By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®
Both Travelers and Chubb put up nice profit numbers in the third quarter, according to their earnings reports released last week. Travelers' operating income was $914 million in the third quarter, a 177 percent gain over the prior year quarter; net income for Chubb was $596 million, about 125 percent over the prior year quarter. Both beat Wall Street's expectations.
Yet the numbers also indicate disquieting trends when it comes to property/casualty
underwriting and the possibilities of future growth.
When it comes to underwriting, both companies showed decreases in net written premiums. Travelers saw a 5 percent drop in net written premiums for its business insurance operations over the prior year quarter. Commercial premiums were down 8 percent for Chubb.
The general consensus is to chalk this up to the down economy.
As Jay S. Fishman, chairman and CEO of Travelers, put it during his company's earnings call, "We are very driven by payroll numbers obviously and business receipts."
It will be interesting to note, however, how other commercial property/casualty insurers fare when it comes to third-quarter net premiums written. John J. Degnan, vice chairman and chief operating officer at Chubb, went on the record during his company's earning call forecasting that the drop in premiums will be consistent across the industry.
Chubb saw a ratio of new to lost business under one: about 0.9 to 1 on average across all lines of business. Some of this is attributable to customers buying less insurance, sure. But could some of it also result from clients going elsewhere?
Mike Paisan, analyst and managing director with Stifel Nicolaus, connects the dots between this ratio and Chubb's ability to get some rate increase plus what he considers a "modest" renewal rate, and he sees that Chubb is losing business because some customers are chasing price.
"Even the strongest companies are losing business because of pricing, which means pricing really does matter," said Paisan.
Chubb doesn't deny it. In fact, company officials were proud to uphold Chubb's reputation for sturdy underwriting that doesn't chase business. In answering an analyst's questions about the new-to-lost-business ratio during his earnings call, Degnan said, "I think it reflects the underwriting discipline that we've had to marshal to deal with this kind of marketplace."
"We price to the exposure (for new business). If we can't get the adequate price, we're not going to put it on the book," he added.
The problem, however, is that the overall economic situation and the insurance market probably will not improve into the coming year. Those blustery "headwinds" that all insurance companies have been facing will continue to blow into, and perhaps beyond, 2010.
As for those third-quarter profits, Paisan points in particular to the $202 million in net favorable reserve developments that Travelers reported to explain them. Paisan said about the industry in general, "They're living off the past."
"Eventually that runs out. That doesn't last forever," Paisan said about reserves. Soon, he warned, insurers will have to live off the business they've been writing in the last couple years, which has proved less profitable.
Despite its strong fundamentals, according to Paisan, the industry is headed on the downward slope of the bell curve of earnings power. The third quarter was the peak, the result of a "perfect storm" of near record reserve releases and a namby-pamby hurricane season.
"It can't get any better," Paisan said.
On Oct. 23, the day after the Chubb earnings release, Stifel Nicolaus downgraded Chubb's stock from Buy to Hold largely because it was overvalued versus its competitors, said Paisan. Chubb had been trading at 1.2 times book versus 1 for comparable insurers ACE and Travelers.
October 27, 2009
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