ALL Allstate Corporation

Property and casualty insurer Chubb Corp. (CB) reported fourth quarter operating earnings of $1.63 per share, ahead of the Zacks Consensus Estimate of $1.60 per share. The better-than-expected earnings stemmed from higher premium written, favorable reserve release, a lower share count partly offset by lower investment income and a high cat loss.  Earnings were, however, lower than $1.69 per share reported during the prior year quarter, a period which was marked by benign cat activity.

Chubb reported net written premiums of $3.0 billion, up 4% year over year, reflecting rate improvements in all three of its business lines.

Fourth quarter combined ratio (a measure of an insurer’s profitability, the lower the better) deteriorated to 89.9%, compared with 87.0% in the prior year quarter. Adjusting for cat losses, combined ratio was 89.5% in 2011 compared with 85.6% last year.

Property and casualty investment income after tax was down 1% year over year to $316 million, primarily due to the continued decline in reinvestment rates. As per management’s estimates, property and casualty investment income after tax is expected to decline 3% – 5% in fiscal year 2012.

Adjusted book value per share, a measure of net worth, increased to $51.38 as of December 31, 2011, compared with $49.05 at 2010 year end. The growth in book value can be attributed to the favorable impact of the increase in unrealized gain position owing to a decrease in interest rates and offset by the unfavorable impact of lower interest rates on the value of the company's pension liability.

For the full year 2011, the company reported earnings of $5.12 per share, a nickel ahead of the Zacks Consensus Estimate. Net written premiums in 2011 increased 5% to $11.8 billion from $11.2 billion in 2010.

Segment Update

At Chubb’s Commercial Insurance (CCI) segment, net written premiums climbed 8% year over year to $1.2 billion during the reported quarter led by rate increase and strong retention levels. Management stated that the quarter saw a positive commercial rate environment and that the segment will continue to see increased business going forward.

Chubb's Specialty Insurance (CSI) net written premiums inched down 1% year over year to $736 million led by lower premium written professional liability lines partly offset by an increase in business in the surety lines. The average renewal rates for professional liability in the United States turned positive in the fourth quarter, a reversal from the trend of negative rates seen over the last three quarters (rates were negative 1% in the third quarter, 2% in the second quarter and 3% in the first quarter of 2011). The last time the professional liability lines obtained positive rate increases in the United States was in 2009, when there was a fair amount of market disruption in the wake of the financial crisis. Prior to that, rates had not increased since the first quarter of 2004.

Chubb’s Personal Insurance (CPI) segment’s net written premiums went up 3% year over year to $991 million. This represented the eighth consecutive quarter of growth, with particularly strong premium increases outside the U.S. Given the recent heavy cat and non-cat weather-related losses, the company is now filing for a rate increase in the homeowners lines of business in the the 5% – 6% range, higher than the earlier 2011 range of 3%–4%.

Capital Management

For the full-year 2011, Chubb repurchased 27.6 million shares at an aggregate cost of $1.7 billion and an average cost of $62.30 per share. As of December 31, 2011, there were approximately 909,000 shares remaining under the company’s December 2010 repurchase program. During January 2012, it repurchased all the remaining shares under this program at an average cost of $69.66 per share. Since December 2005, Chubb has repurchased approximately 45% of the outstanding shares. Just prior to the earnings release, the company announced the new $1.2 billion share repurchase program, which is intended to be complete by the end of January 2013.                                          

Higher 2012 Outlook

Management expects operating income per share for 2012 to be in the range of $5.30 – $5.70, which at the midpoint is $0.38 or 7% higher than the company’s actual operating income per share for 2011. This guidance is based on the expectation that net written premium growth will be 2% – 4%, assuming a negative 1% impact of foreign currency translation. Combined ratio is expected in the range of 93% – 95%.

Our Take

The big event for Chubb this year was extraordinary high levels of catastrophe losses. Despite record catastrophe losses, and a challenging macroeconomic and property and casualty industry environment, the company managed to perform well in 2011.

The year 2012 is expected to be a turnaround year for the insurance industry. The market continues to be firm and a continued increase in insurance pricing is expected, which will benefit top line growth. However, some of the headwinds such as low interest rates and declining reserve release will continue to put pressure on the company’s profitability.

Nevertheless, in our view Chubb’s strong capital position will enable it to return capital to shareholders and take advantage of opportunities to grow profitably. Moreover, Chubb’s superior underwriting, customer loyalty and conservative investing approach gives it a competitive edge over its peers like The Travelers Companies. (TRV), XL Group Plc (XL), The Allstate Corp. (ALL), W.R. Berkley Corp. (WRB) among others.

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
CHUBB CORP (CB): Free Stock Analysis Report
 
TRAVELERS COS (TRV): Free Stock Analysis Report
 
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
 
XL GROUP PLC (XL): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research