Rising Rates Not Enough to Offset Catastrophes

While primary U.S. property and casualty carriers are reporting favorable pricing trends — especially on commercial lines — pressure on other areas of the balance sheet will cancel out any benefit to the industry’s underlying profitability.

Third-quarter earnings from U.S. property/casualty insurers are pointing to rising rates as losses from Hurricane Irene and Tropical Storm Lee make their way into some of the largest regional U.S. markets

Along with those increased prices comes the promise of higher margins and growing profits: something that has eluded the sector for years.

“A year ago, after several years of declining commercial insurance pricing and low investment yields following the financial crisis, we increased our efforts to actively seek improved pricing for many of our insurance products to continue to create shareholder value by generating top tier returns on equity,” said Travelers CEO Jay Fishman in a third quarter earnings statement. “”We are very pleased with our progress to date. Overall, we have produced three sequential quarters of improving quarter over quarter renewal price gains. As a result of our accelerated efforts, renewal price gains in Business Insurance increased within the quarter.”

Travelers report $333 million in net income on Wednesday, down from $1.005 billion a year ago.

Chubb, which reported net income of $298 million for the quarter (down from $537 million a year ago), also said that increased prices could be counted on to add to the bottom line.

“We were pleased to see continued incremental rate improvement in the third quarter, especially in our U.S. standard commercial book, where renewal rates were up 4% on average year over year,” said Chubb CEO John D. Finnegan.

But rather the celebrate, analysts and industry watchers are cautioning that price increases alone will not translate into the carriers’ bottom line even if the trend continues into the next quarter or even next year.

One reason is that P/C carriers’ investment income has been declining or remained stagnant. Chubb’s P/C investment income rose modest $6 million year over year for the third quarter, and it has declined when comparing the nine-month return period. Travelers’ net investment income fell from $735 million in the third quarter of 2010 to $690 million this year.

Separately, catastrophe losses are pushing carriers’ combined ratios to even greater levels, making it more difficult to book new business profitably. Chubb’s combined ratio shot up to 102.6 percent in the third quarter of 2011 from 86.2 percent a year ago. Travelers’ combined ratio moved from 90.6 percent in 2010 to 104.5% in the latest reporting period.

Those combined forces, while not completely canceling out the positive impact of increased prices, will just make nearly impossible for investors to realize any benefit, according to a report by UBS Analyst Brian Meredith in a report.

“[Pricing] appears to be above loss cost inflation which if loss costs inflation remains at the current level should result in underlying margin expansion in 2012,” Meredith says. “That said, we do not anticipate any improvement in ROE’s as reserve releases diminish and investment yields.”

Chubb’s Finnegan admitted as much in his third-quarter statement, saying, “Rates will need to continue to increase to offset the negative impact on industry earnings attributable to the prolonged soft market, record level of catastrophe losses and significantly lower yields currently available on investments.”


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