Large Carriers Post Positive Second-Quarter Results

Over the past three weeks, U.S. property/casualty insurers have been busy posting their second-quarter results. With continuing low premium rates and high claims costs, it may look like bad news for the industry as a whole; but for some of the bigger companies, the results are more positive as the lengthy trend of rate cutting seem to be reversing.

“The second-quarter results contain more positive news than we’ve heard in the last two years,” said Dr. Robert Hartwig, Insurance Information Institute of New York (I.I.I.) vice president and chief economist. “I’m talking about the major companies out there…companies like ACE, AIG, Chubb, Marsh [and] CNA all turning in good earnings reports.”

To Hartwig, this signals that a turn in the commercial market has taken root. “And by taking root, what I mean is that what companies started to talk about a year to a year and a half ago in terms of first walking away from bad business, and second, trying to bring rates back toward adequacy,” he said. “[It’s a move] in the right direction [that] has been successful so far.”

But that doesn’t mean there isn’t a long way to go, Hartwig warned. “In fact, it was only in the Spring of this year that renewals in commercial lines were uniformly upward,” he said. “They had been negative for several years, although the negative number had been shrinking…but the important thing to note is that the trend is positive and it’s probably going to be sustained that way, at least through 2001.”

Shifting over to the personal lines side, the industry witnessed an overall rate decrease in 1999 of 3.2 percent. “And that comes on the heels of a 2.8 percent decrease in 1998,” Hartwig added. “This year, the first half of the year was basically mixed- probably a wash in terms of increases and decreases. But the second half of the year-the preponderance of rate changes are in the up direction.”

This year is likely to bring, overall, a 2 to 3 percent gain in auto rates, according to Hartwig. “The good news is that…it doesn’t appear that in a line like personal auto the price cutting is going to get as vicious and savage as was the case in the commercial lines side.”

Playing the stocks
According to Hartwig, the p/c industry is witnessing a tremendous amount of exposure growth due to a record spell of economic growth and prosperity.

“[Look at the] hundreds of billions of dollars of new home construction, hundreds of billions of dollars of new cars being sold, including light trucks and SUVs which are more expensive to insure,” he said. “Now, combine the change in the price with the strong growth and exposure, and you’ve got what makes for a good investment opportunity on Wall Street for those companies that are stock companies.”

This equation, Hartwig explained, is what has put some distance between insurers and most other market sectors-including technology-through the first half of 2000. In fact, there are a number of p/c companies (as well as life insurance companies) that have outperformed tech stocks by about 50 to 60 points since the Nasdaq crashed in March.

“This means that a smart investor who bought shares in most publicly traded p&c companies, outside of the Reliance-type companies, really did well-with returns rivaling those of hot tech stocks last year…doubling their money in some instances,” Hartwig said.

But this good news comes with a word of caution. “Wall Street is going to continue to want to see these companies perform…
so they’re going to have to keep backing up these higher stock prices with improved earnings,” Hartwig warned. “But I think that’s possible if current trends keep up. I think the valuations on Wall Street are reflecting the view that the fundamentals are headed in the right direction for the most part.”

Cleaning house
Hartwig explained that in order for this trend to continue its upward motion, some important issues must first be confronted. “For example, a lot needs to be done in workers’ comp in terms of achieving rate adequacy, and that’s probably number one on the to-do list of a lot of commercial lines insurers today,” he said. “For the personal lines insurers, number one is stemming underwriting losses in personal auto. But both of those are manageable issues.”

Beyond that, another issue which could be viewed as an ever-present threat is the State Farm after-market parts issue, according to Hartwig. In fact, he sees it as an important issue for both insurers and consumers—one in which everyone benefits. “This is an example of a legal battle or regulatory battle which is going to be fought…which helps insurers contain costs, improve profitability, but keep down the cost of insurance,” he said, explaining how there is no downside to anyone.

In the year ahead, insurers are going to have to make sure that policyholders are aware that the legal or regulatory battles that insurers are engaged in are, in fact, on the policyholders’ behalf.

All in all, the second quarter was “probably the best that this industry has seen in quite a while,” Hartwig said. “But this is a very large ship, it takes a while to turn around.”

The following is a run-down of some of the larger companies’ second-quarter results:

The Chubb Corporation
Chubb reported operating income of $180.7 million or $1 per share for the second quarter of 2000. In the year-earlier second quarter, operating income, which excludes realized investment gains, was $163.5 million or $1 per share.

Net income, which includes realized investment gains, was $184.6 million or $1.02 per share in the second quarter of 2000, compared with $193.3 million or $1.18 per share in the 1999 second quarter. For the six months ended June 30, 2000, operating income was $330.6 million or $1.85 per share, compared with $329.9 million or $2.02 per share in the first six months of 1999. Net income for the first half of 2000 was $338.3 million or $1.89 per share, compared with 1999 first half net income of $380.2 million or $2.32 per share.

Reported property and casualty net premiums written in the second quarter of 2000 grew 6.8 percent to $1.5 billion. U.S. premiums grew 13.5 percent; more than half of the increase was related to the acquisition of Executive Risk. Reported premiums written outside the U.S. declined solely because of the elimination of a three-month lag in the reporting of European results.

Excluding the effect of the European reporting change, non-U.S. premiums grew about 15 percent in local currencies. Reported property and casualty net premiums written in the first six months of 2000 increased 9.9 percent to $3.1 billion. Excluding the acquisition and the reporting change, premiums grew about 5 percent in the first half.

According to Dean R. O’Hare, chairman and CEO of Chubb, the company had “an excellent second quarter in all three major business segments.”

American International Group
AIG announced that its second-quarter operating profit rose 13 percent to $1.43 billion, matching analysts’ estimates. The New York-based insurer said net profit, including realized investment losses, rose 10 percent, to $1.41 billion, or 90 cents per share, from $1.28 billion, or 81 cents. AIG’s shares hit an all-time high of 127-3/16 July 26 before closing at 124-7/8. The surge was most likely caused by positive comments from other insurers on rising premium rates in AIG’s core commercial insurance market. And on July 31 (before market open) AIG’s stock split 3:2.

“It was a good quarter for AIG overall, with strong results from most of our major businesses and continued progress in terms of firming pricing in the U.S. property-casualty market,” said AIG Chairman Maurice Greenberg in a prepared statement.

ACE Limited
ACE reported net investment income, excluding net realized gains (losses) of $181 million for the fiscal 2000 second quarter, compared with $85 million for the same period last year, an increase of 113 percent.

Net income for the quarter ended June 30, 2000, was $113.9 million, compared with $69.1 million in 1999; and earnings per share, after deducting preferred dividends, was 49 cents for the current quarter compared with 35 cents for the same quarter last year.

Gross premiums written during the quarter increased by nearly four times to $2 billion, compared with $509 million for the comparable quarter last year. Net premiums written during the quarter increased by more than three times to $1.2 billion, compared with $392 million for the same quarter last year.

Net premiums earned during the quarter increased nearly four times to $1.2 billion from $300 million in the same quarter last year.

As the company continues to experience solid growth in top line production and earnings per share, Brian Duperreault, chairman and CEO of ACE, believes that the ACE INA acquisition and subsequent restructuring efforts have firmly established ACE as a truly global enterprise.

Marsh & McLennan Companies
MMC reported strong revenues and earnings for both the quarter and six months ended June 30. For the quarter, MMC’s revenues rose 11 percent to $2.5 billion. Net income grew 21 percent to $276 million and earnings per share rose 17 percent to 96 cents.

For the same period of 1999, net income was $228 million and earnings per share was 82 cents, excluding a special charge. For the six months, MMC’s revenues reached $5.1 billion, up 12 percent from $4.6 billion in 1999.

Net income increased 21 percent to $613 million and earnings per share grew 16 percent to $2.15, compared with $507 million and $1.85, respectively, for the same period of 1999, excluding the special charge.

Recent initiatives in Marsh, along with changing business conditions, led to revenue growth for the quarter. Ongoing consolidation savings associated with the integration of Sedgwick contributed to Marsh’s strong earnings.

Topics USA Carriers Profit Loss Property Casualty AIG Chubb