The Chubb Corp.’s (CB) third quarter operating earnings of $1.69 per share beat the Zacks Consensus Estimate of $1.40. Results also compared favorably with $1.56 in the prior year quarter. Earnings were primarily helped by a lower base, due to aggressive share repurchases by the company, which led to a decline in share count by 40 million year over year.
Total revenue of $3.1 billion was slightly below the Zacks Consensus Estimate $3.2 billion.
Net income declined 4.0% year over year to $572 million; however, on a per share basis net income increased 6.5% to $1.80 per share due to the base effect.
Net premium written was up modestly by 1% year over year to $2.7 billion. However, excluding the effect of currency fluctuation, premiums were flat in the US and 6% up in the international market. Management continues to emphasize on underwriting discipline in a market environment that remains competitive.
Catastrophe activity remained at elevated levels compared with the same period a year ago, which led to a more than two fold increase in cat-related pre-tax losses to $58 million from $22 million in the prior year quarter.
Property and casualty investment income remained unchanged at $317 million, relative to the prior year quarter.
The consolidated combined ratio deteriorated 120 basis points year over year to 86.2%, primarily due to high cat losses. However, excluding these losses, the combined ratio improved 50 basis points to 84.1%.
Favorable underwriting and investment results led to a 15.4% increase in book value per share to $52.41 from $45.43 as on September 30, 2009.
Segmental Results
Net premium at Chubb Personal Insurance increased 4.0% year over year to $980 million due to a 7% increase in Automobile premium, a modest increase of 2% in Homeowner’s insurance along with a 7% rise in Other personal lines. The combined ratio deteriorated 380 basis points to 85.4%, primarily due to higher cat losses. Excluding the effect of cat loss, combined ratio was worse only by a modest 10 basis points.
The quarter witnessed the continuation of the same trend as seen in the previous quarter when net written premium remained unchanged at Chubb Commercial Insurance at $1.1 billion, after declining ever since the first quarter of 2008.. The combined ratio improved 140 basis points year over year to 89.1%, because of the lower impact of cat losses in the segment compared with the prior year quarter.
Also, Chubb Specialty Insurance reported no change in net written premiums relative to the prior year quarter, which stood at $669 million. Combined ratio, however, improved modestly by 30 basis points to 83.6%.
2010 Outlook
Given favorable results for the first three quarters of the year and a favorable operating environment, along with low cat loss expectation for the next quarter, management at Chubb raised its 2010 full year EPS expectation to between $5.75 and $ 5.55 per share from its earlier $5.15 to $5.55 per share range.
Chubb surprised by 20.7% in the quarter. It has been putting together a decent streak of earnings surprises, including an average of 13.5% in the last 4 quarters.
We think Chubb is poised to benefit modestly from the stable rate environment at Personal insurance and slow declines in renewals at Commercial. The bottom line EPS is set to benefit from the aggressive share repurchase that remains a priority for management. But even though a modest recovery is seen in the market, competitive forces are to some extent nullifying the positives.
Moreover, net investment income is expected to remain suppressed as long as the low interest rate environment continues. However, low leverage, strong financial strength ratings, adequate risk-based capitalization, continual dividend increment and strong fixed-charge payment capability are other positives.
Chubb carries a Zacks Rank #3 which translates into a Hold recommendation over the short term.
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