Publication Date: 04/30/2008
Source: BestWire Services
 
Property insurers are beginning to take note of the rising specter of inflation, and will have to start accounting for higher building materials, labor and other costs in the pricing decisions they make, Ace Ltd. Chairman Evan Greenberg told equity analysts in a quarterly conference call.

Greenberg, whose comments came several hours ahead of a decision by the Federal Open Markets Committee to cut the benchmark federal funds rate by 25 basis points, noted the Bermuda-based insurer and reinsurer is tracking loss-cost trends in anticipation of future increases, noting the company is "pricing today for the long term."

"I can't pin an exact time. I'm not measuring it in months, I'm measuring it more in years. But I do believe in the medium term, over the next two or three years, we're going to see loss costs tick up," Greenberg said.

According to the U.S. Bureau of Labor Statistics, the Producer Price Index for finished goods rose by a seasonally adjusted annual rate of 10.2% during the first quarter, after previously climbing to an 11.5% SAAR in the fourth quarter of 2007. Earlier this month, BLS reported the Consumer Price Index for all urban consumers rose 0.9% from February to March 2008, and was up 4% from March 2007.

"Building materials, based on commodity prices, are going up all over," Greenberg said. "We all know what's going on with consumer prices, and that eventually finds its way in there. A weak dollar is inflationary to all imports, and if you believe the Democrats (are) getting in the White House, I think that's going to have an impact, ultimately, on the legal environment."

Even as it cut the funds rate 2%, its lowest level since 2004, and enacted a separate quarter-point cut that brought the discount rate to 2.25%, the FOMC nonetheless noted in its April 30 statement that "energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months."

"The committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization," the statement read. "Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully."

Ace (NYSE: ACE) reported first-quarter profits of $377 million, down 46.2% from a year earlier, as the turbulent credit and equity markets forced the company book $350 million in investment losses. Despite that drop, equity analysts were mostly upbeat on Ace's quarter, noting the company's strong underwriting results.

"Unlike other companies that have reported thus far, Ace's accident year loss ratio is better than expected. We view this as a testament to Ace's diversification by geography and line of business," David Small of Bear Stearns wrote in an investor's note. The combined ratio for Ace's property/casualty business improved to 84.6, from 87.1 in the first quarter of 2007.

Looking forward, Greenberg said the company expects to see continued claims development in directors and officers coverage arising out of the subprime and financial market turmoil, but noted that thus far, such claims have been in line with expectations and well within the company's current reserves. He also said Ace is beginning to shift its commercial book away from large account risk management and risk transfer workers' comp toward writing more North American middle market specialty business.