Few Underachievers Disturb First Qtr. Party Atmosphere

While most property-casualty insurers were invited to the first-quarter party celebrating higher earnings, lower combined ratios and double-digit premium increases, investors and analysts were impatient with those few that did not make the “A” list.

“If you dont start making hay while the sun shines, then the board of directors should look for management changes,” an investor told CNA executives in Chicago during a conference call held earlier this month.

“Why should shareholders entrust all this capital to management if were not making good money in a really good environment? [Its] not going to last forever,” he said, after CNA leaders informed listeners that the company is ultimately capable of being a “top-quartile earner,” but that a 10 percent return-on-equity wasnt necessarily forthcoming for any quarter in 2002.

CNA was one of only four companies among 27 whose operating earnings were tracked by National Underwriter to report lower operating earnings in first-quarter 2002 than in first-quarter 2001. Vesta Insurance Group in Birmingham, Ala., was another laggard.

During Vestas conference call, a man identifying himself as a long-term shareholder was also losing patience. “What are some things–especially the way this market is, with Enron and other companies–that you can tell individual investors to keep our trust in the management [and] your ability, once you get the earnings growing again, to keep them growing?” he asked.

“Can you say with any assurance that this [second] quarter will be any better than the first quarter?” a different caller asked, after executives said they were doing everything they could “to cut off the drain and drag of standard auto,” which hurt first-quarter results. President Norman Gayle responded that the companys goal is to improve earnings over the next four-to-six quarters.

Negatively-worded questions and comments, however, were atypical in a quarter that was, for the most part, uneventful. “No surprises” was the theme of several calls hosted by p-c executives.

“The good news is that theres no bad news,” said Steven Markel, vice chairman of Richmond, Va.-based Markel Corp. “After several quarters of this not being true, [Markels] business is on track and on budget. Were participating in this marketplace and enjoying it at last,” he added, referring to the fact that underwriting losses and reserve boosts needed for Markels international operations have plagued the company in recent years.

At Seattle-based SAFECO, President and Chief Executive Officer Mike McGavick said: “What is remarkable is theres really nothing remarkable to report,” reporting the companys best quarter in three years. In contrast, last years quarterly reports had Mr. McGavick detailing job cuts, a third-quarter $240 million pre-tax reserve charge, and a first-quarter charge of more than $900 million for the writeoff of the goodwill asset associated with prior acquisitions.

This year, the net income figures of several insurers tracked by NU were impacted by the adoption of new accounting standards relating to goodwill–the difference between the purchase price and the fair value of an acquired company. A new accounting standard approved by the Financial Accounting Standards Board last year (Statement No. 142) changed the accounting for goodwill from an amortization method to an impairment-only approach, requiring companies to annually test if there has been a decline in the value of goodwill.

The accounting change generated some notable differences between net income and operating earnings in first-quarter 2002. Travelers Insurance, for example, took a $242.6 million charge to write off goodwill related to its 2000 acquisition of Northland, causing a 79 percent drop in first-quarter net income, compared to only a 6 percent decline in operating earnings. Travelers said its operating earnings drop was the result of an expected decline in investment income.

Northbrook, Ill.-based Allstate, the final company on NUs list to report an operating earnings decline, boosted reserves by $148 million as it continued to battle homeowners issues in the quarter.

In the aggregate, operating earnings, net income and net premiums written all grew around 20 percent for the group tracked by NU. Individual combined ratios improved for 27 of the 30 companies that disclosed them, with more than half of these insurers reporting underwriting profits. Roughly one-third saw combined ratio drops of more than five points, while some large companies (like Allstate and Travelers) reported worse combined ratios in first-quarter 2002.

“Overall, property-casualty insurers did better than most people anticipated in the first quarter,” according to Michael Paisan, an analyst for The Williams Capital Group in New York. One of the reasons was because this was a mild catastrophe quarter, he said.

Indeed, it was the mildest in a decade, according to the Property Claims Services unit of the Insurance Services Office Inc. in Jersey City, N.J., which said insurers will pay $580 million for three catastrophe events for first-quarter 2002, besting last years $705 million figure.

Predicting increased “earnings momentum” for the remainder of the year, Mr. Paisan said, “were beginning to see the benefits of rate increases taken last year filtering down to the bottom line. The fundamentals began to show” in the quarter, he said–adding, however, that another reason that most companies beat analysts expectations was that “expectations were fairly low.”

ACE Ltd. in Bermuda was a glaring exception. “ACE doesnt usually miss by a penny one way or the other,” he said. With operating earnings-per-share falling five cents short of analysts expectations, ACE proved that you could report the best quarter in your history and still face the wrath of analysts.

ACE executives spent the better part of an agonizing conference call explaining why the companys growth (in the mid-teens on a net basis) didnt measure up to 30-to-40 percent rates reported by what analysts identified as comparable top-tier companies, such as XL Capital and Chubb. ACE Chairman and CEO Brian Duperreault noted the distorting impact of loss portfolio transfers, explaining that while ACE wrote three LPT contracts for $250 million in premium in first-quarter 2001, it wrote none in first-quarter 2002.

At one point, the call even had an analyst take up ACEs defense to convince doubters of ACEs earnings power, citing “pretty fantastic” 13.5 percent return and growth rates that soared over those of competitors in past years.

During The St. Paul conference call, a similar phenomenon was repeated, but in the latter case an analyst felt the need to confirm the Minnesota-based companys prior-year disclosure of a $100 million reserve release. The defense came after another preached about the need to disclose all positive and negative material items to analysts, a commentary that might have had more to do with post-Enron skittishness about financial reporting than St. Pauls first quarter.

While Mr. Paisan identified The St. Paul as one insurer that hasnt yet joined the 2002 party, the company still managed to report 5 percent growth in its operating earnings.

The St. Paul is “in the midst of a major overhaul,” Mr. Paisan noted. That restructuring continued in the quarter, with the company announcing plans to transfer its ongoing reinsurance operation to a new Bermuda company. More recently, The St. Paul said it plans to form a new underwriting operation to target large U.S. property risks.

At Ohio Casualty in Fairfield, a strategic restructuring set in motion last year to cut staff, exit some personal lines markets, and achieve specific growth and combined ratio targets is on track based on first-quarter results. Still, one analyst displayed a different sort of impatience. With everything going so well, why doesnt the company revise its outlook to be more optimistic, he asked.

“The second quarter is always a higher catastrophe quarter than the first,” CEO Dan Carmichael warned.

Similarly, at Chubb, a usually optimistic Chairman Dean OHare told an analyst that hes learned to err on the conservative side, when asked why the company had predicted commercial lines growth so much lower than it achieved.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 27 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Few Underachievers Disturb First Qtr. Party Atmosphere

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