Motor exposure should offer rate increases in 2010, regardless of cat levels

There may be a silver lining to Chaucer’s 58% decline in pre-tax profit in the first half of 2010, according to analysts.

Chaucer made a pre-tax profit of £7m for the first half of 2010, compared to a profit of £17m for the same period last year. Chaucer expects a combined net loss from the Chile earthquakes and Windstorm Xynthia of £25m; $25m (£16.2m) from the Deepwater Horizon oil rig explosion; £1m from the sinking of the Aban Pearl semi-submersible oil-drilling platform off the coast of Venezuala; and £10.7m from the Bangkok riots.

The company has also been affected by rising bodily injury claims in its motor book. Chaucer’s UK division reported a combined ratio of 111%. The groupwide combined ratio was 105.1%, up from 91% in the same period last year.

However, stockbroker Execution Noble’s analyst Santosh Singh said he had expected the losses.

Keefe Bruyette & Woods analyst Chris Hitchings agreed, adding: “If you take out the currency effects, the results were better than expected.”

One plus point for Singh is the fact that Chaucer’s investible assets are 5.5 times net tangible assets. “In the current environment, with 1% or 1.5% returns on investment, that really helps,” he said.

In addition, Chaucer’s exposure to motor business should ensure that the company enjoys rate increases this year, he said. Chaucer expects to increase motor rates by 16.8% for the full year of 2010.

Singh added that he expected rate increases at Chaucer, even if there are no further catastrophes this year. “For some other insurers, that will only happen if the hurricane season is active,” he said.

For 2010, he expected Chaucer to make a return on net tangible assets of between 8% and 9%, but if there is an inactive hurricane season, this could rise to more than 15% for the full years of 2011 and 2012.

Chaucer’s return on equity fell to 3.1% in the first half of 2010 from 8.6% in H1 2009. Gross written premium increased slightly to £493m in the first half of 2010 from £491m in the same period last year.