Summary
-Chubb (CB) is an international property and casualty insurer.
-Revenue has been static over the most recent five year period.
-Five year average net income growth has been 7%.
-Five year book value growth has averaged over 12% annually.
-Five year dividend growth has been over 11%.
-Current yield: 2.60%
-Shares seem attractive at current prices, with a P/E of under 9.
Overview
Chubb (CB) 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 businesses.
Business Segments
Chubb has three business segments, and the executives expect an underwriting profit from each of them.
Commercial Insurance
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.
Personal Insurance
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.
Specialty Insurance
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, and Australia.
Revenue, Profit, and Equity
Chubb receives revenue from premiums written, in addition to income earned from investments and a few other areas.
Revenue
| Year | Premiums Earned | Investment Income | Other Sources | Total Revenue |
|---|---|---|---|---|
| 2009 | $11.331 billion | $1.585 billion | $100 million | $13.016 billion |
| 2008 | $11.828 billion | $1.652 billion | ($259 million) | $13.221 billion |
| 2007 | $11.946 billion | $1.622 billion | $539 million | $14.107 billion |
| 2006 | $11.958 billion | $1.485 billion | $560 million | $14.003 billion |
| 2005 | $12.176 billion | $1.342 billion | $565 million | $14.083 billion |
| 2004 | $11.636 billion | $1.207 billion | $334 million | $13.177 billion |
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.
Net Income
| Year | Net Income |
|---|---|
| 2009 | $2.183 billion |
| 2008 | $1.804 billion |
| 2007 | $2.807 billion |
| 2006 | $2.528 billion |
| 2005 | $1.826 billion |
| 2004 | $1.548 billion |
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.
Shareholder Equity
| Year | Total Shareholder Equity | Book Value per Share |
|---|---|---|
| 2009 | $15.634 billion | $47.09 |
| 2008 | $13.432 billion | $38.13 |
| 2007 | $14.445 billion | $38.56 |
| 2006 | $13.386 billion | $33.71 |
| 2005 | $12.407 billion | $29.68 |
| 2004 | $10.126 billion | $26.28 |
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.
Dividend Growth
Chubb has increased its dividend for 45 consecutive years and has a payout ratio of under 30%.
Dividend Growth
| Year | Dividend | Yield |
|---|---|---|
| 2010 | $1.48 | 2.60% |
| 2009 | $1.40 | 3.00% |
| 2008 | $1.32 | 2.80% |
| 2007 | $1.16 | 2.20% |
| 2006 | $1.00 | 2.00% |
| 2005 | $0.86 | 2.00% |
| 2004 | $0.78 | 2.40% |
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 dividend.
Balance Sheet
Chubb’s Property and Casualty Finance strength has been given an AA rating by Standard and Poor’s, and comparable ratings by other agencies.
Combined Loss to Expense ratio was reported to be 86% in 2009, which is excellent.
Investment Thesis
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 2008.
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 business:
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 Masterpiece 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 insurance claim.
Risks
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.
Full Disclosure: I own shares of Chubb at the time of this writing.
You can see my full list of individual holdings here.
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Well written! When I looked for an insurance company my choice stood between Chubb and Cinciatti. I picked Cinciatti because of the high dividend yield and because its revenues seemed to have been increasing faster then Chubb. I did not take share repurchases into the calculation. You have an excellent point there. Some international exposure is interesting aswel. I will take a closer look at Chubb.
Thanks,
For these insurance companies, especially at these very low valuations, share repurchases are the bulk of returns. Usually I don’t like share repurchases much but at these low valuations they just make sense.
I did an analysis of CINF and HGIC a while back. I liked both companies, but CINF took a bit of an extra beating during this economic crisis. CINF has the highest yield yet the lowest dividend growth, and they stopped repurchasing shares during 2009 when their prices were at their lowest (which is the opposite of what is ideal). If I recall, it was because a significant chunk of their portfolio was in financial stocks. They didn’t diversify well, but now are diversified after learning the hard way.
HGIC is the middle of the road between CINF and CB with 4+% yield and significant share repurchases as well. I currently own HGIC and CB, but if CINF continues at its current trend I wouldn’t mind adding that one too.
When i look at the number of shares 2009 vs 2004 there isnt that much of a difference (Chubb -10%, Cinc -8%). But u do have a good point in the timing of the repurchases. Timing is crucial.
Yes Cinciattis equityportfolio did even worse then the general market in 2008. They “blame” one specific financial stock in their annual report (I have forgotten which and Im to lazy to check it up).
Harleysville does seem like an interesting company but my stockbroker doesnt provide it, probably because its too small.
Chubb has mostly municipal bonds in its investmentportfolio while Cinciatti has about 25% of its portfolio in equity. An important difference. Chubb has a more safe and conservative investmentporfolio while Cinciattis holdings are more daring, but (hopefully) more promising.
Another great analysis. I was just wondering, does anyone know where I can find good information on analyzing an insurance company? I would like to add some to my portfolio but am hesitant since I don’t quite understand how to value them yet. Any advice is appreciated! thanks
barry
Hi Barry,
Thanks for the compliment. I can mention a few things and point you to a few other articles.
First, if you’ve enjoyed this article, look through my stock analysis section and read up on HGIC and CINF. If you’ve done that, you’ll now have become familiar with three property and causality insurance companies.
Next, I can mention a few things I look for.
-I check premiums over the last several years. This is the majority of revenue. Insurance companies are an industry that I am forgiving of if they don’t have much revenue growth, but I would rather see some than none. Premiums represent continued and new business clients.
-I check the combined ratio. It’s a measure of how skillful and efficient a given insurer is. (Chubb is well above average here.)
-I check the investment income over time. It’s the other main component of revenue. It shows how good an insurance company is at investing their float.
-I check the balance sheet. Different insurance companies invest in different things. Most of their portfolios are conservative by individual standards, with a lot of fixed-income investments. Some are a bit more aggressive than others, and invest in a significant amount of equities. As Defensiven pointed out in an above comment, CINF has a fairly aggressive balance sheet with a significant mixture of equities in with its fixed income.
-I check the price/book ratio. For insurance companies, this should be pretty low. Closer to 1, rather than 2 or 3 or higher like other companies. P/B helps show the valuation of an insurance company. I also of course check P/E.
-I check of course for dividends (yield and growth), and also for share buybacks. Insurance companies are one industry where I LOVE share buybacks, because the valuations are so low and so the companies can get great returns on a per-share basis by buying back their own stock. You can look on the cash flow statement for how much the company is spending on buybacks, and you can also check on other statements to see how the total number of company shares is changing over time.
You can also go to Seeking Alpha and type in the ticker symbols and see what people have to say. SA has tons of good contributors.
I also found two Motley Fool articles that might be helpful.
Insurance Company Basics: Combined Ratio Explanation
Insurance Company Basics: Premiums
Matt,
Thanks for the info, it’s much appreciated. I’ve read up on your other analysis and am going to start doing my own soon. Keep up the great work.
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