- Chubb (
) is an international property and casualty insurer.
- Revenue has been static over the most recent five year
- Five year average net income growth has been 7%.
- Five year book value growth has averaged over 12%
- Five year dividend growth has been over 11%.
- Current yield: 2.60%
- Shares seem attractive at current prices, with a P/E of under
Chubb was founded in 1882 as a marine underwriting business in
New York, and now exists as an international property and casualty
insurance company with over 10,000 employees.
The premise behind an insurance company is that they spread risk
out over a wide number of people and businesses. They collect
premiums (payments) from clients and in return those clients are
covered in case of a serious loss. From an insurance business
standpoint, it's ideal to collect more in premiums than you pay out
for losses. This is not the primary form of earnings, though. An
insurance business, after collecting all of the premiums, holds a
great deal of assets that, over time, are paid out for client
losses. An insurance company constantly receives premiums and pays
out for losses, so as long as they are prudent with their business,
they get to constantly keep this large sum of stored-up assets. As
any investor reading this knows, a great sum of money can be used
to generate income from investments, and that's how an insurance
company really makes money. Chubb, however, is adept at ensuring
that their premiums exceed their payouts, so compared to many other
insurers, Chubb receives significant income from their underwriting
Chubb has three business segments, and the executives expect an
underwriting profit from each of them.
This segment accounted for $4.7 billion in premiums in 2009,
representing 42% of the total. Insurance products are offered for
casualty, peril, workers compensation, property, and marine.
This segment accounted for $3.7 billion in premiums in 2009,
representing 33% of the total. Insurance products are offered for
fine homes, automobiles, and possessions.
This segment accounted for $2.7 billion in premiums in 2009,
representing 25% of the total. Insurance products are offered for
specialty professional liability for companies, institutions,
firms, and healthcare organizations.
24% of Chubb's total premiums come from outside of the United
States. The company holds offices in 27 countries, and on
continents including North America, South America, Europe, Asia,
Revenue, Profit, and Equity
Chubb receives revenue from premiums written, in addition to
income earned from investments and a few other areas.
Premiums earned have diminished by an average of 1% annually
over these five years. Investment income has grown by over 5% per
year on average during this period. The overall result is that
total revenue has remained virtually static for 2009 compared to
2004. Premiums are on track to be relatively static or modestly
down throughout 2010 as well.
Income has been fairly erratic due to this recession. Over this
five year period, the average income growth has been 7%. EPS growth
is even bigger due to share repurchases.
Total Shareholder Equity
Book Value per Share
Total shareholder equity for the company has increased by an
average of over 9% annually over this five year period. Equity per
share, or book value, has increased by an average of over 12%
during this same period. Book value has increased faster than total
shareholder equity because the company has been repurchasing its
own shares, and therefore the total shareholder equity is divided
over a continually smaller number of shares in existence.
Chubb has increased its dividend for 27 consecutive years and
has a payout ratio of under 30%.
Over this six year period, the company has grown dividends by an
average of over 11% annually. This chart takes into account a stock
split and also projects 2010 data based on the current quarterly
Chubb's Property and Casualty Finance strength has been given an
AA rating by Standard and Poor's, and comparable ratings by other
Combined Loss to Expense ratio was reported to be 86% in 2009,
which is excellent.
Chubb has a business model that is slightly different than some
other insurers. The premiums they charge tend to be a bit high, but
they typically offer superior claim service. Management insists on
a culture where the company does not chase premium growth at the
expense of having to under-charge on insurance products. The
company conservatively allocates its resources, and has weathered
mass asbestos claims, hurricane Katrina, and the economic crisis of
And then there's the topic of share buybacks - an important
aspect of this investment. There exist debates on whether share
repurchases are useful for creating shareholder value, and of
course like just about any other debate topic, the answer is that
it depends on the unique situation. Some companies are poor at
using share repurchases to create shareholder value. They buy their
shares when they are highly valued and cash is flowing, but then
reduce or eliminate their share repurchases during times when the
economy is tough, cash is scarce, and their stock is cheap. This is
the exact opposite of what a shareholder wants.
Some companies, on the other hand, use share repurchases
effectively. They pay dividends to shareholders, and use excess
capital to repurchase shares. They constantly repurchase shares,
meaning they dollar cost average into their own company, and/or
they specifically focus on repurchasing shares during times of
economic uncertainty when their shares are at the cheapest in terms
of P/E. A lot of insurers, including Chubb, fall into this
category. Some insurance company valuations tend to be fairly low,
and their price-to-book (P/B) ratios tend to be close to 1. Chubb
has been repurchasing its own shares for several years, and is
currently purchasing them while the P/E is under 9 and the P/B is
1.17. Their 2009 annual report describes their reason for doing
this. Chubb's investment portfolio mainly consists of fixed income
producing securities, and with interest rates so low, returns from
this type of security are currently poor. Chubb management has
decided that the best use of excess capital is to repurchase their
own cheap shares. This mindset puts Chubb into a position where
they tend to look favorably on share repurchases during times of
economic uncertainty, meaning they act in the exact opposite way of
companies that have poor share repurchase timing.
At the end of the fourth quarter of 2006, Chubb had
approximately 428 million shares outstanding. The most recent
quarter in 2010 (second quarter) reports that the number of shares
outstanding is approximately 314 million. Chubb has repurchased
over $1 billion worth of its own stock each year since at least
2006. This means that the company earnings and dividend payments
are divided over an increasingly smaller number of shares, and so
EPS and dividends per share grow at an attractive rate despite
static business operations producing little or no growth. With the
low P/E, the company can purchase many shares for their money, and
dividend growth can lead to great returns for shareholders.
The net result is that this seems to be a good business at a low
price. Company-wide revenue declines make this company look
unattractive, but equity growth and income growth balance this out,
and share repurchases that lead to EPS growth and dividend growth
make the investment very worthwhile. All this company has to do to
increase dividends and EPS is to maintain the current trend. Any
growth is icing on the cake.
The company has stated that they focus primarily on bottom line
growth; profitability. They look to boost premiums where possible,
but not at the expense of profitability. Their business model has
been summed up as follows by the son of the founder of the
The way to success is to select good risks and cover them.
Obviously this does not lead to great size, but it should
produce profitable business.
-Percy Chubb, 1857-1930
By offering great claim service for slightly higher premiums,
the company hopes to be looked upon as the select company in their
various niches. This is working quite well for their
policy, which is an insurance product for the affluent.
Still, I'd like to eventually see some top-line premium growth
for the company. This would show that they have a decent economic
moat. Company management has referred to the bailouts of their
financially troubled competitors as "troubling". Some companies
that chase premium growth, or hold riskier balance sheets, have
been bailed out by the federal government, while prudently managed
companies like Chubb have not needed bailouts. One could argue that
his encourages businesses to play a riskier game, and can affect
the growth of the more conservative and responsible businesses.
Chubb management's current advertising focuses on the fact that
insurance is not a commodity. It's not just something that you need
to have, and look for the cheapest price to attain it. "Who insures
you doesn't matter. Until it does." is one of their slogans,
attempting to draw client attention towards their exceptional
claims service and financial strength. While this strategy has
given shareholders great returns, time will tell if this business
model of higher premiums and better service continues to be
effective. The truth is, although insurance businesses are simple
and profitable, it can be extremely difficult to develop a
significant economic moat because insurance really is viewed as a
commodity in most cases. Companies battle to provide a nearly
identical product, and the customers only find out about the
differences on the rare occasion that they have to file an
All companies face risk. Insurance companies are businesses
about reducing risk and spreading it out, and they even insure
their own operations against risk. Chubb faces the risk of a
continued difficult economy, as well as catastrophic losses. In
addition, since they are an international insurer, they face
currency risk. A less tangible risk is their modestly falling
premiums. An eroding competitive advantage must be avoided.
Conclusion and Valuation
In conclusion, Chubb looks like a solid dividend growth
investment at current prices. Management seems quite adept at
investing and building value, but time will tell whether they can
grow their market share, boost profits, and improve premiums
earned. Chubb can grow its dividend and EPS despite static
company-wide results due to its continual repurchasing of its own
cheap shares. With a strong balance sheet, good earnings, prudent
management, and growing dividends, this represents a good way to
add some conservative financial exposure to a portfolio. The low
P/E of under 9 combined with the strong financial condition of this
business and their long history of consecutive dividend increases
provides a sturdy margin of safety.
I own shares of Chubb at the time of this writing.
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