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

I estimate that we are almost halfway through insurance earnings season now, so here are the broad trends from the various insurance sub-industries (see part I, part II and part III):

Primary Commercial

What a hot sub-industry. Beating the estimates were CNA Financial Corporation (CNA), James River (JRVR), Ohio Casualty (OCAS), American Financial Group (AFG), American Safety (ASI), Navigators Group (NAVG), and Hanover Group (THG).

All but Ohio Casualty and CNA increased their net written premiums. Ohio casualty was particularly impressive, with the loss ratio improving in the commercial and specialty lines.

Now, I am not a fan of the commercial lines in this part of the cycle, good as earnings look for now. Here are things to look at for analysts because of the long-tailed nature of this business:

1. Are the current year loss picks (loss estimates from new business as a percentage of earned premium) deteriorating?
2. How much income is arising from release of prior accident year reserves?
3. How much is pricing deteriorating?
4. Are terms and conditions deteriorating?
5. Are they daring to grow in areas where pricing and terms and conditions are deteriorating?

Too many red flags and you should discount current earnings heavily.

Mortgage Insurance

No good news here. PMI Group (PMI) and Genworth (GNW) both miss. Genworth misses due to mortgage claims (LTC takes a day off from capital destruction), and PMI misses due to higher mortgage claims in the US and Australia.

Life

Principal Financial (PFG) misses due to higher death claims. Odd reason for a big company; the law of large numbers should be doing more for them. High valuation, so it might take some abuse tomorrow. That said, I would view it as transitory, so if PFG get smashed, I want to pick up the pieces.

The Bermudans

Axis Capital (AXS) beats handily. What else would you expect in a low cat quarter? If it doesn’t rise much today, it means that the P&C reinsurers have reached equilibrium with the good quarter.

Conglomerates

Unitrin (UTR) misses on lower net written premiums, and poor performance in their personal lines, and their Unitrin Direct line.

That’s all for now; let’s see what today brings.

Comments

[bobbyjoe]

We are Bermudians, not Bermudans.