Reinsurance Price Declines Won't Offset Other Insurance Woes
January 08 2010 - 10:23AM
Dow Jones News
Property and casualty insurers paid less for reinsurance as they
renewed coverage on Jan. 1, thanks to fewer catastrophes than
expected and an ample supply of capacity.
But the price cuts add up to only a "marginal positive" for most
property/casualty insurers, who face soft prices and diminished
demand for their own products, said Vinay Misquith, an analyst with
Credit Suisse.
Property/casualty insurers and reinsurers have generally come
through the financial crisis better than other financial
institutions, though persistently low interest rates have reduced
their investment income. Below-average storm seasons in the U.S.
the past few years also helped.
Now earnings are expected to drop in 2010, and possibly 2011 as
well for both p/c insurers and reinsurers, though analysts expect
insurers to get squeezed a bit more. Analysts on average expect
commercial insurer median earnings to shrink 6% in 2010, after
rising about 6.7% in 2009, estimated Bijan Moazami of FBR Capital
Markets in a Wednesday report. Barclays Capital analyst Jay Gelb
estimated Thursday that insurer and reinsurer earnings per share
could drop 11% in 2011.
Moazami cut his ratings on several insurers Wednesday, including
Chubb Corp. (CB) and Travelers Cos. Inc. (TRV).
Gelb favors Travelers, Ace Ltd. (ACE), and Arch Capital Group
(ACGL), because of their strong track record in navigating the
"challenging environment."
Misquith and Moazami both see personal lines insurer Allstate
Corp. (ALL) doing better than commercial insurers. Unlike most
commercial insurers, Allstate has been raising rates in its core
homeowners insurance business, Misquith said, and personal lines
insurers have had better profit margins recently than commercial
insurers.
Misquith sees a similar split among reinsurers, with those that
specialize in coverage for catastrophe damage to property doing
better than reinsurers who cover liability-related losses, due to
higher liability losses in recent years.
Guy Carpenter, the reinsurance brokerage unit of Marsh &
McLennan Cos. (MMC), estimated that U.S. property catastrophe
reinsurance rates fell 11% on average for contracts that renewed on
Jan. 1. Casualty rates were generally flat to down 10%, though
liability rates for some sectors, such as financial institutions
increased in the single digits.
In a Monday conference call with analysts, Michael C. Sapnar,
chief underwriting officer for domestic operations at casualty
reinsurer Transatlantic Holdings Inc. (TRH) said that casualty
reinsurers in general are "likely still profitable," though whether
they have an adequate return on equity is another question.
One negative is a surge in new capacity, "all of which is former
AIG people or designed to take advantage of AIG issues," Sapnar
said. "We think loss cost trends are producing results that mask
fundamental price inadequacy in general in liability or casualty
lines."
A Transatlantic Holdings spokesman did not return a phone call
seeking comment.
Kevin J. O'Donnell, president of Renaissance Reinsurance Ltd., a
unit of Renaissance Re Holdings Ltd. (RNR) which specializes in
property reinsurance called results in that sector "adequate,"
helped by catastrophe activity that was so low last year it hardly
affected reinsurers at all. "Many reinsurance companies ended the
year with a much stronger balance sheet, which led to increased
supply and increased appetite for risk," he said. Renaissance Re
was unavailable for a comment.
A return next year to more normal levels of weather-related
catastrophes could result in "disappointing" return on equity for
the group in 2010, Keefe, Bruyette & Woods analyst Cliff
Gallant said in a Tuesday note.
Investors may "take a more jaundiced view of the P&C
industry" as the hurricane season approaches, because of the
lowered prices, credit analyst David Havens of Hexagon Securities
said in an email. The soft prices could also put more pressure on
companies to merge in order to find growth, said reinsurance
consultant Andrew Barile of Rancho Santa Fe, Calif. "Primary buyers
could find their options decreasing as mergers take place" later in
the year, he said.
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com
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