On Chubb Ltd. (NYSE: CB), a provider of P&C and health and life insurance, as well as reinsurance. We believe it is difficult to develop a sustainable competitive advantage in the insurance industry. Insurers compete aggressively for business, and have similar policies and service levels. In addition, they often set premiums too low, underestimating the cost of claims and pursuing growth at the expense of margins. We also believe that the pandemic could reduce demand for auto insurance, among other coverage needs.
However, despite these industry challenges, we expect Chubb’s strong management team, healthy balance sheet, and strong brand to generate solid returns over time. We would consider raising our rating on CB on signs of rising premiums or improving combined ratios in 2021.
The beta on CB shares is 1.06.
On October 27, Chubb reported 3Q20 core operating income of $907 million. Third-quarter revenue rose 1% to $8.9 billion.
Net premiums written were $8.5 billion, up 6.4% in constant dollars. Net premiums earned rose 5.3%, primarily due to rate increases in the U.S. and in overseas markets. Book value rose 3% to $124.98 per share.
In September 2020, the company issued $1 billion of 1.375% 10-year debt.
Chubb’s six business segments are Commercial P&C Insurance, Personal P&C, Agricultural Insurance (all North America), Overseas General Insurance, Global Reinsurance, and Life Insurance. In 3Q, Commercial P&C net premiums written rose 10% to $4.6 billion. The segment combined ratio worsened to 94.7 from 88.3, reflecting substantial catastrophe losses. However, the segment combined ratio excluding catastrophe losses decreased to 83.6.
Summarizing the remaining segments, Personal P&C saw written premiums rise 2.8% to $1.3 billion, and the combined ratio improved to 74.8 from 81.3. In Agricultural Insurance, premiums rose 5% to $986 million and the combined ratio improved to 90.4 from 97.7. Overseas premiums rose 0.5% to $2.2 billion, and the combined ratio improved to 87.9 from 90. Reinsurance net premiums rose 28.4% to $181 million, and the combined ratio improved to 80.8 from 82.1. (We note that the segment combined ratios cited above exclude catastrophe losses.)
Lastly, Life Insurance premiums written fell 0.4% to $610 million; segment income rose 10.6% to $104 million.
EARNINGS & GROWTH ANALYSIS
At the same time, we look for Chubb to benefit from improved economic conditions in 2021. Management noted that retention rates remain strong, and that premiums continue to rise modestly both in the U.S. and in international markets.
FINANCIAL STRENGTH & DIVIDEND
The debt/equity ratio was 29%. The operating margin was 10.2%. Core ROE was 7%.
Moody’s has withdrawn its rating (which was Aa3 with a positive outlook).
Over the past four years (since the ACE merger), CB has raised the dividend by an average of 3.0% annually. We are lowering our dividend estimate for 2020 to $3.09 from.
On November 21, 2019, Chubb announced a new $1.5 billion share buyback plan for 2020, which represented 2.2% of the company’s market value at the time. During the first quarter, the company repurchased 2.3 million shares for $326 million. However, management said that it would be an opportunistic buyer in the future.
MANAGEMENT & RISKS
Following the January 2016 merger with ACE, the new company took the name Chubb Ltd. and four Chubb directors were added to the board. Evan Greenberg, previously the CEO of ACE, is chairman and CEO of Chubb. We have a positive view of Mr. Greenberg’s management and note that ACE grew through acquisitions and achieved a 14% return on equity under his leadership. We also like the fact that a number of veteran Chubb managers remain in key positions.
In addition, Chubb faces challenges related to its post-merger integration.
Is a global specialty insurer and reinsurer formed through ACE Ltd.’s acquisition of Chubb Corp. in January 2016. The merged firm, which retained the Chubb name, is one of the world’s largest property and casualty insurance companies. With a market cap of approximately $58 billion, CB shares are generally regarded as large-cap value.
The shares are also trading at 1.1-times book value, in line with the peer median. We believe that these multiples adequately reflect Chubb’s solid dividend yield and prospects for improved insurance pricing, offset by the impact of rising costs.