Property and Casualty insurer Chubb Corp. (CB)
is slated to release second quarter earnings on July 21, after the
market closes. The current Zacks Consensus Estimate is $1.02 per
share for the quarter, projecting a year-over-year decline of
27.8%.
Chubb has consistently outperformed Zacks Consensus Estimates.
Over the past four quarters, the average earnings surprise is
12.13%.
First Quarter in Brief
In the first quarter of 2011, Chubb recorded operating earnings
of $1.35 per share, beating the Zacks Consensus Estimate of $1.13,
on the back of reduced claims costs owing to natural disasters and
an increase in premium revenue.
Chubb wrote premiums of $2.86 billion during the first quarter,
up 3% from $2.77 billion in the comparable period last year, driven
by a strong overseas growth, as well as a positive growth in the
United States.
Operating costs and expenses rose 4.9% year over year to $904
million. But its combined loss and expense ratio stood at 93.7%,
almost in line with the year-earlier quarter (93.6%).
Losses from worldwide catastrophes totaled $270 million before
tax in the first quarter, compared with $344 million in the
year-ago quarter. The losses in the first quarter of 2011 emanated
primarily from winter storms in the U.S., floods in Australia and
earthquakes in New Zealand and Japan.
Looking Forward
With the release of fiscal 2010 earnings, Chubb provided its
fiscal 2011 earnings guidance. At that time it, had forecasted
operating income per share of $5.35 to $5.75. The midpoint of
the guidance range was 35 cents below the actual operating income
per share recorded in 2010. This reflected an expectation of the
negative impact of margin deterioration and lower investment
yields, which was more than offset by the positive impact of its
share repurchase program and lowered expected catastrophe
losses.
However, contrary to management’s expectation of low catastrophe
(cat) losses with respect to 2010, the first half of 2011 alone
experienced exceptionally high cat losses.. The impact of
catastrophes translated into 9.5 points of the combined ratio and
affected the company’s results by 59 cents per share in the first
quarter itself.
Chubb suffered a full-year average cat loss of 5.7 points in
2010, which management viewed as unusually high. However,
considering severe cat losses incurred in first quarter 2011, the
cat loss drag on 2011 earnings will be starkly higher than
management’s full-year average expectation of a drag of 3.5 points
on combined ratio. The impact of each percentage point of cat
losses on 2011 operating income per share will expectedly be 25
cents, compared with 22 cents incurred in 2010.
Management did not revise the guidance for first quarter
earnings. Instead, it stated that it would revisit its guidance
during the release of second quarter results, when the operating
conditions for 2011 become clearer.
Chubb is facing a difficult catastrophe environment. The
insurers could further suffer if the hurricane season that kicked
off June 1 translates into significant losses. According to the
estimates by the National Oceanic and Atmospheric Administration
and other forecasting groups, 6–10 hurricanes, with 3–6 classified
as major hurricanes, are expected this year. On account of all
this, we expect management to lower its previous
guidance.
Estimate Revision Trend
Analysts’ estimate revision trends for the second quarter have
been significant over the past month. Over the last 30 days,
fifteen out of the 20 analysts covering the stock pulled down their
estimates. Furthermore, one analyst has decreased the estimate over
the last 7 days. No analysts made an upward revision over those
time periods. A similar trend was noticed for fiscal 2011, which
saw 17 downgrades (out of 21 analysts) over the last 30 days and 1
downgrade over the past 7 days.
However, we notice an insignificant revision trend for the third
quarter, where 2 out of 18 analysts have decreased their estimates
over 30 days and 1 over the last 7 days. The Zacks Consensus
Estimate for the third quarter is pegged at $1.36 per share, which
translates into a year-over-year deterioration of 19.30%.
Magnitude of Estimate Revisions
The magnitude of revisions has been significant over the past
month, with estimates for the second quarter declining from $1.31
to $1.02. However, over the past 7 days, no change in estimates has
been seen. For fiscal 2011, 30-day, as well as 7-day old estimates,
remained at par with the current level of $5.29 per share.
Our Recommendation
Chubb’s Commercial Insurance (CCI), which represented about 34%
of the net written premium in 2010, is recently witnessing a slowly
improving market. The segment has been reporting a reversal of
trend or stabilization after declining continuously since fourth
quarter of 2008.
However, Chubb’s Specialty Insurance business does not look
encouraging unlike CCI. Chubb’s Specialty insurance business has
been suffering rate reductions over the past several years. The
company’s surety, professional liability and personal lines of
business are also expected to remain under some pressure as new
business pricing stays negative or at low single digits. Combined
with the continued discipline in underwriting, these challenges
will continue to suppress premiums in the near term. Although there
have been some signs that an economic recovery may be underway, the
when and how of it remain uncertain. Even if it does occur, premium
growth will lag any recovery that takes place, thus pressuring
margins.
Chubb’s Personal Insurance is also strengthening gradually based
on positive improvements in new business growth in premiums, as
well as in-force count levels.
However, the vital thing to look out for in Chubb’s second
quarter earnings would be the cat losses details. In May, Chubb
revised its second quarter cat loss expectation upwards by
approximately $80 million to the range of $250 million to $310
million. Chubb ranked fourth by the size of losses from April-May
tornadoes, with the top three positions held by Allstate
Corp. (ALL) with $2 billion loss, State
Farm with $1.75 billion loss, and Travelers
Companies Inc. (TRV)
with $1.09 billion loss.
The catastrophe losses, incurred early during the year, will
expectedly drain Chubb’s second quarter 2011 earnings by 55–68
cents per share after tax. Huge cat losses can drain insurers’
capital and force them to limit share repurchases and dividend
payments. Chubb is otherwise active at share buyback and dividend
hike, with its recent annual dividend hike marking its twenty-ninth
year of consecutive dividend increase.
Recently, Chubb’s close peer The Travellers Companies announced
that it would limit its share repurchase to below $250 million for
the second quarter of 2011, which will be almost 3.5 times lower
than the repurchases made during second quarter 2010.
However, we believe Chubb’s superior underwriting expertise,
strong capital position, prudent investment philosophy, and
excellent credit ratings will enable it to generate solid returns
in a difficult economic environment and capitalize on business
opportunities as they arise.
We carry a “Neutral” recommendation on the stock for now but
might revisit our recommendation after second quarter earnings. The
stock carries a Zacks #3 Rank, which also translates into a
short-term (1-3 months) ‘Hold’ recommendation.
ALLSTATE CORP (ALL): Free Stock Analysis Report
CHUBB CORP (CB): Free Stock Analysis Report
TRAVELERS COS (TRV): Free Stock Analysis Report
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