Chubb Corporation (CB) is an insurer that sells home, car, business, and supplemental health policies. The company sells insurance through independent agents and brokers throughout North and South America, Australia, Europe and Asia. They were established in 1882 and have increased dividends each year for over 3 decades. In the first half of 2014, about 77% of Chubb's premium revenue came from the US with just 23% coming internationally.
2nd Quarter Results
Chubb was down after reporting its second quarter results due to a decline in net income of 8% from the previous quarter. Chubb posted another quarter with a combined ratio under 100%. For the 2nd quarter of 2014, the company's combined ratio was 90% versus 88.8% in the second quarter of 2013. The combined ratio excluding the impact of catastrophes increased from 80.9% a year ago to 85.2% today.
On the positive side, Chubb increased its premium revenue 5% on a constant currency basis versus the same period last year. US premium revenue increased 5%, and international premium revenue grew 1%. Property and casualty investment income declined 4% versus the same quarter a year ago.
Chubb breaks its business into 3 reporting divisions: Chubb Personal Insurance, Chubb Commercial Insurance, and Chubb Specialty Insurance.
Chubb Personal Insurance
- Net written premiums up 5%
- Combined ratio excluding catastrophic losses up to 85.2% from 76.9% in 2nd quarter of 2013
- 38% of second quarter 2014 revenue
Chubb Commercial Insurance
- Net written premiums up 3%
- Combined ratio excluding catastrophic losses up to 88.4% up from 81.8% in 2nd quarter of 2013
- 42% of total second quarter 2014 revenue
Chubb Specialty Insurance
- Net written premiums up 5%
- Combined ratio down to 78.7% from 86% in the 2nd quarter of 2013
- 20% of total second quarter 2014 revenue
Underlying Business Is Still Growing
Chubb's negative earnings per share growth is due to lower investment income and a higher combined ratio. The underlying business grew 5% on a constant currency basis based on the amount of premiums written. Investment income and the combined ratio fluctuate on a yearly basis and do not reflect underlying business growth. The increase in the combined ratio is not cause for alarm, as it is still well under 100% meaning the company is doing an excellent job of writing profitable policies.
Chubb's competitive advantage comes from its disciplined underwriting approach. The company reported a combined ratio well under 100% for the 2nd quarter of 2014. Chubb has not had a year with a combined ratio over 100% since 2002.
Source: Chubb 2013 Annual Report
Shareholder Return and Future Growth Prospects
Chubb repurchased nearly 6% of its shares outstanding over the last year, boosting shareholder return. Moreover, Chubb has timed these purchases well as the company has maintained a low P/E ratio over the last year and currently trades at a P/E ratio of just 11.1.
The company expects 2% to 4% premium growth for the full year of 2014. Shareholders of Chubb can expect returns going forward from growth in the 2% to 4% range, share repurchases in the 4% to .56% range, and dividends of about 2% for a total CAGR of between 8% and 12.5%. This strong return for a high quality, disciplined insurance business does not take into consideration any gains (or losses) from changes in the company's valuation multiple.
Chubb's future growth prospects are strong in the US. The company's disciplined underwriting allows it to steal market share from less conservative insurers due to the fluctuations in the insurance industry. When the insurance market is highly competitive, Chubb writes less policies while its competitors write policies at a loss. When these unprofitable policies cause a contraction in the company's competitors, Chubb is there to increases its market share. The company has a long history of profitable growth. Chubb has increased its dividend payments for 32 consecutive years and still has a low payout ratio. The increases have come almost entirely from growth in the underlying business as opposed to changes in payout ratio.
Consecutive Years of Dividend Increases
Chubb has increased its dividend payments for 32 consecutive years. The company's long history of dividend increases is evidence of its durable competitive advantage in the fragmented insurance industry.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Chubb has a dividend yield of 2.16%, the 81st highest out of 121 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Chubb has a low payout ratio of only about 27%. The company has the 12th lowest payout ratio out of 128 businesses with 25+ years of dividend payments without a reduction. Chubb's low payout ratio gives it an opportunity to increase dividends significantly faster than overall company growth for several years if it chooses to do so. In recent years, the company has paid out its excess cash in the form of share repurchases. For the last 12 months, the company has repurchased about 6% of shares outstanding.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Long-Term Growth Rate
Chubb has grown revenue per share at 6.45% over the last decade. The company's solid revenue growth ranks it as the 38th fastest growing stock with 25+ years of dividend payments without a reduction out of 128.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Chubb's long-term standard deviation of 27.24% is about average for businesses with a long history of dividend increases. The company has the 58th lowest standard deviation out of 128 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Chubb is a high quality insurer with a long history of profitable growth. The company is very shareholder friendly, repurchasing its shares at a rapid rate. Further, Chubb has paid increasing dividends for over 3 decades.
Chubb ranks as a Top 10 stock based on the 8 Rules of Dividend Investing due to its low payout ratio, solid growth, and average yield and volatility. Overall, Chubb is a solid long term buy despite relatively weak earnings in the 2nd quarter of 2014.
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