Strong pound puts brake on profits at Commercial Union

Cut-throat underwriting competition, the strong pound and the resurgent housing market helped keep the lid on rising profits at Commercial Union in the first three months of the year. Subsidence claims, which always rise as the house market picks up and more surveys are carried out, jumped 11 per cent in the very dry first quarter, raising payouts to householders by a third.

That contributed to a deterioration in the important UK underwriting result at CU, in contrast to General Accident, which earlier in the week surprised analysts with a small profit in the home general insurance division. Although CU said there were signs of improvement in motor policies, where rates have been under pressure for more than two years, premium income as a whole in the UK slipped 4 per cent to pounds 344m.

The main drag on first quarter profits, however, was the pound. At actual exchange rates profits rose pounds 19m to pounds 102m during the three months to March - using comparable rates the improvement would have been pounds 32m, or 46 per cent.

Shares in all the composite insurers fell yesterday after CU admitted to losing pounds 32m on its UK underwriting account, pounds 6m more than last year. Commercial Union closed 15.5p lower at 734p, while General Accident shed 13p to 944.5p. Royal Sun Alliance and GRE also eased.

Even after a much more benign winter in the US, the world-wide underwriting loss improved by only pounds 28m from pounds 99m to pounds 71m. After lower investment returns from its upfront premium income, general insurance profits rose by only pounds 3m to pounds 67m.

Other trends to emerge from CU's general insurance result included a sharp fall in thefts from commercial property, with last year's surge in computer thefts coming to an end. Fewer cars were stolen but arson, responsible for a quarter of all commercial fire claims, was significantly up on last year.

The disappointing underwriting result confirmed the continuing difficulties plaguing the industry and left analysts puzzling over the sustainability of share prices, which are currently at a large premium to net assets.

Traditionally the sector has been rated at a discount to the underlying value of its assets to reflect the inherent cyclicality of insurance underwriting but all the majors are currently valued by the stock market at up to a third more than their NAVs. CU's net asset value rose 23p in the period to 568p.

John Carter, chief executive, said the acquisition of SEV, a French life assurer, in April, meant life operations accounted for half of total group premium income. He said that proportion would rise in the future.

Life profits increased over the quarter by pounds 4m to pounds 62m, also hit by exchange rate movements. Stripping out the impact of the rising pound, life profits were 25 per cent better.