Rates above loss costs & margin expansion: Chubb CEO Greenberg

It’s always worth a look at Evan Greenberg’s comments when it comes to quarterly reporting from global insurance and reinsurance giant Chubb and the latest reporting yesterday holds a wealth of insight into factors that can help to make ILS returns increasingly attractive.

We don’t mean the returns ILS funds generate from any business Chubb cedes to them through its reinsurance program.

Instead we are referring to how the market dynamics that Chubb is experiencing will flow through the market, ultimately to the benefit of reinsurance and ILS fund capacity providers.

The first factor of note is that Chubb grew its reinsurance premiums underwritten by 14.4% in the fourth-quarter of 2020, as the company took advantage of market conditions through its Chubb Tempest Re division.

For full-year 2020 the growth was also significant in reinsurance for Chubb, as the company underwrote $731 million of premiums, up 12.6% across the year.

Chubb’s reinsurance combined ratios were higher though, meaning that any third-party capital providers backing its reinsurance business may have taken a share, with a 99.6% combined ratio reported for Q4 2020, on the back of catastrophe loss activity, and 92.5% for the full-year.

Chubb seemingly received some reinsurance benefits during the fourth-quarter of the year, as its net reinsurance recoverable on losses and loss expenses actually fell in Q4 (from the $15.67bn it reported at the end of Q3, to $15.59bn), despite elevated losses being experienced.

This could have been down to recoveries made after the elevated losses experienced in Q3, we suspect although cannot confirm.

Q4 2020 catastrophe losses were reported by Chubb as being $314 million before tax, actually lower than the prior year and much lower than Q3’s $925 million.

But, aside from the reinsurance market and results, Chubb’s commentary on rates is perhaps most important, as CEO Evan Greenberg said that rates are now exceeding loss costs in most areas of the commercial insurance market.

Chubb reported that commercial P&C rate increases seen in Q4 2020 averaged 16.5% in North America Insurance and 18.5% in Overseas General Insurance, which exceeded loss cost trends by 11.5 percentage points and 15.5 percentage points, respectively.

This is important, as it suggests pricing getting towards levels where sustainable performance can be expected and these trends are feeding through to reinsurance and ILS capital via quota share and proportional arrangements, but also increasingly through excess of loss contracts as well.

Evan Greenberg cited “continued underwriting margin improvement and double-digit commercial lines premium growth globally,” in the quarter.

“The margin improvement in our combined ratio was a result of both expense and loss ratio improvements that were broad based. Virtually all of our commercial P&C lines of business are achieving rates that exceed loss costs,” he explained.

He said that Chubb sought to capitalise on the “strong and continuously improving pricing environment in most regions of the world.”

Leading him to state that, “In fact, the pricing environment was the strongest we’ve seen since rates in certain classes began to rise about three years ago.”

Adding, “I expect the favorable underwriting conditions to continue.”

This kind of bullish commentary and outlook does bode well for the ability of the reinsurance market to sustain firmer pricing for longer this time around.

As if reinsurance began to soften again, for any reason such as more capital flowing in, it seems unlikely primary business would follow suit, given the momentum now underway.

If it did, soften, you’d end up in a situation where reinsurance capital was so much cheaper than primary risk capital, that arbitrage might become an option and appetites to use more reinsurance capacity as growth capital might increase.

Which could be interesting and deliver more opportunities to deploy more capacity. But longer-term may not help the industry achieve a sustainable baseline, in terms of rates.

Right now, it seems achieving rate increases above loss costs will continue for the likes of Chubb, helping them to absorb elevated frequency weather and catastrophe losses, when that occurs, and to deliver stronger shareholder profits over the coming year.

This is what drives expanding margins, which as we regularly explain should be factored into the pricing.

As we regularly explain, the reinsurance (and ILS) market needs to establish new baselines for pricing across the longer-term, at levels that preserve profitability and cover the sector’s loss costs, cost-of-capital, expense and provide for the ability to generate margin.

Chubb appears to be getting to those levels of rate. Of course the company has many levers in its strategy that provide for efficiency as well, which is where the ability to compete on rate can also be accentuated, by being more efficient and effective than your competition.

Greenberg commented during Chubb’s earnings call yesterday, “Looking forward, we are off to a very good start to the year in the first-quarter, both growth and the level of rate increase we are achieving look a lot like the fourth-quarter.

“Based on everything we see, the current commercial market conditions has legs. My colleagues and I are confident in our ability to grow our business and continue to expand margins.”

Going forwards, should primary and reinsurance pricing diverge it could make for interesting discussions come the next renewals, as reinsurance and ILS markets will be expecting at least to see their layer of the market attempt to keep pace with rate acceleration in primary lines.