Quarterly Insurance Round Up 2q08

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Quarterly report on top 10 property/casualty insurers

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Quarterly Insurance Round Up 2q08

  1. 1. Jones Strategy Consulting, Inc. 402 Main Street, Suite 100-329 Metuchen, New Jersey 08840 Tel (732) 476-6387 • Fax (732) 692-8505 Quarterly Insurance Round-up: Second Quarter 2008 Author and company contact: Jason A. Jones, (732) 476-6387; jjones@JonesStrategyConsulting.com Publication date: August 8, 2008 Quarterly highlights and key issues Earnings for most of the top U.S. P/C insurers weakened in the second quarter, but core underwriting results remained strong. Investment losses and surprisingly high catastrophe losses hit the industry, though on-going rate decreases in commercial insurance put further downward pressure on earnings. AIG stood out in terms of the magnitude of its investment losses, which resulted in a $5.4 billion net loss on the quarter, as it continues to deal with weakness in the U.S. housing and credit markets and related investment losses. Despite core underwriting results that were generally strong, earnings are down significantly from 2007 levels. Most companies should face continued pressure on earnings for the rest of 2008 and through 2009, as declining commercial rate adequacy and fewer reserve releases result in lower underwriting income. Volatility could also be higher in the near term due to uncertain investment performance and potential catastrophe losses during peak hurricane season in the next 2 months. Despite pressure on profits, strong capital positions are allowing many companies to return capital to shareholders or make acquisitions (AIG is a notable exception – it fortified its capital position with $20 billion of equity and hybrid capital raised in the second quarter and intends to make no major acquisition in the near term). Rates and terms/conditions (commercial lines weakened; personal lines doing fine). There were continued rate declines and competitive pressures in commercial lines; though this was offset to some extent by strong non-catastrophe results in personal lines. In personal lines, favorable trends in loss frequency helped to offset higher loss severity, thus sustaining strong results. Among those companies describing commercial rate trends, declines in the low to mid single digits were the norm, though there is also pressure on insurers to broaden terms and conditions, and this adds uncertainty to the amount of rate deterioration. Given weakening terms and conditions and indications from agents and brokers that rate declines are greater than those indicated by carriers, rate trends could emerge worse than expected, and this is the biggest current risk for most companies in my view. Investments (significant investment losses, but not all flow through net income). AIG was most affected by investment losses, though most companies were affected to some extent due to weakness in housing and the economy more broadly. At many companies, the majority of investment declines occurred as unrealized losses that flowed through other comprehensive income rather than net income, .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 1
  2. 2. Quarterly Insurance Round-up: Second Quarter 2008 and a look at the change in shareholders’ equity and AOCI can help one appreciate the full impact of investment performance. It’s quite possible that today’s unrealized losses will materially lower earnings in future quarters, as other-than-temporary impairments or realized losses are made. Global consolidation (major acquisitions announced): Two major acquisitions of U.S. insurers were recently announced. Liberty Mutual announced its plan to acquire Safeco for $6.2 billion, and this transaction is expected to close in third quarter. On July 23, Japanese insurer Tokio Marine Holdings (formerly called Millea Holdings) announced its plan to acquire Philadelphia Consolidated for $4.7 billion. Both deals were made at significant premiums to the share prices that existed before they were announced. In addition, there have been a number of small and mid-sized M&A deals, often involving Bermuda or U.K. insurers. For example, Max Capital is acquiring the Lloyd’s operations from Imagine Group, Tokio Marine Holdings is acquiring Kiln Ltd. and Tower Group is acquiring CastlePoint. I believe that acquisitions are likely to be more common than average over the next year or so, because insurers with excess capital will seek ways to deploy it. They will also find acquisitions a more viable path to profitable growth than organic growth as the market continues to soften. The rise of sovereign wealth funds, weakness in the dollar and foreign investor interest suggest there could be more acquisitions of U.S. companies by foreign companies. The key challenges for acquirers will be to avoid over-paying and managing integration risk. Share repurchases (companies continue to return excess capital to shareholders): Many companies continue to repurchase shares of common stock as a way of returning excess capital to shareholders. Given the very strong capital positions that were built up at many companies in the recent hard market, and fewer opportunities to deploy capital profitably in the softening market, share repurchases make a lot of sense and are likely to continue in the near future. In my view, share repurchasing is often a more attractive use of capital than making acquisitions. Since rating agency capital requirements are the biggest constraint for most companies, those companies with the most capital in excess of rating agency requirements will be in the best position to return shareholder capital. Catastrophes (Losses from U.S. Midwest storms). It was one of the worst second quarters on record for U.S. catastrophes due to storm losses. Companies with significant exposure to homeowners and commercial property lines in the Midwest were hit hardest, as these lines of business often sustained combined ratio increases of 10 points or more from catastrophes. Review of top 10: The next several pages summarize second quarter results and key issues for the 10 largest GAAP filing U.S. P/C insurers: AIG, Allstate, Travelers, Berkshire Hathaway, Liberty Mutual, Progressive, Hartford, Chubb, CNA, and Safeco. These companies account for 37% of the U.S. market based on net premiums written. A few large companies are not included, since they do not report GAAP financials or have more limited financial disclosure. For a list of the top 20 in the U.S., including the 10 described herein, see appendix 1. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 2
  3. 3. Quarterly Insurance Round-up: Second Quarter 2008 AIG ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 12,220 12,080 10,999 11,823 12,139 12,106 10,753 11,224 Chg in NPW 0.7% -0.2% 2.3% 5.3% 4.3% 7.6% 6.2% 8.8% Combined 97.7% 96.9% 96.6% 90.2% 87.1% 87.5% 91.7% 89.1% ratio Net income (5,357) (7,805) (5,292) 3,085 4,277 4,130 3,439 4,224 Shareholders' 78,088 79,703 95,801 104,067 104,330 103,055 101,677 96,154 equity ROE -27.2% -35.6% -21.2% 11.8% 16.5% 16.1% 13.9% 18.4% Notes • $5.4 billion net loss due to housing • Good P/C underwriting results market and investment problems • Robert Willumstad took CEO role in June • $20 billion of new capital raised For the third consecutive quarter, AIG had a net loss ($5.4 billion) tied to difficulties in the housing and credit markets and related investments. There was a $5.6 billion pre-tax charge from the super senior credit default swap portfolio in AIG Financial Products Corp. (AIGFP), and $6.1 billion of pre-tax net realized capital losses, mainly due to other-than-temporary impairments in the investment portfolio that were due to severe declines in fair value of residential MBS and other structured securities. In the midst of recent difficulties, Robert Willumstad took over the role of CEO in mid-June, while retaining his role as chairman of the board that he had since 2006. Recognizing the need for change, Mr. Willumstad said, “We are conducting a comprehensive review of all AIG’s businesses with the objective of improving results, reducing AIG’s risk profile and protecting our capital base…We are considering all options.” He promised that AIG would report on its progress in late September. General Insurance, AIG’s property/casualty segment, had a $1.4 billion operating income before realized capital losses, a 54% decline from the same quarter in 2007. The main factors accounting for the decline were lower investment income, an increase in the operating losses at mortgage insurance subsidiary United Guaranty Corp. (UGC) and a rise in the combined ratio in Commercial Insurance. Catastrophe losses were very modest, as it was higher current accident year loss ratio combined with slightly unfavorable reserve development that drove the weakening underwriting result. AIG’s General Insurance segment is divided into the following sub-segments, which are reviewed in greater detail below: Commercial Insurance (49% of General Insurance NPW), Personal Lines Insurance (10%), Mortgage Guaranty (2%), Transatlantic Holdings (8%), and Foreign General (30%). Commercial Insurance: The combined ratio rose to 93.7% versus 83% in 2q’07, as competitive pressure in the commercial market continued. Prior accident year reserves developed unfavorably by $75 million, compared with $65 million of favorable development in 2q’07. However, a greater amount of deterioration was due to a rising loss ratio on current business. While the deterioration has been .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 3
  4. 4. Quarterly Insurance Round-up: Second Quarter 2008 notable, the underwriting result in Commercial Insurance was still good and comparable to that of some other major insurers. Personal Lines Insurance. The 103% combined ratio and $29 million underwriting loss were weak compared with a 94.5% combined ratio and $63 million underwriting profit in 2q’07. Given the small size of this part of General Insurance, the overall impact on results was modest. Mortgage Guaranty (UGC). This business is taking the brunt of mortgage losses, as it exists to provide credit enhancement on residential mortgages for Fannie Mae, Freddie Mac and other buyers of mortgages. With underwriting losses rising to $562 million in 2q’08, it materially dragged down overall results for General Insurance. Domestic first-lien and second-lien loans both performed poorly. Transatlantic Holdings. Underwriting profits rose and were good, as the combined ratio declined to 94.4% from 95.0% in 2q’07. Premiums were flat, as international growth offset declining U.S. premiums. Foreign General. This segment was the star and has been doing consistently very well. The combined ratio was a solid 88.3% versus 85.4% in 2q’07. Premiums written grew nearly 15% from last year’s second quarter. Foreign General is the second biggest part of General Insurance by premium, but the biggest contributor to underwriting profits by a slight margin over Commercial Insurance. In AIG’s substantial non-P/C businesses – Life Insurance & Retirement Services, Financial Services, and Asset Management, there were mixed results, with strong profitability in some areas that helped to offset the large investment losses cited earlier. In Life Insurance & Retirement Services, 2q’08 operating income before net realized capital gains (losses) was $2.6 billion, a 10% decline versus 2q’07. The $5.9 billion operating loss (before realized capital losses) in Financial Services was driven by the previously mentioned $5.6 billion charge due to unrealized losses in AIG Financial Products, partly offset by very strong results in aircraft leasing. Asset Management had $150 million of operating income before net realized capital gains (losses) in 2q’08 versus $575 million in 2q’07. Other Operations had a second quarter operating loss of $745 million compared to a $482 million loss in 2q’07, with the change due to higher interest expense from higher borrowings and higher unallocated corporate expenses. In May, AIG raised $20 billion of equity and equity-like hybrid capital to strengthen its financial position and to offset erosion of capital from net losses and unrealized losses. AIG’s AA- financial strength rating was left unchanged by Standard & Poor’s following AIG’s earnings release, though the rating remains on CreditWatch negative. Standard & Poor’s said the second quarter loss was within its range of expectation and that the rating will likely be lowered by one notch if earnings don’t stabilize in the third quarter. If recoveries in value begin to emerge in AIG’s CDS and other investments and insurance profits remain strong, Standard & Poor’s said it could revise the ratings outlook to stable. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 4
  5. 5. Quarterly Insurance Round-up: Second Quarter 2008 Allstate Corp. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 6,803 6,514 6,560 7,075 6,939 6,609 6,604 7,123 Chg in NPW -2.0% -1.4% -0.7% -0.7% -1.9% -1.7% -0.8% -0.5% Combined 94.4% 94.0% 95.9% 91.0% 87.6% 84.6% 85.7% 84.1% ratio Net income 25 348 760 978 1,403 1,495 1,213 1,158 Shareholders' 19,709 20,303 21,851 21,634 21,560 22,491 21,846 22,200 equity ROE 0.5% 6.6% 14.0% 18.1% 25.5% 27.0% 22.0% 21.6% Notes • Net income sharply reduced by • Investment risk reduction programs catastrophes and realized investment initiated losses • Management made favorable revision to • Continuation of share repurchases its P/C underwriting outlook Net income declined 98% in 2q’08 versus 2q’07, as investment losses and record second quarter catastrophe losses offset otherwise strong results. Primarily due to $698 million of catastrophe losses, the property/liability combined ratio rose to 94.4% versus 87.6% in the same quarter in 2007. Excluding the impact of catastrophes and a very small amount of adverse prior year reserve development, the combined ratio in the quarter was a strong 84.1% - unchanged from the same quarter in 2007. Homeowners business took the brunt of the catastrophe losses, while standard and non-standard auto did much better. Realized after-tax capital losses of $788 million were driven by asset write-downs and realized losses on dispositions of fixed income securities at Allstate Financial. As a result of management’s view that pressures on the economy and investment markets will be prolonged, Allstate developed additional investment risk mitigation and return optimization programs in the second quarter. These programs include macro-hedging to protect the overall investment portfolio and potential future reductions in certain real-estate and financial-related market sectors. Allstate favorably adjusted its guidance for the property-liability underlying combined ratio (which excludes catastrophes and prior year reserve development) to the 86.0 – 88.0 range for full-year 2008, which would be a strong result and a one point improvement from the guidance provided in January. This reflects better than previously expected profitability (excluding catastrophes) due to reduced claim frequency and moderate severity. With $434 million of share repurchases in the quarter, Allstate was able to continue its share repurchase program without reducing capital levels materially. The company expects to complete the remaining $1.4 billion of share repurchases available under its current authorization by the first quarter of 2009. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 5
  6. 6. Quarterly Insurance Round-up: Second Quarter 2008 Travelers Companies, Inc. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 5,629 5,188 5,366 5,394 5,714 5,144 5,437 5,284 Chg in NPW -1.5% 0.9% -1.3% 2.1% 1.0% 7.8% 2.7% 3.7% Combined 89.3% 87.6% 88.4% 84.4% 87.8% 89.2% 86.7% 87.2% ratio Net income 942 967 1,063 1,198 1,254 1,086 1,189 1,043 Shareholders' 25,923 26,388 26,616 26,307 25,322 25,357 25,135 24,747 equity ROE 14.4% 14.6% 16.1% 18.6% 19.8% 17.2% 19.1% 17.5% Notes • Strong results in spite of catastrophes and • Strong performance in personal insurance market softening • Strong capital generation allows • Peak catastrophe risk exposure is well significant share buy-backs contained • Favorable reserve development Underwriting results were strong in the second quarter of 2008, albeit slightly weaker than the same quarter of 2007. Significant favorable development on prior year loss reserves more than offset higher catastrophe losses from U.S. storms. Travelers’ catastrophe losses added 6.6% points to the combined ratio – comparable to peers. The company’s catastrophe management and modest peak catastrophe risk profile should help it contain catastrophe losses prospectively. Despite softening in the broader commercial market, Travelers is doing relatively well on account of stable and strong account retention and rates and premiums that are down only slightly overall. The greatest competitive pressure was for large account new business. Personal insurance results were weaker due to higher catastrophe losses, though personal insurance is otherwise performing very well due to strong retention, higher new business volume and rate increases. Pre-tax favorable reserve development was $526 million in the quarter, which lowered the combined ratio by 9.8 points (versus 2.4 points of favorable impact in 2q’07). This reflected better than expected loss experience, particularly for accident years 2004 – 2007 in commercial multi-peril, general liability, property and commercial auto, partly offset by reserve strengthening in workers’ compensation. Capitalization was strong and at or above target levels for all rating agencies. Debt-to-capital financial leverage of 19.7% (excl. FAS 115) was slightly below the company’s 20% target. The company’s financial strength ratings were recently upgraded to Aa2 by Moody’s. Because of its strength in earnings and capitalization, Travelers has been able to make substantial amounts of common share repurchases, with $750 in share repurchases in 2q’08, and a total of $5.8 billion in repurchases since 2q’06. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 6
  7. 7. Quarterly Insurance Round-up: Second Quarter 2008 Berkshire Hathaway Inc. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPE 6,231 6,209 6,299 6,020 5,950 13,514 6,247 6,359 Chg in NPE 4.7% -54.1% 0.8% -5.3% 2.0% 144.7% 9.8% 10.0% Combined 91.0% 95.5% 88.6% 87.5% 83.6% 93.1% 78.8% 77.6% ratio Net income 2,880 940 2,947 4,553 3,118 2,595 3,583 2,772 Shareholders' 117,994 119,372 120,733 119,903 115,272 109,891 108,419 102,244 equity ROE 9.7% 3.1% 9.8% 15.5% 11.1% 9.5% 13.6% 11.1% Notes: Equitas reinsurance deal in 1q’07 raised premium for that quarter by $7.1 billion. • Good earnings despite investment • Strong 91% combined ratio in insurance volatility and reinsurance • Significant investments in credit • Strong capitalization derivatives and structured products, but • Minimal catastrophe losses Berkshire avoided troubled housing and MBS sectors Net income fell 8% in 2q’08 versus 2q’07 due to lower, but still strong underwriting income. Despite the strong 91% combined ratio and stable earnings in other areas (investment and derivative gains, investment income in the insurance operations, and non-insurance operating earnings), the ROE was only 9.7%. While this is not bad, the ROE is depressed somewhat due to the strong levels of capitalization maintained at Berkshire Hathaway. Berkshire Hathaway often invests large positions in equities or sophisticated instruments such as 5 year credit default swaps and even longer term equity index put options. While it has experienced investment losses (mostly unrealized), it has fared better than many other financial institutions during the recent volatility driven by housing and credit market problems. This partly reflects the fact that none of Berkshire’s credit default contracts involve direct exposure to MBS, ABS or CDOs. Realized investment gains and derivative gains were both positive in the second quarter and contributed $935 million of revenue, while pre-tax unrealized losses of $6.7 billion showed up in AOCI and caused total shareholders’ equity to decline slightly to $118 billion. During the first half of 2008, the company acquired $6.5 billion of investment grade auction rate securities and variable rate demand notes issued by states, municipalities and political subdivisions in a period of significant displacement for these types of securities. While these securities are typically insured by third-parties, the substantial majority of them had good underlying credit characteristics based on the company’s analysis and about 80% of them had underlying ratings of A or higher. Berkshire Hathaway’s insurance and reinsurance operations are reported in four parts – Geico, General Re, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Insurance Group, which we review sequentially below. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 7
  8. 8. Quarterly Insurance Round-up: Second Quarter 2008 Geico. This private passenger auto insurer is Berkshire’s biggest insurance operation and produced a little more than half of its total underwriting profit, with a $298 million underwriting profit on the quarter. This is down slightly from $325 million on the same quarter in 2007 due to a slight rise in the combined ratio to 90.4%. PIF grew 7.8%, while earned premium grew 5%. General Re. Premiums were down 6% but underwriting profits fell by more than half versus 2q’07, as this unit produced an underwriting profit of $102 million in 2q’08. The combined ratio was 93.1%. The lower premium reflected competitive conditions in the reinsurance markets and Berkshire’s declining of business when it considers the profitability inadequate. Berkshire expects further premium declines in General Re in the remainder of 2008, as policy cancellations and non-renewals outpace new business. Berkshire Hathaway Reinsurance Group. This part of Berkshire’s insurance operations saw the sharpest decline in underwriting profits, with $79 million underwriting profit in 2q’08 versus $356 million in 2q’07. The combined ratio was 93.2% in 2q’08. Catastrophe and individual risk business declined sharply due to increased price competition and fewer attractive opportunities. Premiums in the other multi-line business increased 49%, reflecting new business from a 5 year 20% quota-share of Swiss Re’s business that became effective on Jan. 1, 2008. Berkshire expects this large treaty to generate about $3 billion of premiums for all of 2008. Berkshire’s new mono-line financial guarantee insurer, Berkshire Hathaway Assurance Company was formed in Dec. 2007 and obtained AAA ratings and over $1 billion of capital by June 30. It is focused on the muni bond part of the financial guarantee sector and generated $520 million of consideration in the first 6 months of 2008. Berkshire Hathaway Primary Group. Declining underwriting gains in NICO Primary Group were more than offset by increases from MedPro and US Liability and the inclusion of USBoat (acquired in August 2007). The net impact was an increase in underwriting profit to $81 million in 2q’08 versus $63 million in 2q’07. The combined ratio was 83.8% in 2q’08. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 8
  9. 9. Quarterly Insurance Round-up: Second Quarter 2008 Liberty Mutual Group ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 6,279 6,256 5,579 5,795 5,477 5,687 4,815 5,159 Chg in NPW 14.6% 10.0% 15.9% 12.3% 2.5% 7.1% 8.2% 13.5% Combined 101.9% 100.7% 101.0% 99.0% 100.1% 101.1% 98.1% 98.0% ratio Net income 300 360 425 404 339 350 455 556 Shareholders' 12,265 12,434 12,366 12,055 11,228 11,318 10,895 10,006 equity ROE 9.7% 11.6% 13.9% 13.9% 12.0% 12.6% 17.4% 23.7% Notes • Safeco acquisition expected to generate • Catastrophe losses in Personal Markets continued growth added to the combined ratio • Slight drop in shareholders’ equity due to • Rating agency pressures unrealized investment losses Liberty Mutual is growing at a strong clip mostly due to acquisitions. Net premiums written rose 14.6% in second quarter 2008 versus the same quarter in 2007, reflecting the acquisition of Ohio Casualty in third quarter 2007, though there was organic growth too. The recently announced acquisition of Safeco Corp. would help Liberty Mutual grow even more if it closes as expected in the third quarter. Currently ranked 6th in the U.S. P/C market by net premiums written, the company should easily move up to 4th by the end of 2008. In response to the announcement of the Safeco acquisition, Standard & Poor’s put Liberty Mutual on CreditWatch Negative, Moody’s changed the rating outlook to negative from stable, and A.M. Best affirmed the rating with a stable outlook. Concerns cited by S&P were a potential significant decline in capital adequacy and uncertainties around the process of integrating Safeco. S&P and Liberty Mutual have announced they expect to meet to discuss these issues. S&P says the rating would likely be affirmed if its concerns are addressed and otherwise the rating could be lowered by one notch. The combined ratio rose to 101.9% in the second quarter of 2008 due to higher catastrophe losses. Catastrophe losses added 5.4 points to the combined ratio. The Personal Markets segment was most affected, with catastrophes contributing 13.9 points to the combined ratio. Excluding catastrophes and some slight favorable development on prior year reserves, the combined ratio would have been 98.0% in the quarter. Shareholder’s equity declined slightly since year-end 2007, as unrealized investment losses offset growth in retained earnings. The raising of $1.25 billion of junior subordinated notes in May to help finance the Safeco acquisition increased the company’s total capital and receives a high level of equity treatment from rating agencies. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 9
  10. 10. Quarterly Insurance Round-up: Second Quarter 2008 Progressive Corp. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 3,511 3,490 3,084 3,483 3,559 3,647 3,194 3,582 Chg in NPW -1.3% -4.3% -3.5% -2.7% -3.3% -0.8% -1.8% 0.7% Combined 93.6% 94.6% 95.0% 93.7% 92.3% 89.5% 87.7% 87.3% ratio Net income 216 239 236 299 284 364 401 410 Shareholders' 4,806 4,750 4,936 5,344 5,503 6,931 6,847 6,714 equity ROE 18.0% 19.8% 18.4% 22.1% 18.3% 21.1% 23.7% 24.9% Notes • Strong earnings • Modest losses from Midwest storm losses • Shareholders’ equity grew slightly, • Small 1% drop in net written premiums despite realized and unrealized investment losses Earnings in the second quarter were strong with a 93.6% combined ratio. This combined ratio includes about 2 points from catastrophe losses, as Progressive had modest losses from the Midwest storms. There were also higher losses in special lines (incl. motorcycle, boat and recreational vehicles) that added about 2 points to the personal lines combined ratio, but this reflects a normal seasonal increase in loss during the warm months. Net premiums written declined 1.3% in 2q’08 versus 2q’07, while policies in force (PIF) grew 1% in personal auto, 8% in special lines, and 4% in commercial auto. The opposite trends in NPW and PIF show some decline in average premium per policy, but this was partly offset by benign loss cost trends in the broader auto market that allowed profitability to remain strong. One reason that loss cost trends are down is the lower loss frequency due to the fact that Americans are driving less due to higher gas prices, though the sustainability of this trend is uncertain. Investments showed some weakness, as $41 million of write-downs were made for other than temporary declines in market value. There was also an increase in unrealized losses in the first half of the year of $692 million that put downward pressure on shareholders’ equity (though it did not flow through net income). Despite these issues, Progressive’s strong earnings allowed it to increase shareholders’ equity in the second quarter from the March 31, 2008 level, though it is still down slightly since Dec. 31, 2007. Third quarter could show some investment losses, as there were $406 million of mark-to-market net losses in July, thought the total impact could change materially by the time the quarter is finished. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 01
  11. 11. Quarterly Insurance Round-up: Second Quarter 2008 Hartford Financial Services Group, Inc. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 2,585 2,586 2,513 2,630 2,675 2,622 2,625 2,699 Chg in NPW -3.4% -1.4% -4.3% -2.6% -1.3% -0.3% 2.3% 3.1% Combined 95.8% 87.8% 91.1% 91.4% 91.7% 88.8% 88.9% 90.4% ratio Net income 543 145 595 851 627 876 783 758 Shareholders' 16,824 17,836 19,204 18,950 18,648 18,851 18,876 17,733 equity ROE 12.5% 3.1% 12.5% 18.1% 13.4% 18.6% 17.1% 18.3% Notes • Strong core earnings in life operations • P/C results remain strong despite higher than average catastrophe losses • Management maintained guidance for • Shareholders’ equity down 12% due to strong core earnings in 2008, but expects unrealized investment losses and share life DAC unlock charge to lower net repurchases income in 3q’08 Net income of $543 million in 2q’08 was down 13% from the same quarter in 2007, but was strong enough to produce a respectable 12% ROE. Total shareholders’ equity was down 12% in the first 6 months of 2008, as share repurchases and more than $2 billion of unrealized losses more than offset growth in retained earnings. Written premiums were flat to down moderately in all P/C segments in 2q’08 versus 2q’07. The 1% reduction in personal lines was largely due to non-renewals to help achieve the company’s planned reduction of Florida property exposure, while reductions in commercial lines were primarily related to competitive pressures and lower rates. The overall combined ratio of 95.8% was weakened by higher than average catastrophe losses but 1.5 points of favorable development on prior year reserves partially offset this weakness. Excluding catastrophes and prior year reserve development, the overall P/C combined ratio was strong at 90.7% and relatively stable compared to recent quarters. Life operations generated strong returns, as life core earnings grew 3% in 2q’08 versus 2q’07. A new variable annuity (VA) product was launched in May in the U.S., though difficult equity market conditions could make growth a challenge. In Japan, recent market conditions and increasing competition put downward pressure on VA deposits, though Hartford management remains committed to the Japan variable annuity market for the long-term. The company will complete its annual life DAC unlock in third quarter and estimates there could be an after-tax charge ranging from $330 to $640 million. However, the company believes it is well positioned to weather the current market, as it has a cushion of $1.5 billion above the requirements to maintain AA rating agency capitalization. Given its capital cushion, the Hartford was able to make common share repurchases, with $888 million of repurchases in the first half of 2008 and $129 million in July. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 11
  12. 12. Quarterly Insurance Round-up: Second Quarter 2008 Chubb Corp. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 3,047 2,936 3,009 2,938 3,058 2,867 2,974 2,994 Chg in NPW -0.4% 2.4% 1.2% -1.9% -0.7% -2.0% -4.0% -0.7% Combined 88.5% 83.9% 83.8% 81.6% 82.7% 83.4% 83.1% 85.5% ratio Net income 469 664 650 738 709 710 654 604 Shareholders' 14,133 14,347 14,445 14,248 13,818 13,873 13,863 13,562 equity ROE 13.2% 18.4% 18.1% 21.0% 20.5% 20.5% 19.1% 18.4% Notes • Strong quarter, though net income was • Management expects share repurchases down to continue in second half of 2008 • Non-U.S. growth offset 3% premium • Favorable prior year reserve development decline in U.S. resulted in about 8 points of combined • Moderate margin pressures from rate ratio improvement declines in commercial insurance Chubb’s earnings remained strong in the second quarter in the U.S. and outside the U.S. However, net income and ROE trended downward. U.S. storms in the quarter caused higher catastrophe losses, especially in the commercial Property & Marine insurance line. One large Surety loss also contributed to higher losses. Favorable reserve development caused a roughly 8 point improvement to the combined ratio. Chubb Personal Insurance (CPI) did very well in the quarter in both homeowners and personal auto lines. NPW grew 4% and the combined ratio was a solid 81.9%, which included 4.5 point of catastrophe losses. The catastrophe losses in CPI were modest when compared with the losses in the personal lines business at many other companies. Chubb Commercial Insurance (CCI) did well, but was not as strong due to rate pressures and catastrophe losses. Average renewal rates in the U.S. were down 6%. The second quarter combined ratio for CCI was 93.7%, with catastrophes accounting for 9.2 points. Commercial multi-peril did very well. Chubb Specialty Insurance (CSI) had a strong underwriting result, with an 89.3% combined ratio. NPW was down 4%. Second quarter renewal rates in the U.S. were down 3% for the professional liability part of CSI, but it still managed a solid 84.0% combined ratio. It was current quarter weakness in surety, due to one large loss that caused CSI’s combined ratio to weaken from 75.6% in the second quarter of 2007. Share repurchases continued in the second quarter, as Chubb repurchased $281 million of common shares, bringing the total amount repurchased in the first half of 2008 to $863 million. The company expects to continue share repurchases and complete its current repurchase authorization by about year end. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 21
  13. 13. Quarterly Insurance Round-up: Second Quarter 2008 CNA Financial ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 1,708 1,619 1,630 1,639 1,773 1,731 1,687 1,796 Chg in NPW -3.7% -6.5% -3.4% -8.7% -0.8% -1.5% 1.9% 5.9% Combined 109.2% 107.5% 111.2% 110.5% 105.2% 104.5% 111.3% 103.4% ratio Net income 181 187 164 174 217 296 329 311 Shareholders' 9,346 9,360 10,150 10,115 10,011 10,139 9,768 9,329 equity ROE 7.7% 7.7% 6.5% 6.9% 8.6% 11.9% 13.8% 13.6% Notes • Non-core operations contributed to • Slightly declining premium and rising weaker than average underwriting results combined ratio trends mirror the overall commercial lines sector • Minimal volatility from recent • Stable loss costs – favorable frequency catastrophes and benign severity trends Mirroring broader trends in its commercial insurance niche, CNA’s net income declined 17% in 2q’08 versus 2q’08, and property/casualty net written premiums declined 4%. Factors contributing to the earnings decline were lower net investment income, decreased current accident year underwriting profits, and higher catastrophe losses. Competitive pressures and rate reductions of 4% to 6% in its major P/C segments were factors contributing to the premium decline. Compared to insurers writing large amounts of homeowners or other property coverage, CNA had minimal volatility from property catastrophe activity (contributing only 2.9 points to the combined ratio.) It is the non-catastrophe underwriting results that continue to be the company’s weakness and the main factor behind CNA’s weaker than average ROE of 7.7% and combined ratio of 109.2% in 2q’08. Note that the combined ratio was 97.7% in Property & Casualty Operations, with the overall combined ratio being higher due to P/C business written in Life & Group Non-Core and Corporate & Other Non- Core, including CNA Re and asbestos and environmental pollution exposures. The specialty lines segment remained the strongest contributor to earnings and standard lines was second. In terms of net premium volume, these segments are about the same in size, but specialty lines produced higher underwriting profits with a combined ratio of 92.9% versus 103.2% for standard lines. Overall, the loss cost environment was relatively stable. Loss frequency trends have been favorable and loss severity trends have been moderate. The company is currently focusing on building a foundation of financial strength, disciplined underwriting, and pro-active expense management. Share repurchases in the first half of 2008 were $70 million. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 31
  14. 14. Quarterly Insurance Round-up: Second Quarter 2008 Safeco Corp. ($millions) 2q'08 1q'08 4q'07 3q'07 2q'07 1q'07 4q'06 3q'06 P/C NPW 1,428 1,361 1,337 1,448 1,466 1,390 1,338 1,426 Chg in NPW -2.5% -2.1% -0.1% 1.5% 0.4% -2.0% -3.2% -3.8% Combined 94.0% 93.0% 93.6% 92.5% 89.7% 89.8% 87.2% 88.7% ratio Net income 150 142 145 194 186 183 216 256 Shareholders' 3,385 3,332 3,393 3,689 4,015 4,084 3,928 4,270 equity ROE 17.8% 16.9% 16.3% 20.2% 18.4% 18.2% 21.1% 24.9% Notes • acquisition by Liberty Mutual at 1.8 times • earnings remained strong but weakened book value was approved by Safeco somewhat by catastrophes shareholders • Rating agency pressure due to pending acquisition Earnings remained strong in 2q’08, despite a drop of nearly 20% in net income from 2q’07 that was primarily attributable to higher catastrophe losses. Surety and auto were the bright spots, with very strong and improved profitability. While catastrophes affected several segments, the impact was most significant for the property business within the Safeco Personal Insurance (SPI) segment. Safeco Business Insurance (SBI) was also weaker, due to lower favorable reserve development on prior years and higher catastrophe losses. Net premiums written were down 2.5% in 2q’08 versus 2q’07, mainly due to lower premiums in personal auto and business insurance, partly offset by premium growth in surety and SPI property. Despite lower premium and policies in force in personal auto, profitability in this segment improved significantly, reflecting the company’s disciplined approach to underwriting and pricing. The merger between Safeco and Liberty Mutual (described in further detail earlier in this report) was approved by Safeco shareholders on July 29. Liberty Mutual agreed to acquire the common stock of Safeco at $68.25 per share, which represents an 81% premium to Safeco’s book value per share. Safeco’s financial strength ratings were put on negative CreditWatch by S&P following the announcement of the Liberty Mutual transaction, since its rating could be equalized to Liberty Mutual’s, which is a notch lower. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 41
  15. 15. Quarterly Insurance Round-up: Second Quarter 2008 Appendix 1: Top 20 U.S. P/C insurers based on 2007 net premiums written Figures are in thousands of U.S. dollars Companies featured in this report are indicated with an asterisk (*). Rank Company 2007 U.S. NPW Market share 1 State Farm Group 47,930,317 10.7% * 2 American International Group, Inc 35,212,724 7.9% * 3 Allstate Insurance Group 26,387,474 5.9% * 4 Travelers Insurance Companies 20,411,528 4.6% * 5 Berkshire Hathaway 19,166,508 4.3% * 6 Liberty Mutual 17,199,325 3.9% 7 Nationwide Group 15,799,416 3.5% 8 Farmers Ins Group 14,341,912 3.2% * 9 Progressive Ins Group 13,773,877 3.1% * 10 Hartford Ins Group 10,437,288 2.3% * 11 Chubb Group 9,675,570 2.2% 12 USAA Group 8,708,947 2.0% * 13 CNA Insurance Cos 7,037,943 1.6% 14 American Family Ins Group 5,952,765 1.3% 15 Zurich Financial Services NA Group 5,865,039 1.3% * 16 Safeco Ins Cos 5,656,145 1.3% 17 Allianz of America 5,032,643 1.1% 18 W.R. Berkley Group 4,362,912 1.0% 19 Auto-Owners Ins Group 4,321,829 1.0% 20 Ace INA Group 4,044,760 0.9% Total of top 10 GAAP filers 164,958,382 37.0% Total of top 20 281,318,922 63.1% Total U.S. P/C Industry 445,990,307 100.0% Source: A.M. Best .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 51
  16. 16. Quarterly Insurance Round-up: Second Quarter 2008 Appendix 2: Share repurchases in first half of 2008 Company Amount of shares repurchased ($ millions) 1 AIG (5,431) Allstate 858 Travelers 1,750 Berkshire Hathaway 0 Liberty Mutual 0 Progressive 178 Hartford Financial Services 888 Chubb Corp 863 CNA Financial 70 Safeco 0 1 The negative figure for AIG represents net new issuance of stock, based on $7,343 million of new common equity and $1,912 million of share repurchases. Appendix 3: Second quarter 2008 combined ratios adjusted for catastrophe losses and prior year reserve development Company Combined ratio Points from Prior year Combined ratio catastrophes favorable / excl. catastrophes (unfavorable) & prior year development development AIG 97.7 (0.6) (0.8) 96.3 Allstate 94.4 (10.3) 0 84.1 Travelers 89.3 (6.6) 9.8 92.5 Berkshire Hathaway 91.0 Liberty Mutual 101.9 (5.4) 1.5 98.0 Progressive 93.6 (1.7) (0.2) 91.7 Hartford Financial 95.8 (6.6) 1.5 90.7 Services Chubb Corp 88.5 (5.4) 8 (approx.) 91.1 CNA Financial2 97.7 (2.9) 0.8 95.6 Safeco 94.0 (4.8) 3.2 92.4 2 Figures for CNA are for Property & Casualty Operations only and exclude non-core and run-off exposures. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 61
  17. 17. Quarterly Insurance Round-up: Second Quarter 2008 Jones Strategy Consulting, Inc is a consultancy focused on risk, finance and strategy, and management of these issues to enhance long-term growth and profitability. Serving insurance and reinsurance clients globally, Jones Strategy Consulting is based in the New York metropolitan area, and its website address is www.jonesstrategyconsulting.com. Jones Strategy Consulting, Inc provides this report for general information purposes only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance information only. Moreover, this document is not intended to recommend any particular product or service over another generally. The observations contained herein are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. Jones Strategy Consulting, Inc makes no representations or warranties, express or implied. The information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such. Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements. Jones Strategy Consulting, Inc undertakes no obligation to update or revise publicly any historical, current or forward-looking statements, whether as a result of new information, research, future events or otherwise. Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide. All such matters should be reviewed with your own qualified advisors in these areas. This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Jones Strategy Consulting, Inc, except that clients of Jones Strategy Consulting, Inc need not obtain such permission when using this report for their internal purposes. The trademark and service marks contained herein are the property of their respective owners. .cnI ,gnitlusnoC ygetartS senoJ 8002 © egaP 71

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