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Reinsurance Price Declines Won't Offset Other Insurance Woes

Source: Dow Jones

Posted on 11 Jan 2010

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Property and casualty insurers paid less for reinsurance as they renewed coverage on January 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.