Barclays on U.S. Insurance: Midway through 3Q11 Earnings: P&C Market Improves; Life Concerns Overblown

October 31, 2011 2:34 PM EDT
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Barclays on U.S. Insurance: Midway through 3Q11 Earnings: P&C Market Improves; Life Concerns Overblown

Barclays analyst, Jay Gelb, said, "Results for the 3Q11 insurance earnings season so far have been better than anticipated for the life insurers despite volatile equity markets and low interest rates. Life insurance earnings so far are better than anticipated-the impact of sustained low interest rates appears manageable, and the impact of new DAC account rules varies by company. Meanwhile, earnings so far are lackluster for the P&C insurers due to elevated catastrophe losses. More important, the P&C commercial insurers and brokers are increasingly optimistic in their outlook for pricing. Primary commercial P&C prices are flat to up modestly and rates accelerated each month during 3Q11. As a result, we upgraded the P&C insurance sector a week ago to Positive."

"Among the P&C insurers, we view ACE Ltd (NYSE: ACE) and Arch Capital (Nasdaq: ACGL) as having the best potential to generate profitable growth in an improving environment. Chubb (NYSE: CB), Travelers (NYSE: TRV), and XL Capital (NYSE: XL) should also benefit. The insurance brokers are the best early-cycle P&C stocks because the benefits of improved prices should improve earnings and margins. Our top pick among the insurance brokers is Marsh & McLennan (NYSE: MMC)."

"...Of the life insurers quantifying the new DAC accounting change so far, the median impact to book value is expected to be 7%. In addition, PFG expects about a 5% impact to 2012 earnings while AFLAC (NYSE: AFL) and Ameriprise Financial (NYSE: AMP) expect no impact to future earnings. Separately, we are reducing or 2012 EPS estimate for MetLife (NYSE: MET) by $0.20 because of the impact of low interest rates, and we are lowering our 2012 EPS outlook for Principal Financial (NYSE: PFG) by $0.15 due to the change in DAC accounting."

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