1Q07 Insurance Earnings: What's Working, What's Not (Part I)

As of yesterday evening, maybe 15% of the insurance industry has reported earnings. Insurance is different from other industries because of the accounting complexity involved. That complexity is necessary, because insurance is one of the few industries where one does not know the cost of goods sold at the time of sale. That’s why insurance is one of the slowest industries to report earnings. As one might expect, the insurance companies generally report in order of increasing accounting complexity. I’ll go through the insurance sub-industries to give you a feel for what is working, and what is not.

Brokers

Rough quarter. AJGallagher (AJG) and Hilb, Rogal, Hobbs (HRH) both missed earnings, and will probably be punished today, if Brown & Brown (BRO) is any measure. Brown & Brown beat earnings by a little, but their organic growth (same store sales) was negative for the first time in who knows how long. Stock down 7%. Well, what could you expect? Premium rates are falling, and insureds are not increasing their coverages by as much, so premiums go down, and commissions move in lockstep.

The Bermudans

Diversified writers have done well. Aside from windstorm Cyrill and some snowstorms in the Midwest, catastrophes have been light, and there have been few trends in the casualty marketplace that would indicate deteriorating on old business. New business is another matter — pricing is weakening rapidly, and in select markets, terms & conditions are getting compromised. Supposedly pricing is still above levels adequate to earn a profit adequate to justify the capital employed, though in some cases, I am beginning to wonder.

That said PartnerRe (PRE), Everest Re (RE), ACE Limited (ACE), Platinum (PTP) and XL (XL) all beat earnings handily. The latter three should do well tomorrow. IPC Re (IPCR) beat as well; they only do property, so they may be indicative of Ren Re and Montpelier (MRH).

Personal Lines

Pricing is deteriorating here, and volume growth is light to non-existent. Allstate (ALL) and Progressive (PGR) reported good quarters with weak premium growth, and they have moved higher. Cincinnati Financial (CINF) guided higher, and has run from there. State Auto Financial (STFC) missed earnings badly, and got whacked. Selective missed due to the Midwest storms, but raised 2007 guidance… we’ll see how the market treats them tomorrow… should be okay. Midland (MLAN) beat and raised guidance; they have special niches, so good for them, but not indicative of broader trends.

Life

None of the bread-and-butter life companies have reported yet. Those that have reported are one-of-a-kind companies that live in their own space. Reinsurance Group of America (RGA) beat earnings with strong revenues and was up significantly; they reinsure most of the life space. Maybe that means that mortality margins will be good. Aflac (AFL), Ameriprise (AMP), Delphi Financial (DFG) and Torchmark (TMK) had good quarters as well. In aggregate, this could be a great quarter for the life companies.

Mortgage

MGIC (MTG) and Radian (RDN) both had poor quarters due to bad performance at C-BASS, which each of them owns 46% of. C-BASS services and securitizes mortgage loans, including subprime loans. Away from that, their core businesses seemed to be performing adequately for now. I would be cautious here; residential real estate pricing trends are weak at best.

Primary Casualty

WR Berkley (BER) and Chubb (CB); both beat estimates. Chubb is up; Berkley is down. Chubb raises guidance, while Berkley sounds conservative. Neither has rising written premiums. This is clearly the part of the cycle where conservative players pull in their horns. Be on the lookout for companies in this space that show rising premiums written amid the falling premium rates. They will be shorting candidates later this year.

Stay tuned for more on this busy season.

Full disclosure: Author is long ALL RGA, short MTG RDN