Property and Casualty insurer Chubb Corp. (CB) has reported second quarter operating earnings of $1.27 per share, substantially outpacing the Zacks Consensus Estimate of $1.02. The results embedded 72 cents per share impact of catastrophes. However, earnings were lower than $1.41 reported in the prior-year quarter, when the impact of catastrophes was 38 cents per share.
Net premiums written was up 5.9% year over year to $3.1 billion, based on an increase across all of its business lines – Commercial, Specialty and Personal.
Underwriting income, however, dropped 49% year over year to $135 million owing to higher operating expenses, which increased 7.4% year over year, coupled with a 52% surge in deferred policy acquisition costs.
Property and casualty investment income after tax upped 2% year over year to $318 million, with about half of the increase ensuing from the favorable currency impact.
Chubb’s net income came in at $419 million or $1.42 per share, down from $518 million or $1.59 per share recorded in the prior-year quarter. Net income during the quarter included investment portfolio net realized gain before tax of $69 million or 15 cents per share after-tax. Last year’s net income included realized investment gains of 18 cents per share.
Combined ratio, a measure of an insurer’s profitability, stood at 94.9% compared with 90.4% in the prior-year quarter. The deterioration was caused by catastrophe losses (cat loss) of $329 million, which adversely affected the combined ratio by 11.3 points. However, the deterioration was partly offset by a favorable reserve development of $205 million, representing a favorable impact on the second quarter combined ratio of about 7 points overall. In the last year quarter, favorable reserve development of $180 impacted the combined ratio of second quarter 2010 by about 6.5 points, while cat loss adversely affected the combined ratio by 6.9 points.
Reported book value per share, which measures the net worth of a business, was $55.24 as of June 30, 2011, 12% higher than the year-ago quarter.
Segment Update
At Chubb’s Commercial Insurance (CCI), net written premiums climbed 8% year over year to $1.3 billion during the reported quarter. The combined ratio was 102.5% versus 92.9% in the prior-year quarter. Excluding the 15.2 point impact of catastrophes, the segment’s second quarter combined ratio stood at 87.3%, in line with the prior-year quarter.
Chubb's Specialty Insurance (CSI) net written premiums inched up 2% year over year to $680 million. CSI's combined ratio was 80% as against 82.5% in second quarter 2010.
Chubb’s Personal Insurance(CPI) net written premiums grew 5% year over year in the second quarter to $1.1 billion. This represented the sixth consecutive quarter of growth, with particularly strong premium increases outside the U.S. CPI produced a combined ratio of 96.9% compared with 92.9% in the comparable period last year. The impact of catastrophes in the second quarter of 2011 was 14.5 points compared with 13.8 points in the previous-year period.
Share Repurchase Update
During the second quarter of 2011, Chubb repurchased 7 million shares at an aggregate cost of $455 million. Year till date the company has repurchased 13.6 million shares for about $842 million.
At second quarter end, Chubb had $14.9 million shares remaining under its current share repurchase program. Management stated that it is set to complete this program by the end of January 2012.
Guidance Revised
On the back of strong second quarter results and more favorable business outlook for the second half of 2011, Chubb management revised its 2011 earnings guidance to the range of $5.55–$5.85 per share from the previously forecasted range of $5.35–$5.75. Also, considering unusually high cat activities during the first half of the year, management now expects cat loss to adversely affect fiscal 2011 combined ratio by 7.5 percentage points. This cat loss expectation is more than double the earlier projection of 3.5 percentage points.
Besides, certain other assumptions are also factored into the 2011 earnings guidance. Net premium written are projected to grow in a range of 4–6% compared with the earlier assumption of 0–2% growth. Combined ratio is likely to deteriorate to 92–94% range as against the January guidance assumption of 91–93% range. After-tax investment income, including currency effect, will expectedly remain in line with the fiscal 2010 year level, compared with the earlier assumption of a decline of 2–4% (excluding the impact of currency). Diluted outstanding shares of $291 million are anticipated to stay unchanged relative to the previously-issued guidance.
Peer Comparison
The Travelers Companies Inc.(TRV), which reported its second quarter earnings on the same day as Chubb, before the opening bell, was severely hit by a huge cat loss of $1.09 billion. Thus, Travelers posted an operating loss of 91 cents per share, wider than the Zacks Consensus Estimate of 62 cents and far behind a profit of $1.39 per share in the prior-year quarter.
Another peer W.R. Berkley Corp. (WRB), which is expected to report second quarter earnings on Monday, after the market closes, has also incurred abnormally high cat loss of $65 million. The Zacks Consensus estimates earnings of 43 cents, which would be down 33.85% year over year.
Our take
Chubb remains optimistic about its performance in its Commercial and Personal lines of business. During the quarter, Chubb’s Commercial segment’s average renewal rates upped 2%, the first increase in the last fve quarters, with retention remaining stable at 87%, in line with the first quarter. About 70% of the segment’s U.S. business witnessed a flat to positive rate increase. The segment’s International business is also witnessing rate hikes led by the recent catastrophes, which have spurred the demand for insurance. Along with the rate increases and stable retention, additional premium received via mid-term endorsement activity and from premium audits, also points toward an improving market environment.
Chubb’s Personal Insurance segment is also performing well, with a 5% increase in net premium written in the quarter. It represents the sixth consecutive quarter of growth, with particularly strong premium increases outside the United States. The segment is witnessing broad-based rate increases in both the auto and the homeowner’s markets. Management thinks that the recent industry catastrophe experience in the U.S. will lead to even larger rate increases going forward.
Moreover, Chubb’s strong capital position poises it to continue with its share repurchase program, which will further generate shareholder’s returns.
However, given Chubb’s huge exposure to catastrophes, it might incur more losses in the second half of fiscal 2011 from the hurricane season (June to November). Moreover, experts predict this year’s hurricane season to be more severe than the previous years.
For the time being, we maintain our long-term (6+ months) “Neutral” recommendation on the stock of Chubb. Also, the stock carries a Zacks Rank #3, which translates into a short-term (1-3 months) ‘Hold’ rating.
CHUBB CORP (CB): Free Stock Analysis Report
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