Suffering continues with third quarter results
Following last week’s early-announcers, Bermudian and US (re)insurers are continuing to unveil third quarter figures badly damaged by the quartet of hurricanes hitting the Caribbean and Florida in September and October.
Boosted by strong investment returns, Bermuda’s second giant, XL Capital (ACE having booked a $3mn net loss), reported third quarter net income of $22.5mn on 1 November, equivalent to $0.16 a share, and down on the $99mn, or $0.71 a share booked in the corresponding period last year.
But excluding net realised gains and losses on investments and net realised and unrealised gains and losses on credit and investment derivative instruments, the company recorded a net loss of $15.4mn, compared to a profit of $124.1mn in the prior year period.
For the year-to-date, XL recorded record net income of $838.2mn, or $6.05 a share, and a 22 percent rise on the same period last year. But the figure excluding net realised gains and losses on investments and net realised and unrealised gains and losses on credit and investment derivative instruments was down 3 percent at $622.3mn, or $4.49 a share.
XL president and CEO Brian O’Hara commented: “In a quarter that witnessed unprecedented natural catastrophe activity, XL delivered solid underlying results. The combined ratio from our general operations, excluding hurricane-related losses, was 86.7 percent reflecting the strength of our underwriting discipline and the continued generally healthy market conditions.
“The combination of our global presence, diversified product expertise and ratings strength allows us to continue to see attractive market opportunities, although we have selectively reduced writings in certain lines where price competition has become aggressive.”
Including the impact of the hurricanes, the group’s overall combined ratio came in at 110.6 percent.
XL’s insurance operations took $188mn in hurricane losses, as well as $89mn in prior-period reserve strengthening for European excess professional lines, in recording an underwriting loss of $83.7mn.
The reinsurance operations fared little better, booking an underwriting loss of $78.3mn, driven by $258.7mn hurricane losses. The company pointed out that without hurricane losses adding 31.6 points, the division’s loss ratio would have come in at 52.1 percent, a historical low.
Net investment income for the third quarter was up by a third on the prior-year period to $253.1mn as invested assets grew year-on-year by 28.1 percent.
Net realised gains on investment were $57mn, compared to $8.7mn in the third quarter of 2003, and net unrealised gains on investments, after tax, were $488.6mn, compared to $158.6mn at the end of the second quarter.
Hamilton headquartered PXRE reported a $73.2mn net loss, compared to a $23.7mn profit in the third quarter of 2003, as the reinsurer booked a $105mn hurricane charge that took its underwriting loss to $74.7mn for the period.
The company’s refocus to providing property cat and retrocessional coverage in the last couple of years meant a third quarter loss ratio badly affected by the impact of the four hurricanes, as it reached a recorded 174.1 percent, compared with just 51 percent in the prior-year period. Also in the figure was an increased reserve for a pending lawsuit.
Loss ratio for the company’s core Catastrophe and Risk Excess segment was 151.4 percent.
Hurricane losses contributed 61 loss ratio points.
Net premiums written were up 61 percent to $112.6mn for the quarter, and net reinstatement premiums rose to $24.6mn from $0.9mn in the prior-year period. Even without reinstatement premiums, net written premium in the Catastrophe and Risk Excess segment would have increased 22 percent.
PXRE president and CEO Jeff Radke commented: “The third quarter was dominated by the effects of the four Florida hurricanes, which will likely result in the largest industry losses ever incurred in any single year. Despite this unusual frequency and severity, PXRE’s risk control limits our loss to approximately 40 percent of our annual catastrophe and risk excess premium, which compares favourably with the figures announced by most of our competitors.”
Radke also expects post-hurricane market conditions will create additional opportunities for the company.
“For 2005, we expect rate increases of 5 percent to 10 percent on our entire premium base. Specifically, by line of business, we expect rate increases of 10 percent to 15 percent in our worldwide retrocessional business, stable to single digit rate increases in our North American property catastrophe business and only moderate decreases in our International catastrophe business. In addition to these higher rates, we expect additional demand from our catastrophe and retrocessional customers,” said Radke.
And, on 4 November, the company announced a $100mn share offering, with net proceeds used to support the underwriting of new business it expects to be presented with during the forthcoming renewal period.
Endurance – one of the island’s fastest growing (re)insurers – managed quarterly net income of $26.8mn, despite booking $115mn in combined losses from the hurricanes. The profit, equivalent to $0.40 a share, was down from the $56.5mn, or $0.83 a share reported in the third quarter of 2003.
The performance took year-to-date profits to $242.5mn, or $3.58 a share, up from $174.5mn or $2.68 a share at the same stage last year.
In the company’s 27 October statement, chairman and CEO Kenneth LeStrange commented: “We are pleased that we have produced a profitable overall result for our shareholders this quarter, despite the magnitude of industry-wide catastrophe losses this hurricane season. Our strategy of portfolio diversification and disciplined risk management proved to be a particularly strong asset for Endurance this quarter. Excluding catastrophe related losses, all segments of our business performed extremely well. Given our strong performance to date, we expect to meet or exceed the upper end of our return on equity guidance for the full year of 2004 of 15.5 percent to 17.5 percent, assuming normal catastrophic losses in the fourth quarter.”
The reinsurer wrote $367.9mn gross premiums in the third quarter, a 13.2 percent increase on the prior year period, bringing the figure for total gross written premiums so far this year to $1.4bn, up from $1.3bn nine months into 2003.
The combined ratio for the quarter suffered the hurricane pain as it deteriorated to 103.0 percent from 88.5 percent in the third quarter of 2003. The loss ratio deteriorated from 59.2 percent to 75.3 percent, as the impact of the windstorm losses was partially mitigated by a positive reserve development of $50.9mn, significantly up from the $11.5mn released in the same quarter last year.
Post 9/11 powerhouse AXIS Capital beat analysts’ expectations with $6.3mn of net income for the quarter, compared to the $147mn profit reported in the corresponding period last year. Net income for the nine months to the end of September reached $313.1mn, down from $371.9mn at the same stage last year.
Excluding net realised gains and losses on investments, the after tax net income figure was $2.8mn for the quarter and $305.1mn for the year-to-date.
The quarterly profit, equivalent to 2 cents a share, compared to an analysts’ consensus loss projection of 18 cents a share.
AXIS president and CEO John Charman, who co-founded the company after departing ACE, commented: “AXIS has weathered the storms by producing a positive net income of $6.3mn for the third quarter of 2004.
“The investment community and many other parties have waited for major losses such as those that have occurred over the last three months to test the Bermuda class of 2001. I am therefore delighted to be able to report a profit for the quarter in spite of the now estimated $30-$40bn of damage caused by this season’s unprecedented number of hurricanes and typhoons.”
Gross premiums written for the quarter totalled $687.7mn, up from $633.9mn in the prior-year period, with the largest increase coming in its US insurance division, driven by greater market penetration.
Combined ratio for the quarter was a creditable 109.7 percent, in the face of $227.4mn net losses from the hurricane, and was partly aided by favourable prior-period reserve development of $49.6mn, equivalent to 9.5 percentage points.
Analysts from Morgan Stanley, who predicted a 25 cents a share loss for the quarter, put the difference down to significantly higher pre-tax underwriting income and investment income.
They also noted AXIS’ increased use of reinsurance, which “could have absorbed a meaningful portion of AXIS’ gross losses in the quarter”. The company’s reinsurance recoverables balance increased to $551mn from $246mn at the end of the second quarter, and $125mn at last year-end.
US insurer HCC Insurance Holdings reported net profits of $15.8mn for the third quarter, equivalent to 24 cents a share, and down from $36.4mn, or 54 cents a share. The quarterly result included net realised investment gains from selling fixed income securities of $2.6mn, or 4 cents a share.
Performance for the year-to-date was strong enough to produce record net income of $106.8mn, or $1.63 a share, up 15 percent from the $93.1mn, or $1.45 a share booked at the three-quarters stage last year.
HCC chairman and CEO Stephen Way commented: “Our core operations had a very strong performance during the quarter notwithstanding the effect of the unprecedented hurricane losses and we expect strong earnings growth to continue into 2005.”
Total revenue rose 31 percent to $322.2mn compared to the corresponding quarter of 2003, and was up 34 percent for the year-to-date to $917.5mn. Combined ratio for the first nine months of the year was 92.9 percent, a deterioration on the 88.8 percent at the same stage last year, but a figure that would have been 7.6 percent lower absent the hurricanes.
Net investment income was up 28 percent to $49.5mn on the first nine months of 2003, primarily as a result of investment assets increasing to $2.1bn from $1.7bn at the last year-end.
Way concluded: “Despite some rate softening, strong profit margins remain stable in our underwriting operations and we continue to be optimistic about 2005.”
US giant insurer The Hartford reported third quarter net income of $494mn, or $1.66 a share last Thursday (4 November), a 44 percent increase on the $343mn or $1.20 a share recorded for the comparable period last year.
The current third quarter result included $264mn after tax in catastrophe losses and related reinstatement reinsurance premiums, as well as a tax benefit of $216mn, and a previously announced $49mn after tax environmental reserves charge.
Chairman and CEO Ramani Ayer commented: “Our underlying property-casualty and life businesses each executed well during a quarter that included both significant catastrophe losses and tax benefits.”
Highlighting the 12 percent increase in ongoing business written by the group’s property-casualty unit, Ayer added: “The unparalleled series of hurricanes this quarter should not mask the sound business fundamentals that resulted in continued double-digit written premium growth, reaching nearly $2.6bn.”
Before the impact of the hurricanes, the company recorded a combined ratio in its ongoing business of 93.3 percent for the quarter, a two-point improvement over the third quarter of 2003.
“Spreads between earned pricing and loss costs remain favourable in most lines of business, even as pricing continued to moderate during the quarter. In lines such as large-risk property and professional liability, prices are declining,” Ayer suggested.
The Hartford’s life business appears to be particularly buoyant, with operating income for the sector up 38 percent to $306mn, before the tax benefit.
“These tremendous operating results were based on a new record in assets under management and strong earnings in group benefits. In addition to variable annuities, our other asset accumulation businesses continued to grow in assets under management. I’m pleased that Japan, 401(k) and mutual funds together generated net flows of $3bn in the quarter,” Ayer said.
Assets under management increased to $233bn in the third quarter, up 21 percent from the end of the third quarter 2003.
Warren Buffett’s investment conglomerate Berkshire Hathaway didn’t escape the impact of the hurricanes, as its (re)insurance operations booked a $215mn consolidated underwriting loss for the quarter, compared to a $260mn profit in the same quarter last year.
Overall net earnings at the company, excluding investment gains and losses, were $619mn, less than half the $1.35bn booked in the corresponding period last year.
The $215mn consolidated (re)insurance underwriting loss was largely as a result of the group’s $1.25bn gross loss figure from the hurricanes, although this total would have been reduced to a degree by reinstatement premiums before feeding through to the profit and loss.
According to analysts from Morgan Stanley, Berkshire Hathaway’s losses from large catastrophic events can range between 3 and 5 percent, with $1.25bn representing around 4 percent of the estimated $30bn industry loss.
Combined ratio in the (re)insurance operations came in at 106.1 percent for the quarter, compared to 92.3 percent in the prior-year period.
But if the figures are adjusted for retroactive contracts, catastrophes, commutations, prior period development, and the accretion of discounted reserves, the ratio drops to 80.1 percent, against a comparable 88.9 percent from the third quarter of 2003.
The division hit hardest by the hurricanes was Berkshire Re, which recorded an underwriting loss of $463mn, compared to a $248mn profit in the corresponding quarter of 2003.
According to Vinay Saqi, equity analyst at Morgan Stanley: “Growth in this segment appeared robust at the surface, but it is unclear how much of the premium growth in the catastrophe and individual risk segment was due to reinstatements or perhaps opportunistic business in light of the heavy storm season.”
He added that growth outside Berkshire Re’s catastrophe and individual risk segment was down, in part because of a decline in the company’s participation in quota share programs, including some at Lloyd’s.
General Re’s run of six quarterly underwriting profits also ran dry as the windstorms took their toll. The company took $255mn in hurricane losses, contributing to a $105mn underwriting loss in part mitigated by a $70mn pension benefit adjustment.
In its third quarter filing, the company commented: “Management expects written and earned premiums to decline over the remainder of 2004 when compared with 2003 volume, mostly due to maintaining underwriting discipline in an increasingly price-competitive property/casualty market.”
Saqi said he expects profits to improve at a “modest pace, assuming margins widen based on recent pricing decisions”.
Berkshire Hathaway’s auto insurer GEICO helped alleviate the damage as it posted close to a record quarterly underwriting profit. Combined ratio also improved, from 93.7 percent to 90 percent. The division also continued its sterling growth as it cements its place in the top five of US motor insurers, recording an 11 percent rise in policies in force quarter-on-quarter.