Commercial insurers’ stock trades down in first quarter; M&As slow as well

Stock Prices: Commercial line insurers’ stocks traded down 2 percent for the first quarter of 2007.

The only company reporting significant stock gains for the first quarter was CNA Financial Corp. (NYSE:CNA) whose stock was up 7 percent. What a difference a year makes. In February, the company reported full year 2006 results which were a dramatic improvement over their 2005 financials. CNA reported net income of $1.1 billion during 2006 compared to $264 million in 2005. The drastic change was the result of improved net operating income and net realized investment results. CNA reported a combined ratio of 96.4 percent for 2006.

The only other company in the black during the first quarter was Ohio Casualty Corp. (Nasdaq:OCAS), which was up a slight 1 percent. In February, the company reported fourth quarter net income of $1.22 per share. Analysts had expected $0.64 per share.

M&A Activity: Commercial insurers have taken a back seat to personal lines insurers with regard to mergers and acquisitions.

With very little recent activity, it seems that commercial insurers are hesitant to make any major moves with the beginning of hurricane season approaching on June 1. Colorado State University has predicted an active 2007 storm season with 17 named storms and nine expected hurricanes.

However, there has been some M&A activity as Argonaut Group Inc. (NYSE:AGII) announced it will merge with Bermuda reinsurer PXRE Group Ltd. (NYSE:PXT). The combined company will do business as Argo Group International Holdings Limited. Argo Group will become the Bermuda holding company for PXRE’s existing insurance subsidiaries, Argonaut Group’s U.S. operations, and a newly formed Bermuda reinsurer named Peleus Reinsurance Ltd. The company will trade on the Nasdaq under Argonaut’s current ticker AGII.

The first quarter started with QBE Insurance Group announcing the acquisition of Winterthur US Holdings Inc. from AXA (NYSE:AXA) for approximately $1.8 billion. Three of the main insurance companies acquired were General Casualty Co., Unigard Insurance Co., and Regent Insurance Co. The companies write a variety of insurance including commercial multiple peril, commercial auto liability, and workers’ compensation. Winterthur US writes through 1,700 independent agents in 33 states. Gross premium income for 2007 is expected to be approximately $1.45 billion.

Capital Raising: Five separate reinsurers announced initial public offerings during the first quarter of 2007, two of which began trading during the quarter. Start-up reinsurers emerged in the wake of the 2005 hurricane season due to the need for underwriting capacity.

Flagstone Reinsurance Holdings Limited (NYSE:FSR) raised approximately $175 million when it sold 13 million common shares at a price of $13.50 per share. The proceeds will be used to increase the underwriting capacity of Flagstone’s reinsurance operations.

Separately, CastlePoint Holdings Ltd. (Nasdaq:CPHL) announced it sold 7,682,238 common shares at $14.50 per share for proceeds of approximately $110 million. Both companies are rated “A-” (Excellent) by A.M. Best.

Also announcing IPOs in the first quarter were Greenlight Capital Re Ltd., Validus Holdings Ltd., and GeoVera Insurance Holdings Ltd.

Topics Mergers & Acquisitions Carriers USA Commercial Lines Business Insurance Reinsurance