Chubb Beats Buffett After Mocking AIG: Riskless Return

Chubb Corp. (CB), which mocked rivals for receiving federal aid during the 2007-2009 financial crisis, is leading the largest publicly traded U.S. insurance firms by producing the highest risk-adjusted return.

Chubb climbed 1.52 percent in the five years through yesterday after adjusting for price swings, beating every stock in the 22-company Standard & Poor’s 500 Insurance Index, including Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), according to the BLOOMBERG RISKLESS RETURN RANKING. Fellow non-life insurers Travelers Cos. and Ace Ltd. (ACE) came in second and fourth, with gains of 0.92 percent and 0.75 percent, respectively. Aon Plc, a London-based broker, was third.

Property-casualty carriers tend to take less risk investing than other insurers because they need to have liquidity to pay claims after large-scale disasters. That strategy helped them sidestep investments in mortgage securities that hobbled American International Group Inc. (AIG) during the housing crash. Investment gains have bolstered the shares, while increasing rates for commercial coverage may improve margins.

“Slow, steady and consistent in the insurance industry is held at a premium,” Paul Newsome, an analyst at Sandler O’Neill & Partners LP, said in a phone interview. Chubb, Travelers and Ace “avoided a lot of the turmoil that hurt companies during the financial crisis” and “appear to be out front of most other companies in raising rates,” he said.

Commercial insurance rates rose 4 percent in June on an annual basis, extending gains that began last year, according to MarketScout data compiled by Bloomberg.

Mocking AIG

Travelers and Warren, New Jersey-based Chubb both increased prices by 8 percent in the first quarter at their units that sell coverage to U.S. businesses. Zurich-based Ace raised rates 3.6 percent in the U.S. in the period. Mark Greenberg, a spokesman for Chubb, New York-based Travelers’ Shane Boyd and Ace’s Stephen Wasdick declined to comment.

Chubb produced the highest total return over the five years, gaining 54 percent, and had the fourth-lowest volatility. The company remained profitable throughout the financial crisis as AIG posted losses and received a U.S. government bailout that left it majority-owned by the Treasury Department. Selena Morris, an AIG spokeswoman, declined to comment.

“If consumers are unlikely to buy a car built by the government, why on earth would they want to buy an insurance policy underwritten and adjusted by folks who act more like bureaucrats than business people?” Chubb’s then Chief Operating Officer John Degnan said in 2009. “We will compete vigorously against companies which are unsustainable but for government bailouts.”

Worst Performer

AIG, based in New York, was the worst performer in the Bloomberg ranking, declining 97 percent in the five-year period, and suffering the second-highest volatility. Hartford Financial Services Group Inc. (HIG), which also received bailout funds, was the second-worst performer on a risk-adjusted basis. The insurer repaid the U.S. government in 2010.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Chubb, Ace and Travelers mainly invest in high-grade corporate and municipal bonds that have rallied in recent years as interest rates fell, said Mark Dwelle, an analyst at RBC Capital Markets. Less than 2 percent of Chubb’s fixed-income portfolio was below investment grade at the end of last year, compared with 3.1 percent for Travelers and 12 percent for Ace, according to regulatory filings.

‘Preserving Capital’

“None of them have been known to reach for yield,” Dwelle said in a phone interview. “They’re very focused on matching their durations and preserving capital.”

That investing approach may present a challenge going forward because their balance sheets could contract very quickly if interest rates rise and inflation picks up, Josh Shanker, an analyst at Deutsche Bank AG in New York, said in a phone interview.

Buffett has said bonds are among the “most dangerous” assets because their returns are eroded by inflation and current low interest rates don’t pay investors for the risk they take. Ten-year Treasury yields fell below 1.5 percent for the first time on June 1.

Berkshire, which holds more of its investments in stocks than fixed-income securities, had a risk-adjusted return of 0.4 percent for the five years, the seventh-highest in the S&P insurance index. The company benefited from the second-lowest volatility among the 22 stocks.

Paulson’s Push

“As long as investors are scared, ultimately Ace, Chubb and Travelers will outperform other financials,” Shanker said. “A rally is not your friend in owning these stocks.”

Life insurers such as MetLife Inc. (MET), as well as AIG and Hartford, which sell both life products and property-casualty coverage, have faced pressure from falling interest rates, which make it harder for them to earn a spread on retirement products with guaranteed rates of returns for customers.

MetLife CEO Steven Kandarian said in May that investors are worried about the life insurer because its cost of capital is higher than its return on equity. His firm had the seventh-worst performance in the index during the past five years on a risk- adjusted basis.

Hartford’s largest shareholder, the hedge fund run by billionaire John Paulson, this year pushed for the insurer to sell its life operations and focus on its more profitable property-casualty business. The company is seeking buyers for several units, including its individual life and retirement-plan operations.

Stock Repurchases

The plan to divest some businesses will boost shareholder value, Shannon Lapierre, a Hartford spokeswoman, said in an e- mail. The insurer’s stock price “reflects the challenges to the global economy and low interest rates,” she said.

Chubb had the strongest performance in the insurance index because its underwriting results have been better than peers and it aggressively repurchased stock, said Sandler O’Neill’s Newsome. The insurer has cut the number of shares outstanding by about 30 percent during the past five years, according to regulatory filings.

Travelers, which repurchased about 40 percent of its shares in the past half-decade, faced more underwriting losses than its rival, Newsome said. Tornadoes in the U.S. last year cost the insurer more than Hurricane Katrina, the most costly natural disaster for the industry. Ace hasn’t bought back much of its stock during the period, Newsome said.

Rate Increases

Travelers had the second-highest total return in the ranking, gaining 36 percent, and Ace was third with a total return of 30 percent. The two companies had the sixth- and seventh-lowest volatility.

Michael Nannizzi, an analyst for Goldman Sachs Group Inc., said in a June 12 note to clients that rising prices for property and casualty coverage are an “important investable theme” for money managers looking at the industry.

“If the pricing cycle wasn’t going the right way, there’d be only a modest amount of interest among investors in these stocks,” said John Roscoe, a portfolio manager who helps oversee about $4.5 billion at New York-based Roosevelt Investments, including shares of Chubb.

The industrywide price increases will probably stick because they’re not too large, said Jonathan Adams, an insurance analyst for Bloomberg Industries. Past periods of rising prices have been steeper and were followed by rate reductions as carriers competed for business, he said.

“These price increases are, by and large, sustainable,” Adams said in a phone interview. “It’ll certainly help them down the road,” by improving their margins, he said.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net

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