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Liberty Mutual's Kelly: Optimism for Insurers Tempered by Competitors' Pricing Behavior

Source: Dow Jones, Erik Holm

Posted on 17 Feb 2011

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Commercial insurance clients are beginning to need more coverage, a hopeful sign for both the economy and for insurance companies, that's what Libert Mutual Group's Chief Executive Edmund "Ted" Kelly said Wednesday.

But Kelly also said to during conference call with analysts that any hope for improved demand is undercut as insurers continue to cut prices to levels that seem to guarantee the policies will lose money over the long term.

Liberty Mutual joins Travelers Cos. and other insurers in citing signs that businesses are growing more optimistic in how much insurance they will need in the year ahead. The stabilization follows a two-year decline in demand as commercial clients closed factories, laid off workers and produced fewer goods--all factors that reduced the amount of coverage they required.

The years of declining demand have been cited as a factor contributing to the falling insurance prices that have plagued the sector.

While demand has been falling, the supply of capital available to back insurance policies has been increasing, and the imbalance exacerbated earlier declines in insurance prices. Some in the industry have warned that recent policies may prove to be unprofitable in later years--with Kelly being among the loudest in warning of under-pricing.

"Any optimism we might have is tempered by competitors' pricing behavior," Kelly said during the call with analysts. "If you sell more exposure at bad rates, you just lose more money."

"Competitors have been mentioning positive changes in exposure [the industry term for the amount of coverage clients need] but...we are much more concerned about price levels," he said.

The stocks of insurance companies are unlikely to turn around until the price of commercial insurance coverage turns around, he noted. Some commercial insurers, including Ace Ltd. (ACE) and CNA Financial Corp. (CNA), currently trade below their book values--a measure of assets minus liabilities that purports to show what a company would be worth if it were liquidated.

That is why Liberty Mutual, which isn't publicly traded, shelved plans last year to offer stock in a portion of the company, Kelly said.

"While we continue to be ready to do it if we deem it appropriate, it's highly unlikely in the near term that insurance stocks will trade at anything like appropriate value," he said. "And until there is some common sense in commercial pricing, we don't think insurance stocks will be fairly valued."
Still, Kelly flagged one reason to be hopeful: Some commercial clients are pushing for their policies to last longer than the usual one year.

"Customers applying pressure to commit to multi-year deals would indicate they expect prices to start moving upwards."