By KATIE KUEHNER-HEBERT, a freelance writer based in San Diego with more than two decades of journalism experience and expertise in financial writing
The catastrophes in Japan, Australia and New Zealand are hitting the bottom lines of insurers exposed to overseas events, though sparing those with policies closer to home. The huge losses that occurred in the first quarter might cause prices within the overall property/casualty insurance industry to finally start to firm, analysts said.
"The real unanswered question is whether the high level of catastrophic losses in the first quarter will spark a rise in pricing," said Cathy Seifert, an equity analyst at Standard
& Poor's. "That is the $64,000 question, and quite frankly, we don't have the answer to that."
A lot of the losses in the first quarter occurred outside the United States, and Seifert expects prices to firm in catastrophic-exposed areas and exposed lines of coverage the world over.
"But it's unknown the degree to which the general property lines will experience price increases," she said. "And a bigger variable will be casualty lines of coverage that tend to be more economically-sensitive, so if we see a business recovery, we'll see rates firm up a bit."
And because most of the catastrophic losses were global, insurers and reinsurers doing business in far-flung places have been more impacted, including American International Group, Zurich Financial Services, Arch Capital Group Ltd. and Axis Capital Holdings Ltd.
Arch's first quarter income fell 91 percent, to $19.3 million, or 41 cents a share, due to booking $178.7 million in catastrophic losses from the Japanese earthquake and tsunami, as well as the New Zealand earthquake, Australian floods, Cyclone Yashi and other events.
After-tax operating income was $7.9 million, or 17 cents a share, compared with $98.7 million or $1.78 a share a year earlier. Analysts on average had expected an operating loss of 91 cents a share.
Axis lost $384 million, or $3.39 a share in the first quarter, due to $577 million in pre-tax net losses from the events in Japan, Australia and New Zealand, Operating loss was $414 million, or $3.65 a share, 30 cents higher than what analysts on average had expected. In the first quarter of 2010, Axis earned $112 million, or 79 cents a share.
Other companies such as Travelers and The Chubb Cos., which do not have much exposure outside the United States, have fared better.
Travelers' first quarter net income rose 30 percent from a year earlier to $839 million, or $1.92 a share, due to lower catastrophic losses, higher prices on commercial policies stemming from higher demand, a $1.1 billion share buyback and a one-time gain of $100 million from a favorable tax resolution. Catastrophic losses fell 61 percent to $122 million after taxes. Operating results were $1.89 a share, compared with the average analyst estimate of $1.51 a share.
Chubb's first quarter net income rose 9.5 percent from a year earlier, to $509 million or $1.70 a share, due to a 3 percent year-over-year increase in net premiums. Operating earnings were $1.35 a share, beating consensus estimate by 22 cents.
AIG and Zurich report earnings next week.
POSITIVES AND NEGATIVES
So far, earnings results have been mixed due to the relative exposure to catastrophic losses and to increases in prices and premiums, said Ed Keane, a senior financial analyst at A.M. Best Co.
"We're starting to see hard prices, but the net rate increases haven't been that significant, so results for are flat or marginally better" for those less impacted by some of the first-quarter CAT losses, Keane said.
"As time goes on, results might slip up a little bit with the CAT losses we've seen in April, depending on where the commercial lines are--if you're an insurer in the South, you'll get with more CAT losses," he said, referring to the spate of tornadoes in the "Dixie Belt," during which more than 300 people died due to the series of tornadoes that touched down in Alabama and other Southern states.
While insurers still face challenges in their portfolios, investment income should begin to improve, said Michael R. Murray, ISO's assistant vice president for financial analysis.
"We're starting to see some upward movement in interest rates and an increase in yields on munies, so going forward, the increases in yields will eventually benefit insurers' investment--but perhaps not immediately because many insurers have older bonds in their portfolios," he said.
Another positive to glean from first-quarter earnings reports is a rise in premium growth, in terms of new policies and larger policies due to new hires at companies, Murray said.
"At first glance, that is positive, but it can also be somewhat of a negative further down the road because, the more capital gains achieved, the larger the surplus, and the more capacity to underwrite--which can actually lengthen the time it takes to see a true powerful turn in prices firming," he said.
April 29, 2011
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