Chubb and Travelers Are the Best, but What About the Rest?

The reason why the best property casualty insurance companies report earnings first is the same reason the smartest pupils sit in the front of the class: they've done their homework and they're ready to answer questions. So it came as no surprise that Chubb was early out of the box to report that third quarter earnings had doubled, and Travelers announced the same day that profits had quadrupled.

Meanwhile in the back of the class - where kids are staring into space, texting on cell phones and counting on government bailouts - the scene is not so serene. They haven't been called upon to recite yet, but a gloomy longer-term picture emerges from what Chubb and Travelers already reported.

Profits are up, but due to the lack of hurricanes in the third quarter. Hurricanes Ike, Gustav and Dolly visited the mainland last year, adding more than $1 billion to Travelers' third quarter expenses. But this year, Tropical Storm Claudette was more polite and costs more negligible. That's an unlikely scenario when compared to 2005 when the industry saw almost $80 billion of hurricane damage.

Everyone's looking at the top line, that is, revenue. And there the picture is not so rosy. Insurance premiums, were down 3 percent at Travelers and 4.6 percent at Chubb (after currency translation). Chubb's top brass used words like "incremental" and "lumpy" to describe what premium growth would look like in the future, particularly when competitors like American International Group operate with government subsidies.

Both Conning Research & Consulting and Advisen Ltd. have said the same thing. Pricing in key lines of business like commercial insurance, where both Chubb and Travelers have big positions, is likely to be very competitive and may decrease.

Will insurers make money on investments? For many years, particularly in the go-go '90's, investments carried insurers who were underpricing their products. Travelers did well with its investments, gaining 3.4 percent this quarter, partly on the strength of its stake in hedge funds and private equity.

Chubb didn't do as well. Its investment income was down marginally. The company blamed it on low short-term interest rates.

So what's the bottom line? Chubb and Travelers will enjoy their current good fortune, but with no illusions that it will last through 2010. "The industry has a ways to go," said Chubb CEO John Finnegan on the conference call. "We will lag the economic recovery."

And will the successful insurers like Chubb and Travelers use that opportunity to scoop up the laggards at relatively cheap prices? Not likely. Travelers CEO Jay Fishman ruled out that idea when speaking with analysts on the conference call. "Obviously with the government stepping in, it took a robust environment (for mergers and acquisitions) and created a lifeline for companies," he said. "Our focus continues to be on what we can do internally."

So the kids in the back of the classroom will keep coming back, especially while the government supports them.