We are reiterating our ‘Neutral’ recommendation on The Chubb Corp. (CB), following its second quarter earnings release. The company significantly outperformed the Zacks Consensus Estimate during the quarter, but the ongoing soft property and casualty market, along with the competitive market pressures, keep us on the sidelines.
Though Chubb faced a sluggish top-line growth in the past several years, it has recently witnessed a slowly improving market. Its CCI segment has been reporting a reversal of trend or stabilization after declining continuously since the fourth quarter of 2008. The segment has also been witnessing low-single-digits increases in average renewal rates since the second quarter of 2011.
Chubb’s Personal Insurance segment is also enjoying a gradual market improvement. In the second quarter, the segment recorded a 4% increase in net premium written. This represented the eleventh consecutive quarter of growth, primarily led by strong premium increases from the international business.
Chubb also has significant international operations, as approximately 27% of its revenues in 2011 were generated from operations outside the U.S. The company's international business benefits from better pricing conditions compared to its domestic operations. We believe that Chubb’s strategy to expand internationally will position it comfortably for long-term growth.
However, 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 businesses are also expected to experience some pressure.
Chubb has been reporting favorable loss reserves since 2004, which have formed a significant component of earnings. However going forward, the pace of reserve release is expected to decline, eroding the benefit it added to earnings.
Nevertheless, Chubb remains well capitalized at the insurance company level in reference to the minimum risk-based capital requirement. Its debt-to-total capitalization ratio also stands low at 20.1%. Moreover, Chubb is known as a dividend aristocrat because of its policy to continuously increase dividend payments.
Based in Warren, New Jersey, Chubb closely competes with the likes of The Travelers Companies Inc. (TRV) and W.R. Berkley Corp. (WRB). The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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