If the stock market and weather are any indication, third-quarter earnings reports from insurers will look a lot better than they did a year ago.
The big companies, which began their reporting season today with Travelers Cos.’ results, are expected to be profitable. The reason: a recovering stock market and no massive hurricane losses.
“We should see significantly improved results,” said Bob Hartwig, president of the Insurance Information Institute, a New York-based industry group. “The improvement in investment environment and reduction in catastrophe losses are a welcome turn of events.”
2008 was a difficult year for property and casualty insurers. Hurricanes Ike, Gustav and Dolly slammed the Gulf Coast region. Ike alone created $12.5 billion in insured losses, making it the third most expensive hurricane in U.S. history, according to Insurance Information Institute data.
Hurricane-related losses drove Travelers’ third-quarter 2008 profit down 82 percent and caused Allstate Corp. to record a $923 million loss.
Travelers had $682 million in catastrophe losses linked to the three hurricanes, nearly three times the $1.8 billion Allstate suffered from 35 weather events. The company doesn’t break out losses for hurricanes.
Both companies, along with other property and casualty insurers and life insurers, also had huge losses as the financial crisis hit. Some of their losses came from the money they had put into soured investments such as mortgage-backed securities that plunged in value as the housing market stumbled.
They also lost billions in the stock market. But the Standard & Poor’s 500 index jumped almost 15 percent in this July-September period, compared with a nearly 9 percent drop during the same quarter last year.
Travelers had $116 million in investment losses in last year’s third quarter, while Allstate had a $1.3 billion loss.
The losses have raised questions about insurers’ financial stability. But Jay Gelb of Barclays Capital said in a recent note to clients that Travelers remains well capitalized, with a strong balance sheet and adequate loss reserves. Allstate, however, “could face pressure from the recession and reduced investment income,” he said.
Insurers are under pressure to maintain solid capital positions to avoid damaging downgrades by ratings agencies. Keeping high ratings is key for insurers because lower ratings can force up their borrowing costs and cause them to lose customers.
Travelers continues to benefit from its size and scale, and has been taking business away from weakened rivals such as American International Group Inc., Gelb said. He expects Travelers to have earned $1.35 per share, up from 55 cents a year earlier. Analysts polled by Thomson Reuters forecast profits of $1.31 per share.
Gelb expects Allstate to have earned $1 per share, just short of analysts’ estimate of $1.01 and significantly better than a loss of 35 cents per share last year. Allstate is expected to report third-quarter earnings on Nov. 4.
Life insurers typically pile up big returns by investing proceeds from writing new policies before they eventually have to pay out after policyholders die or begin collecting on annuities. Last year’s market turmoil turned those expected profits into losses.
While each company has its own investment style, Fox-Pitt Kelton analyst Mark Finkelstein said nearly all insurers have benefited from the markets’ recovery. Life insurers’ shares are up, on average nearly 50 percent since June 30.
Hartford Financial Services Group Inc. more than doubled during the July-September period, while Lincoln National Corp. saw its stock rise 51 percent. Prudential Financial Inc. shares grew 34 percent.
Last year, Hartford reported a loss of $1.40 per share, as investment losses overwhelmed its insurance revenue. The insurer is one of six life insurers that were approved by the government to tap its $700 billion bailout program. Hartford received $3.4 billion in funds in late June.
The insurer last month appointed Liam E. McGee, the former head of consumer banking at Bank of America, as its new chairman and CEO. The move “should stabilize questions at the management level,” said Finkelstein, who expects Hartford to earn 75 cents a share. Analysts, on average, expect earnings of $1.10 per share, when it reports results on Nov. 3.
Other insurers, including Prudential and MetLife Inc., should also show favorable results, Finkelstein said.
He expects MetLife, which reports earnings on Oct. 29, to earn 86 cents a share, in line with analysts’ estimates. MetLife earned 83 cents a share in the third quarter last year.
Finkelstein expects Prudential to earn $1.22 per share in the third quarter. Analysts expect earnings of $1.33. Prudential is expected to report earnings on Nov. 4.
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