, is trading at just seven times its trailing-12-month earnings. Pricing in the industry, which tends to be cyclical, has been very strong over the past couple of years. While this has led to great earnings, the concern is that increased competition might eat away at these healthy results.

Recent reports from ISO -- a data and analytics company that follows the insurance industry -- and the Property Casualty Insurers Association of America suggest that increased competition may be causing pricing to soften. Net written premiums for the first half of 2007 grew an anemic 0.1%, and earned premiums grew a slightly better, though still very slow, 1.4%.

Michael Murray, an assistant vice president for financial analysis at ISO, said, "At 0.1 percent in first-half 2007, net written premium growth was the weakest for any first half in at least two decades ... Market surveys and U.S. government data indicate that escalating competition and declines in the price of insurance are cutting into premium growth."

In addition to the slow premium growth, the combined ratio for the first half of the year increased to 92.7%, up from 92% in 2006. So the question for P&C insurance bulls may be whether shares that look cheap right now are cheap enough to provide cushion for the squeeze ahead.

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