As a global, multiline insurer focused on property and casualty, Chubb Corporation (CB, Financial) has been a favorite pick among investors in the past, due to its narrow moat rating and experienced trajectory, dating back to 1882. With 75% of overall revenue generated in the U.S, the firm is the 12th largest insurer of its kind in the country, offering commercial, personal and specialty insurance. As such, the company’s results are tied to external conditions, such as climate changes and natural catastrophes, which were favorable throughout 2013.
Thus, while Hurricane Sandy dampened 2012’s earnings, fiscal 2013 showed a different picture, with annual EPS jumping from $5.69 to $9.0, and fourth quarter operating earnings of $2.07 per share, up times year over year. And although management announced that January’s weather conditions will likely weaken 2014’s results, investment gurus like David Dreman (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) seem confident about Chubb’s profitability, having bought its stock last quarter.
The Differential Factor
With catastrophe losses increasing significantly over the last couple of years and interest rates currently at a low point, competitors like Allstate Corporation (ALL, Financial), Travelers Companies Inc. (TRV, Financial) or ACE Limited (ACE, Financial) have had to bump prices up in order to compensate for lower investment income. However, Chubb has taken a different approach by pulling back its business to the most profitable lines. While sacrificing the top line will dampen its results, focusing on the bottom line in the current environment is a value-creative strategy and will help maintain profits in the long term. Furthermore, management’s aggressive targeting of the personal lines is a clever move, as this segment is more predictable and has been generating mid-single digit premium increases over the past year.
Chubb also stands to benefit from its operating segments in the insurance industry, as it generates 75% of underwriting profits from the personal and specialty lines. While the personal lines business mainly targets a limited amount of high net-worth individuals, this also limits the number of industry competitors for the segment, thereby putting the company at a competitive advantage. Moreover, the firm is also set on expanding its international business, which currently accounts for 25% of overall revenue and reported high-single-digit rate increases throughout fourth quarter fiscal 2013, despite negative currency effects. On another note, Chubb seems to be returning to its original rate of returns on equity, which averaged 15% over the past 10 years, reporting a quarterly ROE of 14.4%, in addition to net premiums written growing by 4%.
A Future with Growth Prospects
Although this firm’s strict underwriting discipline and the maturity of the insurance market are bound to limit growth opportunities looking forward, 2013’s results showed a positive financial picture, which will likely continue in the following years. While earned premiums are expected to grow slowly at a 3% compound average rate, Chubb’s average combined ratio will be at 92% until 2019 (last five years averaged 93%), due to the future increase in interest rates. Also, returns on equity will average around 13% for the next seven years, sporting an upside compared to the 12% ROE averaged over the past five years.
After a few flat years regarding operating margins, fiscal 2013 recorded a strong 23.2% expansion, which is likely to continue in the years to come. Revenue has experienced a similar boost, increasing at an annual rate of 9.10% (currently at $13.9 billion) after a stagnant 2012. Considering that the stock’s trading price is currently at 10.1x trailing earnings, at a discount to the industry average of 11.3x, I believe investors can stand to profit in the long run from this company’s growth and shareholder stewardship.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
