Second-Quarter Earnings: Change in the Weather

The earnings season is about to begin in earnest for the P/C insurance industry. Early indications are that fewer storm losses could lead to a sunny second quarter for some.

By DAN REYNOLDS, senior editor of Risk & Insurance®

Storms, or the continued lack of them, could play a major role in propping up the earnings of U.S. based insurers, according to a pre-earnings report by some New York-based analysts.

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In their second-quarter earnings preview, analysts with Keefe, Bruyette & Woods point to a continued lack of major storm activity as one factor that should keep the second quarter profitable for many property/casualty insurers.

"Tornado activity is down by 30 percent versus a bad year in 2008, and other major loss events were fortunately sparse," the analysts wrote in a preview to the second-quarter earnings season, which is reaching full roar this week and the next.

INSURERS TO WATCH OUT FOR

Among major insurers with substantial U.S. operations, KBW is pointing investors toward Bermuda-based ACE Ltd and the Warren, N.J.-based Chubb Group of Insurance Cos.

KBW refers to ACE and Chubb as financially stable and well positioned for market-share gains over the next several quarters.

Even though we are well-entrenched in a recession, KBW is predicting continued net written premium growth for ACE Ltd., although not as hot as the company recorded in the second quarter of 2008. ACE registered 16.7 percent NWP growth in the second quarter of 2008, and KBW predicts it will report NWP growth of 4 percent in Q2 of 2009.

KBW believes that ACE will continue to benefit from a sterling combined ratio. The company recorded a combined ratio of 87.8 in the second quarter of 2008, should register a combined ratio of 87.7 in the second quarter of 2009 and is projected to finish the year with a combined ratio of 88.2 percent.

For its part, Chubb is also expected to benefit from an excellent combined ratio of 87.3 percent in the second quarter of 2009 and is projected by KBW to finish the year with a combined ratio of 87.9. More in keeping with the overall economic climate, Chubb is expected to see a decrease of 3.9 percent in net written premium in the second quarter of 2009 and is projected to record a loss of 3 percent of net written premium overall in 2009.

Chubb will be releasing earnings after the close of the market on Thursday, July 23. Ace will release earnings after market close on Monday, July 27.

Among the smaller-cap, publicly traded insurers, KBW likes the Bermuda-based Argo Group International Holdings Inc.; the New York-based Navigators Group Inc.; and the Worcester, Mass.-based Hanover Insurance Group Inc.

BROKER TO WATCH: MARSH

Among brokers, Marsh, which made headlines earlier this month when it cut loose the heads of many well-entrenched practices, should show substantial improvement in its operating margin in the second quarter of 2009. KBW predicts that Marsh will pump its operating margin up to 17.5 percent in the second quarter, which would be a substantial improvement from the second-quarter operating margin of 10.9 percent that it reported in the second quarter of 2008.

If Marsh can deliver that kind of margin, it should bring it into much closer contention with arch rivals Aon Corp. and Willis Group Holdings Ltd., which KBW analysts believe will register operating margins of 20.2 percent and 19.3 percent, respectively, in the second quarter of 2009.

July 21, 2009

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