Chubb: Earnings Preview

| About: Chubb Ltd (CB)

Property and Casualty insurer Chubb Corp. (NYSE:CB) is slated to release its first quarter earnings on April 19, after the markets close. The current Zacks Consensus Estimate is $1.49 per share for the quarter, projecting a year-over-year expected growth of 10.4%.

Revenue estimates for the quarter, as per the Zacks Consensus, stands at $3.4 billion, representing a revenue growth of 2.1% year over year.

Previous Quarter Performance

In the fourth quarter of 2011, Chubb's operating earnings of $1.63 per share were ahead of the Zacks Consensus Estimate of $1.60 per share.

The better-than-expected earnings stemmed from higher premium written, favorable reserve release, and a lower share count, partly offset by lower investment income and high cat loss. Earnings were, however, lower than $1.69 per share reported during the prior-year quarter, a period marked by benign cat activity.

Chubb reported net written premiums of $3.0 billion, up 4% year over year, reflecting rate improvements in all three of its business lines.

The company's combined ratio for the quarter deteriorated to 89.9%, compared with 87.0% in the prior-year quarter. Adjusting for cat losses, combined ratio was 89.5% in 2011 compared with 85.6% in fiscal 2010.

Earnings Estimate Revisions: Overview

Ahead of the earnings release, Zacks Consensus Estimate for the first quarter witnessed a upward estimate revision over the past 7 and 30 days,

A complete absence of any downward trend in estimate revision is also palpable, making the strength in the stock more obvious.

We will now discuss the details of earnings estimate revisions to validate the strength of the stock, justifying its place in an investment portfolio.

Agreement of Estimate Revisions

9 out of 18 analysts covering the stock have raised their estimates for the first quarter over the last 30 days while 3 of them have increased the estimates over the past 7 days. Given the absence of any downward estimate earnings revision and an upward revision bias, it is quite clear that analysts are in agreement with the bullish first-quarter earnings outlook for the property and casualty insurer.

Moreover, for fiscal year 2012, 7 of the total 19 analysts covering the stock have raised their estimates over the last 30 days while 2 analysts have raised the same over the past 7 days. Again the absence of any downward revision over both the time periods indicates an expected earnings outperformance from the company.

The overall upward earnings estimate revisions prove that the analysts are in agreement with the company's above-the-line earnings expectations. Analysts expect the company to beat the estimates on the back of modestly improving insurance rates and adequate reserves.

Magnitude of Estimate Revisions

The magnitude of revisions has been modest over the past 7 days with estimates for the first quarter inched up by a penny to $1.49 per share and from $1.45 over the past 30 days.

For fiscal 2012, earnings estimates moved up to $5.75 per share from $5.74 over the past 7 days and from $5.71 per share over the past 30 days.

Earnings Surprise

With respect to earnings surprise, Chubb has consistently outperformed the respective Zacks Consensus Estimates, over the trailing four quarters. The average earnings surprise was 13.6%, implying that Chubb has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Our Recommendation

We believe Chubb will live up to the expectations of the investors helped by the gradually improving insurance pricing.

Its Commercial segment has been reporting a reversal of trend or stabilization after declining continuously since the fourth quarter of 2008. The segment has been witnessing low single-digits increase in average renewal rates. Retention ratio is also stable. The segment's International business is also experiencing rate hikes owing to the recent catastrophes, which have increased the demand for insurance. Along with the rate increases and stable retention, additional premium received via mid-term endorsement activity and premium audits also point toward an improving market environment.

Chubb's Personal Insurance segment is also witnessing a gradual market improvement. In the fourth quarter of 2011, the segment recorded a 3% increase in net premium written. This represented the ninth consecutive quarter of growth, primarily led by strong premium increases from international business. Management continues to witness a general rate hike in the industry for both auto and homeowners. We have a favorable view of business expansion (homeowner sand personal auto) into West and Southwest U.S., which is otherwise concentrated in the Northeast region, a cat prone area.

Chubb also stands to gain from its international business, which benefits from better pricing conditions than the domestic market.

But Chubb's Specialty insurance business has been suffering from rate reductions over the past several years. The company's surety, professional liability and personal lines of business are expected to remain under some pressure as new business pricing remains negative or at low-single digits. Combined with the sustained discipline in underwriting, these challenges will continue to put pressure on premiums in the near term.

Nevertheless, a strong capital with low reliance on debt and solid capital management has acted as a cushion to earnings. The company also qualifies as a dividend aristocrat having increased dividend every year for the past 28 years. For a value investor, this stock can be a safe bet.

Based in New Jersey, Chubb closely competes with a host of other property and casualty carriers such as W.R. Berkley Corp. (NYSE:WRB), The Travelers Companies, Inc. (NYSE:TRV), and The Allstate Corp. (NYSE:ALL), Cincinnati Financial Corp. (NASDAQ:CINF), and XL Group Inc. (NYSE:XL).