(By Mani) U.S. insurers are set to announce their second quarter earnings results this week, and primary carriers may incur full normalized catastrophe losses due to certain significant events in the quarter.
The U.S. has experienced several notable loss events recently including Colorado wild fires, a couple material hail storms in the Southwest, and another sizeable hail storm through Colorado and Wyoming.
On July 10, Chubb Corp. (NYSE:CB) announced $200 million to $240 million in pre-tax catastrophes losses from 13 wind and hail events, which will affect EPS by 48 to 57 cents a share. However, this does not account for any losses stemming from the wildfires in Colorado Springs.
As the first company to pre-report catastrophe losses this quarter, the extent of losses could exceed initial estimates and may prove to be warning for other carriers with Midwest and Southeastern exposure, namely Allstate, Cincinnati Financial, and Travelers.
However, these losses will likely not reach into higher loss reinsurance layers as their business model relies in a global portfolio of business. On a global basis, the second quarter was a relatively quiet quarter with limited global catastrophes, a positive sign for global reinsurers.
On the sector front, the rate gain acceleration from the back half of 2011 through the first quarter of 2012 may be slowing. Reports from the brokerage community show that while rates are still increasing in the second quarter, it is at lower levels than the prior two quarters.
"We believe that without a few major catastrophic events this year, the industry will have a challenging time maintaining these rates into 2013," Deutsche Bank analyst Joshua Shanker wrote in a note to clients.
Investors would look closely at the comments mainly from Travelers and W.R. Berkley who are pushing the rate argument most strongly.
Following is a write-up on how some key insurers would fare in the second quarter:
Travelers Companies, Inc. (NYSE:TRV) is one of the first insurers to report on July 19, and for the last few quarters has been a leader in tracing the positive trend in achieved rate increases.
Wall Street expects Travelers to earn $1.38 a share on revenue of $5.98 billion, according to analysts polled by Thomson Reuters. In the year-ago period, it reported a loss of 91 cents a share on revenue of $5.82 billion.
"We expect the company to continue to report increases, though we believe they may have leveled out," Shanker wrote.
Investors would focus on the personal auto business, which had a combined ratio fell down to 95.8 percent in the first quarter from 107.7 percent in the fourth quarter. If personal auto results were to move to a significant underwriting loss again, it might be a warning sign of larger issues in that line of business.
Allstate Corp. (NYSE:ALL) is expected to earn 84 cents a share on revenue of $6.85 billion, compared with a loss of $1.23 a share on revenue of $6.61 billion a year-ago.
Historically, the challenging quarters for Allstate have stemmed from homeowners' losses. However, the second quarter looks to be a normalized catastrophic loss quarter for Allstate.
The company, which reported $280 million in cat losses for the month of April, have not preannounced any cat losses for May, implying that the quarter should be in line with the second quarter average of $683 million over the last eight years.
"While we still do not know the extent of cat losses in June, there were a couple of large hail storms and the Colorado wildfires during the month which may produce outsized losses for the month," said Shanker, who expects catastrophe losses of $659 million for the quarter.
Earnings of American International Group, Inc. (AIG) are projected to decline to 59 cents a share from 69 cents a share as revenue is estimated to fall 2.2 percent to $8.83 billion.
All eyes will be on the performance of Chartis unit. Last quarter, there was an increase in the expense ratio for Chartis to over 34 percent as management invests in the business and transitions the overall book into more profitable lines. AIG should try to control the expense ratio of Chartis as continued expansion in excess of 34 percent would start to cause concern.
"Overall, we would like to see flat to improving results at Chartis given the continued improvement in the rate environment, and we expect the market will be looking for improvement at least directionally if not materially," Shanker added.