By DAN REYNOLDS, senior editor of Risk & Insurance®
As it rolled out impressive second-quarter earnings figures this week, Warren, N.J.-based Chubb Corp. indicated that it will continue to push, in a measured way, for higher commercial insurance pricing.
Chubb was joined in that news by Zurich-based ACE Ltd., which also recorded a strong second quarter from an earnings perspective and an average rate increase of 4 percent.
Chubb beat analysts' expectations by recording a second-quarter combined ratio of 85.9 and operating income per share of $1.49. Analysts had estimated that the company would record a combined ratio of 87.3 for the quarter and operating income of $1.39 per share.
The company's second-quarter net income of $551 million represented a 17.4 percent increase over its net income of $469 million in the second quarter of 2008.
John Degnan, Chubb's vice chairman and chief operating officer, pointed to four major factors that he said will be impacting the commercial insurance market and Chubb's results for the remainder of the year. He said those factors are currency, market dislocation, a weakening economy and rate trends.
Looking at rate, Chubb seems to be one of a couple companies that, because of its solid financial position, is doing its darndest to help turn the soft market and capture rate. Degnan reported on Thursday that the company saw a 2 percent rate increase on its renewals overall in the first half of 2009 and is going to continue to hold the line the best it can.
"The real story in Chubb Commercial Insurance is its determined and consistent drive to secure rate increases," Degnan said as part of his address to investors and analysts in Chubb's earnings conference call this week.
"The progress has been gradual and incremental, but it has also been steady and disciplined. And it has been accomplished with a pretty good retention rate of 83 and a ratio of new to lost business in the United States of 1 to 1," Degnan added.
A New York-based insurance analyst said he thinks it's fair to say that Chubb's strength has allowed it to get better pricing.
"I think that clearly there is a flight to quality, and those companies that are in a better financial position, those that are quality names, are attracting business," said Michael Paisan, a managing director with Stifel Nicolaus Equity Research in New York.
"I think they were patting themselves on the back and saying, 'We are taking a leading position in trying to raise rates; not everybody is following our lead,' " Paisan added.
But Chubb wasn't the only one reporting firmer rates this week. Zurich-based ACE had even better news in that department. In ACE's earnings call on July 27, Chairman and CEO Evan Greenberg reported that ACE's insurance business saw a 4 percent price increase overall in the second quarter of 2009.
Like Chubb's Degnan, Greenberg said ACE is willing to trade slightly lower renewal rates for the increase in price at this point.
"In those areas of our business, generally casualty related, where more than price matters, where there is a customer or producer flight to quality or capability, we are experiencing very good growth, particularly in the United States," Greenberg added.
Like Chubb, ACE reported a very solid second quarter. ACE reported net income of $535 million, which for comparison's sake was 28 percent below the company's Q2 2008 net income of $746 million.
There was very little drop-off for ACE in its six-month numbers, compared with 2008. The company had net income of $1.10 billion for the first six months of 2009 compared with $1.12 billion for the first six months of 2008.
Investors welcomed Chubb's second-quarter news. The company's stock was trading above $45 per share on Friday, at least 6 percent above where it stood at the close of market on Thursday, July 23, when Chubb announced its results.
ACE's stock price was enjoying a more modest increase in the 1 percent to 2 percent range the day after it reported earnings with its stock price around $49 per share.
Analysts with New York-based Keefe, Bruyette & Woods said this week that they believe ACE is uniquely positioned in its global platform and set a 12-month target price for the company's stock of $67 per share.
Cliff Gallant, an analyst with Keefe, Bruyette & Woods, said ACE's only true competitor in its global platform may be the company formerly known as American International Group, now known as AIU Holdings Inc. and soon to be known as Chartis.
He said both ACE and Chubb are well positioned.
"The environment is pretty good right now. Profitability is decent, balance sheets are strong, they are in a good spot."
It would be a mistake though, Gallant cautioned, to extrapolate a hardening market overall from the modest insurance price increases ACE and Chubb reported in the second quarter.
"It's an unusual position to be in, but we are sort of delicately balanced where I think it is going to be stable for a while," Gallant said."Typically things are going up or down, right now things are kind of flat."
PROF. LIABILITY RESERVES
Degnan also said that Chubb has more than adequate reserves to cover its exposure to directors' and officers' and errors-and-omissions liability insurance claims from lawsuits brought about by the ongoing economic troubles sparked by the credit crisis.
The company has booked reserves of $4 billion to cover such exposures.
"The predicted wave of D&O litigation does not seem to be materializing yet," Degnan said.
Paisan said it is now becoming apparent to him that the size of the predicted wave of E&O and D&O cases has been a bit overblown, as have estimates of Chubb's exposure in that line.
"Some of the numbers I have seen out there were ridiculously high," Paisan said of estimates of Chubb's exposure.
Other major factors that Degnan pointed to were currency fluctuations and the continued weak economy. Chubb reported a reduction in net written premiums (NWP) for the second quarter of 7 percent. The company attributed 4 percent of that decline to losses due to currency fluctuations.
Those currency fluctuations were most noted in the company's foreign results, which, compared to the second quarter of 2008 saw a 12 percent reduction in NWP compared to 5 percent in the United States.
ACE also would have shown a modest increase in NPW of 1.5 percent were it not for a 6 percent impact from foreign currency fluctuations, Greenberg said.
July 24, 2009
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