Chubb CEO Calls Casualty Sidecar Money 'Very Naive Capacity,' Says Fronting Carriers May Hold 'The Trash'
Evan Greenberg said investor-backed capacity is throwing supply out of balance with demand as casualty pricing trails loss costs.
Chubb Chairman and CEO Evan Greenberg used the company's third-quarter earnings call on Wednesday to criticize investor money entering casualty insurance, saying sidecars, broker facilities and MGAs are throwing supply out of balance with demand. "It's a lot of very naive capacity," he said, as North America commercial premiums fell 2.7% in the quarter.
What Greenberg said about the new capital
Asked by a UBS analyst whether casualty sidecars and broker facilities are changing market conditions, Greenberg said supply and demand drive insurance cycles. He listed sidecars, broker facilities, blind-follow facilities and MGAs with capital behind them as forces unbalancing the two.
He described two kinds of investor. One, he said, is cleverly arranging to pass the tail to the carrier fronting the deal, "who's going to end up holding the trash." That investor, he added, "may make a turn."
The other kind, in his view, does not understand pricing against the loss-cost environment and will not make the turn it expects. He said cheap money chasing absolute rather than risk-adjusted returns has found its way into insurance as an alternative asset class, though the world is beginning to change.
A Raymond James analyst asked whether higher rates could push the industry toward cash-flow underwriting on long-tail casualty. Greenberg said only on the margin: "You're not cash flow underwriting at a 10% or 12% interest rate."
Pricing and the North America commercial drag
In his prepared remarks, Greenberg said competitive conditions are spreading beyond property to more casualty lines. Pricing in numerous areas is failing to keep pace with loss costs, which he said "continue to well outpace general inflation."
North America commercial premiums fell 2.7%. Non-renewals and extra reinsurance in large-account and E&S property and financial lines cut growth by about four and a half points. Total P&C premiums rose 1.9%.
Gross commercial pricing in North America was down 4.2% for property, up 5.7% for casualty and up 2.1% for financial lines. On the business Chubb actually wrote, Greenberg said property pricing was down 11% in major accounts and specialty, and up a little over half a percent in middle and small commercial.
He said he expects North America commercial growth to improve materially in future quarters, as headwinds diminish and middle and small commercial opportunities grow.
What to watch
A Wolfe Research analyst asked for the glide path, including how far Chubb is through its financial-lines and large-account property actions. Greenberg replied: "I gave as much as I'm going to give on that." The next quarterly call will show whether the promised improvement arrives.
Greenberg also told an Evercore ISI analyst he does not give margin guidance, and that observers should not "over obsess about North America commercial."
Sources
- Chubb (CB) Q3 Earnings and Revenues Surpass Estimates — Yahoo Finance
- Earnings Beat Might Change The Case For Investing In Chubb Stock (CB) — Yahoo Finance
- Chubb Q3 Net Income Down Slightly on More Catastrophe Losses — insurancejournal.com
- Chubb (CB) Posted Steady Third Quarter Results, Is The Stock Fully Priced? — Yahoo Finance
- Chubb Q3 earnings top consensus as net premiums written grow (CB:NYSE) | Seeking Alpha — seekingalpha.com
