By Katie Kuehner-Hebert, a freelancer with extensive experience covering financial services
Commercial insurers have been hit by catastrophic losses caused by the worst tornadoes in American history, which leveled towns like Joplin, Mo., though second quarter results show that some fared better than others.
"This quarter everything is about CATs -- it's been the main driver of results," said Ed Keane, a senior financial analyst at A.M. Best Co. "We're seeing higher combined ratios at most insurers due to higher underwriting losses, which ultimately impacts the bottom line."
Such losses might be offset in future quarters by higher premiums, Keane said. "This might not impact underwriting results today, but it's going to have a positive impact down the road."
The Travelers Cos. Inc. posted a net loss of $364 million, or 88 cents a share, due to $1.09 billion in catastrophic losses. Excluding investment gains and losses, the company's operating loss was 91 cents a share, 27 cents more than analysts on average had expected, according to Thomson Reuters.
In the year-earlier quarter, Travelers saw net income of $670 million, or $1.35 per share.
Michael G. Paisan, an analyst at Stifel, Nicolaus & Company Inc., wrote in a July 22 note that Travelers' catastrophic losses overshadowed premium growth and overall price improvement. Net written premiums rose 2 percent, reflecting pricing gains in all commercial insurance product lines, led by gains in workers' compensation.
"It was a well-executed quarter for Travelers despite the weather challenges," Paisan wrote.
Mark Dwelle, an analyst at RBC Capital Markets LLC, in a July 21 note reiterated his "outperform" rating on Travelers' stock.
"Although it was a difficult quarter for Travelers, we remain encouraged with recent trends (positive pricing, solid reserve releases, high retention rates, and a tailwind from the economy), amid the fairly subdued property/casualty pricing environment," Dwelle wrote.
In other carrier earnings news, Chubb Corp. earned $419 million, $1.42 a share, compared to a year-earlier profit of $518 million, or $1.59 per share. While operating income fell to $1.27 a share from a year earlier, it was 26 cents higher than analysts on average had estimated. The company posted $329 million in catastrophic losses.
"Results in Q2 were mixed with positive premiums growth, solid reserve releases and price improvement in some lines of business, partially offset by higher CATs, and slight margin compression as evidenced by the deterioration in accident year combined ratios excluding CATs," Paisan wrote in a July 21 note. "We believe margins could improve into 2012. However Chubb's aggressive share repurchase strategy and continued strong reserve releases will be major driving forces to generating stronger earnings momentum in 2011 and 2012."
Dwelle wrote in a July 22 note that there are not many insurers with the ability to absorb high catastrophe losses two quarters in a row and then raise guidance, like Chubb. The carrier increased its 2011 guidance to $5.55?5.85 from $5.35?5.75.
"Although Chubb shares trade at a premium to peers, it's a premium that some might be willing to pay for such a high quality franchise and strong balance sheet," Dwelle wrote.
ACE Ltd. earned $607 million, or $1.77 a share, including net realized losses of $79 million. Its operating income was $2.01 a share, in line with results a year earlier, but 33 percent higher than the analysts' consensus estimate. Pretax catastrophe losses, including reinstatement premiums, were $134 million for the quarter.
"We continue to believe that ACE is one of the best names for investing in a potential hard market in 2012," Paisan wrote in a July 27 note.
Dwelle also wrote in that note that ACE's shares trade at about 95 percent of book value and the company is enjoying solid top-line growth from both acquisitions and firming industry conditions.
"To the extent these trends continue, few companies are as well positioned as ACE to capitalize considering its multi-line global platform," he wrote.
W.R. Berkley earned $83 million, or 56 cents a share, compared with $110 million, or 70 cents a share, a year earlier. The results beat the analysts' mean estimate of 42 cents.
Meyer Shields, an analyst at Stifel, Nicolaus & Company Inc., wrote in a July 26 note that his team's medium-to-longer-term outlook is more positive for W.R. Berkley than its peers.
"W.R. Berkley should see hard market rate increases plus the return of quasi-specialty risks from standard carriers," Shields wrote. W.R. Berkley's conservative reserving practices should also allow it to dodge the adverse reserve development that often mars results early in hard markets, Shields said.
Dwelle wrote in a July 26 note that while W.R. Berkley's margins were pressured by catastrophe losses in the second quarter, core results as well as the outlook remain positive.
"We view the significant premium growth rate (+10 percent) as again the highlight during the June quarter, the third consecutive quarter of double-digit top-line growth for the company," Dwelle wrote. Much of the growth was coming from start-up units mainly within the specialty and alternative risk segments.
"While growing in this kind of market is no easy task, we believe management is being conservative in establishing initial loss picks while early loss trends within the start-up units appear consistent with company expectations," he wrote.
August 1, 2011
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