Smith Barney ?04 P-C Firms Analysis Is Upbeat

NU Online News Service, Jan. 23, 2:37 p.m. EST?Property-casualty insurers' upcoming fourth-quarter reports for 2003 will be generally favorable, thanks to improving current accident-year results and mostly low catastrophe losses, an investment research firm said in a report analyzing major carriers.[@@]

New York-based Smith Barney also forecast that it doesn't expect "a wave of reserve-strengthening events" during the fourth-quarter earnings reporting season. However, there could be some exceptions with a few insurers that have already issued cautionary statements, such as The Chubb Corporation on asbestos. The St. Paul Companies Inc. announced this morning that it took a $228 million after-tax charge in the fourth quarter to boost reserves on rising medical malpractice claims.

The following are Smith Barney's fourth-quarter analyses for some major p-c companies due to report their earnings in the coming days:

? ACE Limited: The Bermuda-based ACE has high earnings visibility for its fourth-quarter results, commented Ronald Frank, a Smith Barney analyst. He noted that ACE had reaffirmed its 2003 guidance at the December Bermuda Angle conference.

ACE also undertook a ground-up study of asbestos reserves at the end of 2002, tripled its gross asbestos reserves following the study, and had reiterated its comfort with the asbestos reserve position on its 2003 third-quarter earnings conference call.

? The Allstate Corporation: In November, Allstate reaffirmed its 2003 profit guidance. However, the company is expected to report that losses from California wildfires will add up to somewhere between $290-to-$330 million, pretax.

? American International Group Inc.: "We expect a strong fourth quarter from AIG," Mr. Frank said. Top-line growth in the general insurance business should remain strong, thanks to favorable conditions in the specialty-casualty lines where AIG is an industry leader."

He said one concern about AIG is that the company conducts its annual loss reserve analysis in the fourth quarter, which brings the risk of reserve strengthening. But Mr. Frank said he doesn't expect any large charge, like the one AIG took during the 2002 fourth quarter, when the company strengthened reserves by about $2 billion.

? Aon Corporation: Smith Barney's forecast for Aon fourth quarter is below the management's guidance. Smith Barney noted the firm's poor earnings visibility and operating difficulties over the last several quarters, including "a severe revenue disappointment" in the core brokerage business during the 2003 third quarter.

? Arch Capital Group Ltd.: Mr. Frank estimated Arch's net written premium growth for the fourth quarter to be around 71 percent, or about half of growth reported in the 2003 third quarter. This analysis reflects Arch's transformation from a start-up mode to more of an established company, as well as some likely moderation in rate hikes.

? AXIS Capital Holdings Ltd.: Smith Barney projects AXIS combined ratio to be around 75.9 percent for the fourth quarter. There is also a positive "earnings surprise potential," but the investment research firm cautioned that AXIS is a young company and engages in potentially volatile lines of business.

? The Chubb Corporation: Underwriting results should reflect the benefits of pricing and underwriting actions taken over the past few years. Smith Barney said it doesn't expect Chubb to have major exposure to the California wildfires, based on Chubb's small California market share in homeowners.

Smith Barney also cautioned that Chubb management left open the possibility of a fourth-quarter asbestos charge on its 2003 third-quarter conference call, stating that asbestos would get increased scrutiny--but not another ground-up study--during the fourth quarter.

? Cincinnati Financial Corporation: "We expect Cincinnati Financial to continue to show profitable commercial lines and personal auto underwriting results," Mr. Frank said. However, the homeowners result is likely to be a drag for fourth-quarter results, as it was during the first nine months of the year.

? HCC Insurance Holdings: Smith Barney expects HCC to continue to deliver strong earnings growth for the fourth quarter, as it has in several previous quarters. "We expect all core business segments to continue to produce favorable loss ratios on a rapidly growing earned premium base," Mr. Frank forecast. He also said cash flow should continue to show strong growth, as HCC increases its net writings and paid loss trends remain favorable. He added he doesn't expect HCC to do material, if any, reserve strengthening in the fourth quarter.

? Marsh & Mclennan Companies Inc.: Smith Barney's fourth-quarter estimate for Marsh & Mclennan assumes "another solid quarter" of 15 percent revenue growth in the company's insurance services. The insurance markets "remain a wind, albeit diminished," at the company's back, the investment firm commented.

? Platinum Underwriters Holdings Ltd.: The investment firm noted that Platinum's estimate for its exposure to California wildfires is less than one-half of one percent of the total market loss--or less than $10 million, assuming total insured losses of $2 billion. This would fall within the "normal" quarterly catastrophe load. Platinum management had also reaffirmed its 2003 profit guidance at the December Bermuda Angle conference.

? Safeco Corporation: The company announced that losses from California wildfires are estimated to cost $10 million after taxes. But favorable underwriting trends in the core personal auto and business insurance segments should continue.

? Travelers Property Casualty: Smith Barney said it expects continued strong operating results in commercial lines, thanks to strong underwriting and pricing discipline amid "hard market" conditions over the past few years.

Travelers Personal lines results would continue to benefit from pricing, which has been running ahead of largely benign loss cost trends. There is also a possibility of a reserve strengthening charge, if management wants to start 2004 and the merger with The St. Paul with a clean slate. The most likely source of such strengthening would be Travelers' majority-owned Gulf unit, rather than core operations.

? Willis Group Holdings: Fourth quarter is a seasonally strong quarter for Willis, Smith Barney observed. Revenue growth, while it can be volatile on a quarterly basis, should be in the double-digit, as commercial insurance pricing remains favorable overall, and Willis management appears to continue having success with regard to recruitment.

? XL Capital Ltd.: XL Capital had announced that as the result of an audit, it would take a pretax reserve charge of $694 million, mostly to cover XL Re America business. But XL management indicated that underlying results continue to be strong. Smith Barney said its estimate for XL fourth quarter, excluding the charge, would be the best quarterly-earnings result in the past few years.

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Smith Barney ?04 P-C Firms Analysis Is Upbeat

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