Chubb Limited: Undervalued, But Facing Some Serious Headwinds

Chubb Limited: Undervalued, But Facing Some Serious Headwinds

Chubb Limited (NYSE:CB) reported its second-quarter earnings earlier this month, and the company had a mixed bag of results.

The company saw growth in the revenues, which was offset by issues regarding catastrophe losses related to weather-related events and the ongoing COVID-19 pandemic.

Chubb appears undervalued on an intrinsic basis and has great liquidity with a growing dividend. Like most insurance companies, this year has been trying like no other in recent history.

Let’s take a look under the cover and see how Chubb performed.

Overview

Chubb Limited, an insurer that specializes in property and casualty and reinsurance products, recently released its second-quarter earnings.

A few highlights from the quarter, before diving into the nitty-gritty of the company’s second-quarter performance.

  • COVID-19 impacted net written premiums in the quarter by adjustments for the quarter of $184 million, from both the North American P&C Insurance and Overseas General Insurance segments to the tune of 2.3 and 2.5 percent points, respectively.
  • Chubb reported net catastrophe losses, including a COVID-19 charge of $1,365 million pre-tax, with $723 million in short-tail, and $642 million in long-tail insurance lines.
  • Chubb also saw negative impacts on net investment income resulting in lower reinvestment rates and lower floating rate obligations from COVID-19.
  • The company reported net losses of $331 million, which included $1,157 million after-tax of COVID-19 related losses.
  • Chubb reported consolidated net premiums were up 0.1 percent for $8.4 billion, with P&C premiums down 0.7 percent or $7.7 billion.
  • The combined ratio for the P&C lines was 112.3 percent compared to 90.1 percent, which includes the catastrophe losses of 23.9 percent factored into the ratio.
  • Excluding catastrophe losses, the P&C combined ratio for the accident year is 87.4 percent compared to 88.9 percent from the year-ago.
  • Operating cash flow for Chubb was $1,985 million for the quarter, compared to $1,386 million from the prior-year quarter.

Chubb operates the company in six segments; let’s next discuss the results of each segment.

North America Commercial P&C Insurance

The segment offers P&C insurance to large, middle, and small businesses in the U.S., Canada, and Bermuda.

Net premiums written increased for the segment by 5.3 percent, which indicates a positive rate increase, renewal retention rates, and new business. Along with the growth in net premiums written, the company also saw an increase in net premiums earned by 6.1 percent, as a result of growth in written premiums, all of which offsets $95 million in COVID-19 related adjustments.

The combined ratio for the segment increased by 32 percent because of higher catastrophe losses as a result of COVID-19, riots in the U.S., and higher natural catastrophes. The claims include $973 million from COVID-19, $118 million from riots, and the tornado in Nashville, TN, and other weather-related incidents.

North American Personal P&C Insurance

The segment includes offerings for high net worth personal line products, such as homeowners, excess liability, auto, and recreational marine services in Canada and the U.S.

Net premiums written for the quarter improved 1.4 percent or $18 million. The company attributes the increases to rate increases and improved retention of customers. Net premiums earned increased by 2.1 percent, or $24 million, closely related to the improvements in written premiums.

The loss and loss expense ratio decreased by 0.2 percent because of lower catastrophe losses for the quarter.

North America Agricultural Insurance

The agricultural segment offers crop insurance, as well as related catastrophe insurance lines including items such as hail damage and rain.

Net premiums written declined in the quarter by 1.1 percent, while net premiums earned declined 0.5 percent. It was primarily related to commodity price declines over the quarter.

The loss and loss expense ratio increased 1.2 percent for the quarter, due to higher catastrophe losses, and the year over year impact from crop derivative losses.

Overseas General Insurance

The segment includes Chubb International that specializes in P&C insurance for large corporations, middle-market, and small businesses.

The segment reported 10.5 percent decrease in net written premiums and a decline of 1.5 percent in net premiums earned. The company attributes the struggles to COVID-19 related issues, mainly in the personal lines from lower travel and lower exposures.

The combined ratio for the segment was 16.3 percent higher for 107.1 percent. The main culprit was the loss and loss expense ratio, which was higher due to higher catastrophe losses related to storms in Australia, wildfires in Australia, and other Mother Nature related events.

Global Reinsurance

The segment reported an increase in net premiums written of 4.6 percent, for $207 million. And net premiums earned also increased by 2.9 percent, for $163 million. The increases in written and earned premiums were resulting from positive rate increases and new business written in the quarter.

The combined ratio improved to 76.6 percent, an increase of 11.1 percent, with the majority of the improvement coming from the loss and loss expense ratio, resulting from improvements in the prior period development.

Life Insurance

The life insurance segment improved 7 percent for the quarter in net premiums written for a total of $619 million, and the net premiums earned improved likewise by 6.5 percent. The increases were a result of growth in Latin America, with an expanded presence in Chile.

The life insurance underwriting income decreased $16 million for the quarter, primarily because of COVID-19 related catastrophe losses.

Corporate

The corporate segment results include non-insurance companies. Loss and loss expenses increased by $242 million related to U.S. child molestation claims, which are primarily reviver statute-related. The company reported a net loss of $570 million for the quarter, up 1.4 percent compared to the prior year.

Investments

Overall the investment portfolio grew from $109,234 million to $110,877 million, with equity securities improving as a result of more favorable market conditions in the second quarter versus the first quarter.

The company recorded net income from investments of $827 million, down 3.7 percent from the prior-year quarter.

Overall, on a revenue and activity quarter, it was more of the same for Chubb, they improved across the board, but mother nature smacked them hard in relation to weather-related events and COVID-19.

Let’s look at the growth story for Chubb going forward.

Growth Story

The continued growth for Chubb starts and ends with the performance regarding premiums. The company saw an increase in the combined ratio for the quarter, which eats into the profitability of the company.

Most of those losses were related to increases in reserves for COVID-19 losses, and effects from mother nature wreaking her havoc. The combined ratio, excluding the effects of these two results in a P&C combined ratio of 87.4 percent. Which yields profitability for Chubb as any combined ratio under 100 indicates profitability in regards to underwriting.

Historically, Chubb has exhibited strong combined ratios:

  • 2015 – 87.3%
  • 2016 – 88.3%
  • 2017 – 94.7%
  • 2018 – 90.6%
  • 2019 – 90.6%

The above-combined ratio indicates that Chubb has done a great job creating profit from its underwriting, and there is every indication that will continue. The likelihood of the losses continuing is unlikely unless mother nature has other plans.

Another bonus for investors is the strong dividend that Chubb pays. The company announced the suspension of share repurchases and has stated that will continue.

But the dividend is continuing, and with an annual payout of $3.12, and yield 2.52 percent, Chubb has grown the dividend by an astounding 27.34 percent over the last five years. The dividend looks strong, too, when considering the payout ratio of 43.8 percent.

The liquidity for Chubb remains strong, with operating cash flows of $3.697 million for the quarter and a $1 billion credit facility at its disposal.

The key for Chubb, as we advance, is to limit the losses that have grown over the last few years and to continue on the excellence in driving premium growth and underwriting profits.

Let’s next move onto the risks Chubb faces.

Risks

The first risk that Chubb faces is the whims of mother nature, with catastrophe losses mounting as the year progresses. Losses from COVID-19 related events have grown over the last two quarters as the pandemic has continued raging around the world.

Along with those losses, the company has also incurred losses from weather related ranging from the tornado in Nashville, TN, and other severe weather that has seemingly been everywhere this year.

Additionally, the company has sustained further losses from the wildfires in Australia, and the riot related civil unrest in the U.S., all of which comes with the territory of being a large insurer in catastrophe insurance.

The company in the first quarter expected these losses and set aside $1.6 billion in anticipation; it will be interesting to see how those losses affect pricing in the future.

Another risk the company faces is the ongoing threat of a legal nature. The company is facing numerous COVID-19 related litigations, which the company claims it is not responsible for as their policies do not cover those claims. If you would like more color on those legal issues, check out the fantastic article outlining those issues far better than I could:

Chubb has a lot of good things going for them, but the losses from COVID-19 will continue to mount as the pandemic continues, even though the company has set aside reserves, who knows how long this pandemic continues and that gives Chubb continuing liability now and into the future, possibly leading to further losses.

Valuation

Let’s move on to the valuation of Chubb, my favorite part.

According to Seeking Alpha authors, Chubb has a bullish rating of 4.0, while Wall Street is also bullish with a 3.5, and the quant rating is more subdued with a neutral rating of 2.86.

Seeking Alpha also gives Chubb a value factor rating of D-, with the company posting negative earnings for the quarter, as we referenced above. The company’s TTM P/E is 26.1, which is well above the sector median of 11.48.

And the TTM price to book of 1.04 is slightly above the sector median of 0.86, but below the company’s five-year average of 1.24 by 16.34 percent.

All in all, Chubb appears overvalued on a relative basis, according to both the TTM for both the P/E and P/B ratios.

The intrinsic valuation tells another story. Because the earnings for the quarter were negative, I normalized the earnings over the last five years, including the TTM, which gave me the starting point to begin the intrinsic valuation.

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After the calculations are complete, Chubb looks undervalued from an intrinsic viewpoint. Based on some pretty conservative numbers, i.e., the cost of equity and expected growth rates, which are below the historical numbers, the company looks undervalued, with a margin of safety of approximately 19 percent in case my assumptions are off-target.

Final Thoughts

Chubb had a challenging second quarter with the ongoing catastrophe losses from both the weather and COVID-19 related issues. The company is still doing a great job creating growing revenue from its focus on growing net written premiums.

The company is undervalued on an intrinsic basis and will continue as long as the COVID-19 related losses continue to mount, probably at least until the end of the year.

Chubb has the advantage of continuing strength in growing revenues, strong liquidity, and a great balance sheet to sustain itself until COVID-19 is in the rearview mirror.

The uncertainty, both now and into the future, gives me pause to pounce on this company, and I would recommend holding until gaining more clarity on the COVID-19 related losses.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

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