We are reiterating our Neutral recommendation on Chubb Corp. (CB), despite the company’s announcement of an expected catastrophe loss (cat loss) of $400 to $475 million in the third quarter, higher than $329 million in the prior quarter. Regardless of the heavy cat loss in the prior quarter, the company managed to beat the Zacks Consensus Estimate significantly.
Management also raised its 2011 guidance, even after taking into account the high level of catastrophe losses in the first half of 2011. It now expects operating earnings per share in the range of $5.55- $5.85 (up from $5.35 -5.75 guided earlier).
Chubb has a business mix, which continues to perform exceptionally well, insulating it from external factors like bad weather that pushed many of its peers into losses. Chubb is also expected to gain from the improvement seen in the overall pricing environment and additional premium receipts via mid-term endorsement activity and from premium audits. Chubb’s active capital management via share repurchases will also add to the bottom-line growth.
Though Chubb had a sluggish top-line growth for the past five years, it is recently witnessing a slowly improving market. Its Commercial segment has been reporting a reversal of trend or stabilization after declining continuously since fourth quarter of 2008. The segment’s average renewal rates upped 2%, the first increase in the last five quarters, with retention remaining strong at 87%, in line with the first quarter. 70% of the segment’s U.S. business witnessed a flat to positive rate increase.
Along with the rate increases and stable retention, additional premium received via mid-term endorsement activity and from premium audits also point toward an improving market environment. This indicates that the overall economy appears to be bouncing back.
Chubb’s Personal Insurance segment is also witnessing a gradual market improvement. In the second quarter, the segment recorded a 5% increase in net premium written. This represented the sixth consecutive quarter of growth, primarily led by strong premium increases from international business.
Management continues to witness a general rate taking in the industry for both auto and homeowners, with rate increases for auto in low-single digits and more aggressive increases for homeowners in mid-single digits. The recent industry catastrophe experience in the U.S. has instilled a greater sense of urgency in the market and will therefore help drive greater rate increases going forward.
However, Chubb’s Specialty insurance business has been suffering rate reductions over the past several years. The company’s surety, professional liability and personal lines of business are also expected to remain under some pressure as new business pricing remains negative or at low single digits.
Combined with the continued discipline in underwriting, these challenges will continue to put pressure on premiums in the near term. Although it seems that an economic recovery may be underway, when and how it would happen remains uncertain. Even if it does occur, premium growth will lag any recovery that takes place, thus keeping margins under pressure.
Chubb is also known as a dividend “aristocrat” because of its policy to continuously increase dividend payments. Chubb’s superior financial health, coupled with active capital management via share repurchases, will help the bottom line.
Warren, New Jersey-based Chubb closely competes with companies like The Travelers Companies Inc. (TRV) and W.R. Berkley Corp. (WRB). The stock is carrying a Zacks #3 Rank, which translates into a Hold rating over the short-term.
