Steady-On At Top-Notch Underwriter Chubb

| About: Chubb Ltd (CB)
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Summary

In the tricky insurance underwriting business, Chubb is one of the best operators both on pricing discipline and wealth managment.

The weak property and casualty market has held back the stock, but that is starting to change and investors should look carefully at Chubb.

When interest rates start to rise, this should also help the stock's investment portfolio income.

Chubb Corp (NYSE:CB) is maybe the best large-cap property insurance underwriter from a technical perspective in the US. The company has managed to thrive in the uber-competitive property and casualty (P&C) market at a time when there is a sea of capital looking to offer protection that not enough people want. Chubb's high-end personal lines especially in the homeowner's market, and its specialty liability lines are very soundly managed. With the current environment in the P&C markets, pricing discipline is the name of the game, and I see Chubb as extremely well-trained in this regard. From everything I know of the company, and all of the water-cooler talk in the industry, CB is a superior underwriter with best-in-class risk management practices.

Amazingly, despite Chubb's underwriting discipline, the company has managed to continue consistently growing revenues over the last few years. Profitability growth has been much more mixed, but frankly that is part and parcel of the overall insurance industry, especially in P&C, where one bad event can cause massive claims losses. In 2013, Chubb reported earned premiums increased roughly 2%, which was pretty good given the competitive environment. At the same time, I think CB will probably see perhaps 4-5% earned premium growth in 2014 and a similar amount in 2015. Selectivity in underwriting is the key to net income growth here along with firming of pricing across the broader P&C market.

Fortunately for shareholders, Chubb's financial position is strong enough that the company has been able to help boost EPS by buying up shares regularly. While the company suspended share buybacks in the turmoil following Superstorm Sandy, this was a brief hiatus and the company is once again returning capital to shareholders. This included roughly 15 million of share buybacks in 2013 for a total of ~$1.3B in cash. With the stock trading well above its tangible book value, the buybacks are an imperfect mechanism to return cash, but Chubb already offers a reasonable dividend and shareholders can hardly expect the company to complain that its stock price is too high.

Chubb's P&C operations are broken up into three different business areas - personal lines (~35% of net premiums in 2013), Commercial insurance (~43% in 2013), and specialty insurance (22% in 2013). All three of these areas are mostly focused on the US, though Chubb does have some limited international business (~25% of premiums in 2013). While there is nothing overly innovative or particularly unusual about any of these three business lines, Chubb has managed to thrive in fashion similar to the path now being taken by many wealth managers - go where the money is. Chubb's consumer businesses in auto insurance and homeonwers coverage are primarily marketed to upper-class individuals with more coverage choices and better coverage than the typical insurance policy. Similarly, the firm's specialty business is primarily focused on professional liability coverage (~90% of premiums written in specialty in 2013) which is an up-market area of the industry. Chubb is appealing to many firms in this area as a result of its financial and brand strength.

Chubb's best-in-class underwriting is exemplified by its low loss ratios. The combined ratio for the firm in 2013 (a good year across the industry) was 86.1%, while 2012 (a bad year for most of the P&C industry) saw a combined ratio of 95.3%. This is particularly significant for CB in that it shows the firm was disciplined and diversified enough in its coverage in a bad year to still make money even before considering the value of investment income generated by the firm's portfolio. That's pretty impressive as numerous other firms saw CR-based losses in 2012 following Superstorm Sandy. Chubb's expense ratio to achieve these results was a very reasonable 31.7%/31.9% in 2012/2013.

The other key for Chubb like so many of its insurance peers is the investment environment. The firm saw a ~6% investment income decline in 2013 thanks in large part to low investment yields on its fixed income portfolio. Unfortunately there is no easy fix to this problem, and relief could be a while in coming. This headwind is going to continue holding back CB shares, but eventually it will turn.

Against this backdrop of solid operating performance, it is probably not surprising that Chubb's share price has more than doubled in the last five years or so. And while the firm is not particularly cheap on a P/TBV or price to ttm EPS basis today, I don't think the ride is necessarily over. Chubb has steadily grown its book value over time, and its dividend offers some reward for long-term holders of the stock and combined these two factors should lead to stability and slow growth going forward.

To really see further super-charged gains though, I do believe Chubb will need a serious catalyst probably in the form of a broad improvement in the overall industry (valuations across the sector are too high for the firm to be able to do a really good transformative acquisition and the stock is probably too big to be a serious buyout candidate for another firm). Instead, the most plausible candidates for an improvement that will boost Chubb going forward are either a broad turn in the P&C market which leads to price firming or an increase in interest rates that starts to boost investment income. Neither catalyst looks imminent, but both could start to appear in a year or two. Until then, steady on with slow but positive returns is the most likely outcome for Chubb shareholders.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.