Property and casualty insurance stock investors need to focus on the industry's improving fundamentals, heading into a weak fourth-quarter earnings season.
Prior to Sandy's catastrophic arrival, Insurance Information Institute president and economist Robert Hartwig said that insured catastrophe losses were "down somewhere in the order of 50 percent" from the previous year. Factoring in an estimated $25 billion in insured losses from Sandy, Hartwig now estimates that insured losses during 2012 in the United States totaled $57.9 billion, increasing from $35.9 billion in 2011.
The 2012 loss estimate is "far above the 2000 to 2011 average loss of $27 billion (in 2012 dollars), according to the Insurance Information Institute.
Despite the "year-end surprise" from Sandy, Hartwig estimated that the combined property and casualty insurers had a combined ratio of 100 percent for 2012, improving from 106.4 percent in 2011. The combined ratio is the sum of incurred losses and expenses divided by earned premiums. It measures underwriting profitability, and a combined ratio of over 100 percent indicates an underwriting loss. An improved combined ratio for 2012, despite having such an unusual hurricane hit the Northeast, is a good sign for improved underwriting profit margins.
JPMorgan analyst Matthew Heimermann said in a report on Jan. 7 that "headline numbers should be anemic with a number of companies reporting operating losses," but that the loss numbers related to Sandy "may simply focus investors on underlying trends."
The positive trends for the industry, according to Heimermann, include: "(1) rate increases that are higher than year-ago levels and at least as good as 3Q; (2) favorable reserve development as loss trends remain favorable in aggregate despite some normalization; and (3) improved underlying margins relative to a year ago and 3Q (adjusting for seasonality)."
"The one risk we see in 4Q is that we expect those companies that provide 2013 guidance to err on the cautious side," Heimermann said. "This does not reflect any change in the outlook, but similar to the start of 2012, managements may choose to assume "normal" loss trend in contrast to the still favorable trend the industry experienced in 2012 (at least for commercial lines)."
The following are brief earnings previews for five major property and casualty insurers, ranked by descending forward price-to-earnings ratio:
Shares of Berkshire Hathaway closed at $77.97 Monday, trading for 14.4 times the consensus 2013 earnings estimate of $5.43, among analysts polled by Thomson Reuters. The consensus 2014 earnings per share estimate is $5.83.
Berkshire's Class B shares were up 4 percent year-to-date through Monday's close, after returning 11 percent during 2012.
The consensus fourth-quarter earnings estimate for the Class B shares is $1.13, declining from $1.37 in the third quarter, but increasing from $1.08 in the fourth quarter of 2011.
Unlike several other companies with a major property and casualty presence in the Northeast, Berkshire Hathaway has not announced a loss estimate from Hurricane Sandy. Of course, the company is involved in other businesses besides insurance, but insurance revenues made up 77 percent of total revenue during the first three quarters of 2012.
During 2011, the company's pre-tax underwriting gain for its combined insurance businesses was $248 million. For the first three quarters of 2012, Berkshire's combined underwriting gain for its property and casualty insurance business was $354 million.
Shares of Chubb closed at $77.97 Monday, trading for 12.5 times the consensus 2013 earnings per share estimate of $6.25. The consensus 2014 earnings per share estimate is $6.64.
The shares returned 11 percent during 2012.
Based on a quarterly payout of 41 cents, the shares have a dividend yield of 1.64 percent.
Chubb plans to announce its fourth-quarter results on Jan. 31, after the market close. The company on Dec. 11 announced that it had estimated that its losses from Hurricane Sandy would be $880 million, or $570 million after taxes. The losses are expected to lower the company's earnings by $2.14 a share.
When announcing the loss estimate, Chubb said it was suspending its share buyback program, but that it expected repurchases to resume, although it no longer expected "to complete repurchases under its current $1.2 billion authorization by the end of January 2013 as previously contemplated." The company also expects to announce an additional buyback program after it announces its fourth-quarter results.
For the first three quarters of 2012, Chubb's underwriting income totaled $880 million. During 2011, underwriting income totaled $574 million.
The consensus estimate for the fourth quarter is for the company to report a net loss of 45 cents a share, compared to earnings per share of $1.98 in the third quarter and $1.63 in the fourth quarter of 2011.
Shares of The Travelers Companies closed at $74.95 Monday, trading for 10.9 times the consensus 2013 earnings per share estimate of $6.85. The consensus 2014 earnings per share estimate is $7.06.
The shares returned 25 percent during 2012.
Based on a quarterly payout of 46 cents, the shares have a dividend yield of 2.45 percent.
Travelers on Dec. 5 announced that its preliminary estimate of losses related to Sandy was $1.135 billion, net of reinsurance. The after-tax loss estimate was $650 million. The company is scheduled announce its fourth-quarter results on Jan. 22, with a consensus earnings estimate of seven cents a share, compared to earnings per share of $2.22 during the third quarter, and $1.48 during the fourth quarter of 2011.
The company on Dec. 5 also said it intended to resume repurchasing common shares, which it had suspended temporarily after Sandy hit.
For the first three quarters of 2012, Travelers reported an underwriting profit of $845 million. For 2011, the company reported an underwriting loss of $745 million.
Shares of American International Group closed at $35.05 Monday, trading for 10 times the consensus 2013 earnings per share estimate of $3.51. The consensus 2014 earnings per share estimate is $3.95.
Of course, the AIG story has been dominated by the aftermath of the massive bailout the company received in 2008 and 2009 — a story that is now over, as the government in December completed its sale of common shares it held in the company. AIG's stock buybacks from the government during 2012 were a major factor in the 52-percent return for its stock.
But the company also has multiple insurance businesses to run. The company on Dec. 7 announced that its preliminary estimate of losses from Sandy was $2.0 billion, net of reinsurance, or $1.3 billion, after tax.
During the first three quarters of 2012, AIG reported an underwriting an underwriting loss of $838 million for its Property Casualty unit. During 2011, the underwriting loss for AIG's Chartis unit was $3.2 billion.
The consensus fourth-quarter estimate is for AIG to report a loss of 9 cents a share, compared to a profit of a dollar a share the previous quarter, and earnings of 82 cents a share in the fourth quarter of 2011.
Wells Fargo analyst John Hall on Thursday downgraded AIG to a "market perform" rating from "outperform," saying that "while we believe that AIG shares remain attractively priced, we are less optimistic about the emergence of near-term catalysts to push the shares higher in 2013."
"Looking ahead, we see the opportunity associated with AIG shares linked to the company's capacity to improve its property-casualty results," Hall said. "These efforts include re-underwriting, re-pricing, re-tooling claims administration and reallocating capital to consumer lines. Over time, we expect AIG to be successful although we are not projecting a substantial P&C improvement over the next year."
Hall estimates that AIG will 86 cents a share in 2013.
Shares of Allstate closed at $42.93 Monday, trading for 9.5 times the consensus 2013 earnings per share estimate of $4.53. The consensus 2014 EPS estimate is $4.88.
The shares returned 50 percent during 2012.
Based on a quarterly payout of 22 cents, the shares have a dividend yield of 2.05 percent.
Allstate announced on Nov. 28 estimated that its losses for October, net of reinsurance, totaled $1.1 billion before taxes. The company said that "autos represent approximately 40 percent of the total gross losses, with 78 percent in New York, 19 percent in New Jersey and 3 percent in other states."
For its property-liability unit, Allstate reported underwriting income of $1.316 billion for the first three quarters of 2012. During 2011, the unit had an underwriting loss of $874 million.
The company will announce its fourth-quarter results on Feb. 7, with analysts expecting a loss of 7 cents a share, compared to a profit of $1.46 a share the previous quarter, and earnings per share of $1.48 during the fourth quarter of 2011.
Allstate on Dec. 17 announced that its board of directors had "approved a share repurchase program of up to $1 billion to be funded by issuing a like amount of subordinated debentures," after its previous buyback program was completed.
Following the company's announcement, Credit Suisse analyst Michael Zaremski reiterated his "outperform" rating for Allstate, with a $42 price target, saying he expected the company's board of directors to approve an additional $1 billion worth of stock (equal to 5 percent of shares outstanding at today's stock price [on Dec. 1]) via the issuance of a like amount of hybrid debt."
Zaremski estimates that Allstate will earn $4.35 a share in 2013 with earnings per share rising to $4.72 in 2014.
—By TheStreet.com's Philip van Doorn
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