Chubb Earnings: Hard Market Leads to Another Strong Quarter

Chubb CB posted a strong second quarter and appears to have avoided the catastrophe losses that have affected some of its peers. An annualized return on equity of 14% (21% on a core tangible basis) was roughly in line with last quarter, which we consider a strong result for the narrow-moat insurer. We think disciplined underwriters such as Chubb have more leverage to a harder market and view recent results as supporting this idea. We will maintain our $213 per share fair value estimate.

Net written premiums for property and casualty lines were up 10% year over year on a constant-currency basis during the quarter. Growth in commercial lines was a little higher at 11% and picked up modestly from the first quarter. The company appears to still be achieving solid pricing increases, which remains the main driver of premium growth at the moment.

While the hard market continues to lead to attractive underwriting margins, we have seen some flattening of margins the past couple of quarters for Chubb and its peers. The underlying combined ratio (which excludes catastrophe losses and reserve development) for Chubb’s P&C operations was 83.3% during the second quarter compared with 83.5% last year.

As we move deeper into the hard market, we don’t think investors should count on further improvement in the company’s underwriting margins. But with underwriting profitability stabilizing at an attractive level, we think Chubb has the opportunity to generate relatively high returns.

Favorable development in P&C lines for the quarter came in at $200 million. Development has been very consistent at roughly this level in recent quarters, another factor that we believe points to stabilization in underwriting results.