But analysts who tear apart the kinds of numbers presented on our charts for a living werent content to stop at such obvious interpretations of results on investor conference calls or during interviews with National Underwriter.

“Wheres the beef?” one asked Chubbs Dean OHare on the companys conference call, after the retiring chairman got through touting what he said were “sensational” results on the companys standard commercial book, which grew 41 percent and showed a 17.7-point combined ratio improvement.

Noting that a much lower level of catastrophe losses had benefited Chubbs results in the quarter, the analyst said Chubbs operating earnings per share were actually flat when catastrophe losses were excluded. He pressed the CEO to explain what rewards the company had actually reaped from price hikes dating back to fourth-quarter 1998.

“At the moment,” investment income is “going no place,” Mr. OHare pointed out in an effort to explain why the earnings-per-share results lagged the growth in premiums.

With his remark, he echoed the sentiments of analysts Alain Karaoglan of Deutsche Bank and Todd Bault of Sanford Bernstein, both based in New York, who pointed to investment income (basically, interest on bonds and stock dividends) as the most obvious disconnect between underwriting indicators and net income numbersboth for Chubb, individually, and for the industry as a whole.

For some companies, investment income was actually lower than it was last year “because yields were so low,” Mr. Bault said. But levels are beginning to improve, because underwriting cash flow is finally better, he said.

However, commenting on the overall psychological impact of lower investment income, Mr. Karaoglan said: “If we think about that, its beneficial. Because insurance companies only have two sources of income–from underwriting and investments,” suggesting that the need to produce underwriting profits is increased in a low-yield environment.

Mr. Bault commented on the psychology beneath key indicators of underwriting profit, noting that higher-than-expected combined ratios demonstrate a level of conservatism that bodes well for a sustained hard market.

“Six months ago, people might have thought things would have been even better by the second quarter,” he said. “If you think about the amounts by which premiums have increased [and] if you listen to the companies [saying] that almost all of it is rate change, [then] actuarially speaking, that ought to have improved the combined ratios quite a lot,” he said. “Yet if you look at the combined ratios, youll see that [companies] are not dropping 20 percent price increases into these combined ratios.”

Instead, he said, they are still strengthening past-year reserves, “and I think theyre being very cautious on current reserves.”

Asked about Chubb specifically, which reported only a one-point improvement in its overall combined ratio (excluding catastrophes), Mr. Karaoglan said the Warren, N.J.-based insurer is historically very well reserved and that, as time passes, the company releases reserves. This year, reserve releases were much lower than last year, he noted.

In addition, he said, companies arent factoring price increases into initial loss ratio assumptions used to set reserves. Giving a hypothetical example, he said a company might book reserves for directors and officers insurance, initially, at a 95 loss ratio and start taking them down when actual losses indicated a ratio of 35.

“Even though theyre getting 100 percent rate increases, theyre still booking at the 95,” he said. “Price increases have not flowed through to income.”

But underwriting improvements “are real,” he added. “No matter what, I know that margins are going to improve industrywide, completely independent of the economy.” His confidence exists, he said, “because of price increases. They are very significant and well above loss-cost increases,” reflecting very serious management intentions to return to underwriting profitability.

Although results for some insurers were significantly impacted by unusual items, the two analysts werent shaken by asbestos issues that damaged results for The St. Paul Companies, or by revisions of World Trade Center estimates, like a $200 million pre-tax adjustment announced by XL Capital. (St. Paul also increased healthcare reserves $100 million, while The Hartford Financial Services Group announced a reclassification of $540 million of reserves to asbestos.)

“I dont think were done with asbestos charges. Theyre not completely over,” Mr. Karaoglan said. “I have never thought that the industry is adequately reserved for asbestos.” But “its important to understand that even if asbestos reserves tripled, the impact on book value is anywhere between zero and 10 percent for most companies,” he added.

Mr. Bault pointed to XLs Sept. 11 loss estimate revision as just another manifestation of industry conservatism.

“XL even said that while the claims theyre getting, particularly business interruption claims, are bigger than anticipated, many of the claims look excessive,” Mr. Bault said. “If they honestly believe the claims are padded, and they believe they can win that argument, then their reserves will be redundant,” he added, noting that XL said it decided to put up a number that corresponds to “what the claims are coming in at” anyway.

“The fact that companies are deciding, in various cases, to make the decision that theyre going to be cautious, says something about their stance towards this market. Its all very disciplined right now,” he said. “Im not sure I would have held that view six months ago. Companies are erring on the side of being conservative, instead of on the side of showing you more earnings.”

For one category of business, several companies were forced by accounting rules to be more conservative than they may have wanted to be. ACE Ltd., Chubb, and XL each had to record “mark-to-market” accounting adjustments for their participation in the credit default swaps market–a market in which insurers agree to provide protection to financial institutions or other third parties from losses from defaults on pools of loans or debt obligations.

Pointing out that insurer participation in this market is similar to providing high layers of excess-of-loss coverage, thereby making the possibility that Chubb and others would actually have to pay any losses remote, Mr. OHare called the accounting charge “meaningless” and “stupid.”

Mr. Karaoglan said he was confident that such charges would be reversed in subsequent quarters as the contract expired without loss payments being made. Still, “what you always worry about is that insurers didnt think about” or thoroughly understand the risks they were taking in these unfamiliar lines, he said.

Alice Schroeder, an analyst with Morgan Stanley in New York, expressed more concerns in an Aug. 8 research report. Comparing companies that write large amounts of credit insurance to those that take on a lot of property-catastrophe risk, she said that while hurricanes and earthquakes are geographically limited, “credit problemsdont necessarily discriminate among industries or underlying credit quality, and can have a chain reaction.”

“Globally, credit markets are fundamentally linked,” she wrote, going on to highlight concerns about whether insurers are tracking the aggregations of risk that exist in credit insurance and bond portfolios, as well as aggregations with other types of insurance, such as D&O.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 19, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.