Commercial insurers’ stocks reflect 4th quarter profits, calm storm season

January 29, 2007

Stock Prices:
Commercial insurers breathed a sigh of relief in the fourth quarter as the 2006 hurricane season officially ended with only minor losses, a dramatic contrast from a year ago. Insurers’ stock prices reflected the calm hurricane season, benefiting from profits particularly on business in catastrophic areas that had experienced large rate increases after the devastation caused by hurricanes in 2005. St. Paul Travelers (NYSE:STA) led the way in stock price performance during the fourth quarter, up 15 percent, and for the full year of 2006, up 23 percent. Through the third quarter of 2006, St. Paul Travelers reported net income of approximately $3 billion, compared to $1.4 billion for the same period a year ago. ACE Ltd. (NYSE:ACE) also had strong stock price results, up 11 percent, CNA Financial Corp. (NYSE:CNA), up 12 percent, and Ohio Casualty Corp. (Nasdaq:OCAS), up 16 percent during the fourth quarter of 2006. In contrast, Cincinnati Financial Corp. (NYSE:CINF) experienced the smallest gain in stock price for the fourth quarter and year among commercial insurers. Their stock traded down 5 percent in the fourth quarter and was up a slight 4 percent for the year. Although Cincinnati Financial does not have as much coastal exposure as other commercial insurers, the company was affected by storms in the Midwest, including a hail storm in April. Another storm in October caused heavy hail damage in central Ohio, resulting in approximately $35 million of losses for policyholders. The company is expected to report a record year for catastrophe losses in 2006.

M&A Activity:
Only a handful of deals that involved commercial insurers were announced during the fourth quarter. The largest occurred on Dec. 13 when QBE Insurance Group Ltd. agreed to acquire Praetorian Financial Group from Hannover Re for $800 million. Praetorian will add almost $1.4 billion in gross premium income on an annualized basis. The portfolios acquired are complementary to QBE’s existing business in the United States. The acquisition will be funded from internal excess capital and short-term debt. Praetorian is based in New York and writes specialist property and casualty insurance programs through various managing agents (78 percent) and specialty retail agency business through brokers (22 percent). Praetorian was created by Hannover Reinsurance Group in 2005 to selectively renew specialty program business from its U.S. subsidiary, Clarendon Insurance Group. The combined operating ratio for the business written into Praetorian for 2005 was 81.7 percent and the projected combined operating ratio for 2006 is 78.1 percent. Praetorian currently reinsures 50 percent of its business through quota share agreements to Hannover Re and its affiliates. QBE intends to cancel these reinsurance arrangements at closing and inject approximately $200 million of additional capital into Praetorian.

Capital Raising:
Approximately $1.6 billion of new capital was raised by commercial insurers during the fourth quarter of 2006. First Mercury Financial Corp. (NYSE:FMR) announced the completion of its initial public offering of 11,161,764 shares of common stock at a price of $17 per share, which includes the exercise in full of the underwriters’ option to purchase 1,455,822 shares of common stock. The net offering proceeds to the company were approximately $174 million. First Mercury offers products in the specialty commercial insurance market in the United States.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. Services include highly-qualified, industry-specific advisory relating to mergers and acquisitions, capital raises and valuations. Contact: 704-943-2600, by e-mail at Info@LMCCapital.com or visit www.LMCCapital.com.