PREVIEW-Premiums, bond rates in focus as insurers report

* Allstate Q3 Weds., MetLife Q3 Thurs.

* AIG, Berkshire Hathaway among those yet to come

* Catastrophe losses likely under control short-term

* Interest rates seen hurting net investment income

* Competition and rate pressure also in focus

By Ben Berkowitz

NEW YORK, Oct 25 (BestGrowthStock) – Insurers are under growing
pressure from two fronts, each of which promises to be a key
focus in earnings reports the next two weeks — depressed
interest rates that could dampen investment income in coming
years and tight markets that have put a lid on pricing power.

Analysts will be watching closely to see how the industry’s
top insurers handle both problems, either of which could be
enough to constrain earnings in coming quarters.

Allstate Corp (ALL.N: ) reports third-quarter results this
Wednesday, followed by MetLife Inc (MET.N: ) this Thursday.
Sometime next week or shortly thereafter, American
International Group Inc (AIG.N: ) and Berkshire Hathaway Inc
(BRKa.N: ) should come with their figures.

They follow Travelers Cos Inc (TRV.N: ) and Chubb Corp
(CB.N: ), which posted results last week. Travelers easily beat
expectations on lower catastrophe losses but warned that est
rates at current levels could slash investment income the next
three years. Chubb beat estimates but said competition in a
weak economy was keeping up the pressure on rates.
[ID:nN21266849] [ID:nN21112997]

“One of the key drivers for insurance companies is interest
rates and the interest rate environment we’re in now is
obviously detrimental to their investment returns,” said Craig
Fehr, a financial services analyst at Edward Jones who covers
Allstate.

“I think it’s about how you manage the premium growth side
of the equation,” he said.

RATES, PRICES DOWN

Interest rates on 10-year bonds have been sinking all year.
They currently stand around 2.5 percent, not far off the
multi-decade lows reached in late 2008 and early 2009.

Travelers said if it reinvested all of its maturities over
the next three years at current interest rates, by the end of
2013 net investment income would be some $162 million lower
than it is now. Through the first nine months of 2010, net
investment income was $597 million.

Brokerage Sandler O’Neill, in an earnings preview earlier
this month, said the insurers with the longest-duration
portfolios and highest leverage — generally life insurers —
stood to suffer the least.

A relatively smaller portion of most life insurers’
investment portfolios will mature in the next few years,
meaning the companies will likely have to reinvest a relatively
small amount of money at low yields, the analysts said.

The other issue is heavy competition at a time insurers
lack substantial pricing power, which means rates are likely to
stay fairly low.

Travelers was careful to say it would be able to grow
premiums “if and when” the economy improved.

FOUR INSURERS, FOUR ISSUES

Allstate, the largest U.S.-listed home and auto insurer, is
feeling pressure from high catastrophe losses and weakness in
homeowners’ policies. Analysts will be watching for signs it
has been able to boost premiums and turn the tide there.

MetLife, the biggest U.S. life insurer, has already said
the profit hit it could take from low interest rates would not
be material. That means investors will be able to focus more on
its pending acquisition of AIG’s foreign life business.

That sale will be important for AIG’s results, as will its
progress in repaying the U.S. government its massive $182.3
billion aid package. On an operating basis, analysts will be
looking for further signs of the underlying stabilization that
characterized AIG’s second-quarter results.

“I’m very interested in their operating results in a
relatively weak life insurance market,” said Aite Group analyst
Clark Troy of MetLife and AIG. “Life insurance demand hasn’t
been at historic highs.”

The other major name yet to report is Warren Buffett’s
Berkshire Hathaway. While Berkshire owns some 80 businesses,
insurance is its biggest, and operating profits soared last
quarter as strong underwriting profits offset falling
investment income. Investors will watch for the same.
(Reporting by Ben Berkowitz, editing by Gerald E. McCormick)

PREVIEW-Premiums, bond rates in focus as insurers report