Shares of insurance giant Chubb Limited (CB -0.68%) were falling on Wednesday, down as much as 4.3% before recovering to a 3.1% decline as of 1:30 p.m. ET.
Chubb reported earnings last night, and in truth, there wasn't much to complain about for shareholders. However, most insurance stocks were down on Wednesday, as economic concerns moved to the forefront. Given Chubb's premium valuation, at least by insurance stocks standards, even good earnings couldn't overcome that high bar.
A "quite favorable" underwriting environment
While investors have soured on stocks of late due to sticky inflation, one of the peskier elements of the recent inflation has been insurance rates. Since 2020, high catastrophe losses, economic inflation, and "social inflation," meaning a more litigious environment toward insurers, have caused some insurers to back out of certain lines of business, enabling the survivors to raise their premium rates significantly.
Chubb is certainly one of those beneficiary survivors, with a storied history of customer service, affording it even higher rates than competitors. That manifested itself in Q1 earnings, as net earned premiums rose 14.2% to $11.58 billion, and non-GAAP (adjusted) core operating net earnings of $5.41 rose 22.7% over the prior year. Both came well ahead of analyst expectations. Meanwhile, core operating return on equity rose from 12.6% to 13.7%, and core operating return on tangible equity rose from 19.4% to 21.9%.
CEO Evan Greenberg chimed in:
The P&C underwriting environment in North America overall is quite favorable, financial lines aside, with pricing exceeding loss costs, which remained steady. From our large middle market business to small commercial to personal lines, and driven by both property and casualty, we saw the best rates and pricing overall that we have seen in the last four to five quarters. It was also one of the best quarters for large account casualty rates and pricing.
Why down? Perhaps too high a bar to clear, and economic clouds
With results like that and a favorable underwriting environment, some may wonder why the stock is down. One reason is that Chubb came into earnings a bit higher-valued than a lot of its insurance peers. The stock trades at 1.7 times book value, but really an even higher 2.3 times its tangible book value, excluding unrealized gains and losses on its investment portfolio and foreign currency movements.
Meanwhile, as a high-priced insurer that has a lot of consumer insurance business, Chubb is somewhat economically sensitive as well. Late yesterday, the S&P Global Flash US Composite PMI, measuring the strength of both the manufacturing and service sectors, came in at 50.9, below analyst expectations of 52. The quick take is that higher interest rates are causing businesses to turn cautious on hiring and investment. That case of rate-driven headwinds wasn't helped today, as the 10-year Treasury bond yield continued to climb, up 6 basis points to 4.66% as of midday.
Still, higher long-term rates would be good for insurance companies' fixed-income holdings. If the economy holds up, many insurance companies look like good buys on this pullback if the economy can remain strong amid higher interest rates.
