Property Insurers Continue to Look Good, But for How Long?

(MoneyWatch)  Third quarter earnings continue to sizzle for the earliest reporting insurers, but the news isn't all optimistic. The mountain air seems to agree with Ace, which moved to Switzerland in 2008. Operating earnings were up 39 percent, topping $700 million.

But pressed by analysts on its earnings conference call, a somewhat different picture emerged. CEO Evan Greenberg, son of the legendary Hank Greenberg who once held that position at American International Group, presented a cautious outlook.

"The industry runs through cycles and the cycles haven't gone away," the younger Greenberg told analysts. "In booking 2008 and 2009 business, the industry was deficiently underpricing its products."

In plain terms, Evan Greenberg reiterated what most other smart insurers have already said. Companies supported by taxpayers, like AIG, can be more reckless in cutting the prices of the policies they offer and others will have to follow suit. This means the industry could be short of money if a disaster does happen.

Like other insurers, Ace is in the sweet spot, with catastrophe losses for the quarter almost negligible. It's even making money from as far back as 2005, when it overbooked the amount of reserves it would have to pay for that year's disasters like Hurricane Katrina.

But the same fears that haunt insurers like Chubb and Travelers also prey on Ace: premiums are falling as recession-ridden consumers, both business and retail, shop for price, and Evan Greenberg made it clear that he wouldn't do any across-the-board price cutting. "Pricing was better in July than in September," he said. Interest rates are also at rock bottom, making it difficult for insurers to grow their investments.

On another front, Arthur J. Gallagher & Co., generally considered the fourth largest insurance broker in the U.S., announced that it was cutting 4 percent of its workforce over the next few months due to concerns over a drop in revenue. CEO Patrick Gallagher Jr. said in a release that his firm, and the industry, "will face continued challenges in late 2009 and into next year."

But not everyone shares his pessimism. One of the oldest and wisest men in the insurance game, W. R. Berkley, reported third quarter income of nearly $100 million for the company that bears his name, compared to a year ago loss. He followed up by saying that while the industry currently operates at a loss (on an accident year basis), "a turn in the cycle is inevitable" over the next six to eight months.

So who do you believe? Well, the Insurance Information Institute put out its own study presenting both sides, and those willing to wade through the more than 100 pages will learn a lot. Basically it comes down to this: Is the recession over or not? If not, there's going to be a lot of unhappy CEOs reporting same time next year.