Dull Times for Carrier Earnings

Property/casualty carriers will struggle to maintain their top lines as pricing continues to drop in 2010. Travelers, however, is already a bright spot for earnings.

By DAN REYNOLDS, senior editor of Risk & Insurance®

There is little publicly traded property/casualty insurers can do to stave off decreases in top-line premium revenue in 2010, according to New York-based financial services analysts Keefe, Bruyette & Woods.

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The analysts published their fourth-quarter earnings preview in mid-January, which said that, although carriers will have a decent fourth quarter, they can expect pricing to continue to drop in 2010.

One carrier that skated past the financial troubles of the past 18 months in exceedingly fine shape appears to be the Travelers Cos. Inc. On Jan. 26, the St. Paul, Minn.-based company reported fourth-quarter net income of $1.28 billion, a record for the company, which went public in 2002. The company's net income figure represented a 60 percent increase over the previous year's fourth quarter.

Although Travelers saw a decrease of 4 percent in net written premiums from the previous year's quarter, its investment results were strong. Travelers' return on equity was up 5.7 percent for the fourth quarter year over year.

Among publicly traded primary property/casualty companies, KBW analysts like The Chubb Corp. because, they believe, the carrier will be able to wring more than 2 percent improvement in investment income out of the world's equity markets this year and in 2011.

Chubb's investment positions should help it maintain a strong combined ratio, according to the analysts. Chubb, projected to have a combined ratio of 86.7 percent in the fourth quarter of 2009, is expected to maintain a combined ratio under 90 percent in 2010 and into 2011, the analysts also said.

Another carrier the KBW analysts like right now is ACE Ltd. The carrier is projected to register earnings per share of $8.10 in 2010, up from $7.72 per share in 2009. The analysts also expect ACE to maintain strong net written premium growth.

Net written premium growth for Chubb is forecasted by KBW to be down almost 5 percent in 2010 and to show an increase of just above 1 percent in 2011.

Among regional insurers, KBW analysts pointed to the Hanover Insurance Group Inc. They expect the Worcester, Mass.-headquartered company to generate earnings per share north of $4 for both 2010 and 2011 and to see an increase of 10.4 percent in net written premiums in 2010.

TOP-LINE DOWNSIDE

One reason besides the soft economy that premium growth will be hard to sustain is that the property/casualty insurance industry is overcapitalized by some $100 billion, according to Barclays Capital analyst Jay Gelb. That, along with the ongoing global recession, is why premium growth is going to be so hard to come by this year.

"It's going to take a long time to work off that excess capital," said Gelb, speaking earlier this month at the annual gathering of property/casualty industry executives in New York hosted by the Insurance Information Institute

One economic factor to fear going forward is inflation, according to Patrick Thiele, CEO of Bermuda-based PartnerRe, who also spoke at the Joint Industry Forum.

Thiele said insurers have typically not managed the transition from periods of low inflation to periods of high inflation very well.

January 26, 2010

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