Sunday, May 7, 2017

A current AIM Fund holding: Chubb (CB) by Joe Flynn. “A major Swiss reinsurance company"

Chubb Ltd. (CB, $136.78): “Not quite done yet - Integration still paying off”
By: Joe Flynn, AIM student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Chubb Limited (NYSE:CB) is a holding company that functions as a global insurance and reinsurance organization. The company offers a wide variety of insurance solutions which include commercial, personal, property and casualty, and supplemental health insurance. The company is headquartered in Zurich, Switzerland and has 31,000 employees.

• The company was founded in January of 2016 after the finalization of a merger between ACE Ltd. and Chubb Ltd., a deal valued at $28B dollars. Management expects synergies of $800M annually by 2018, and further acceleration would boost EPS growth.

• Chubb produced a 2016 ROE of 10.5% despite headwinds from softening property and casualty prices. The figure compares favorably against Chubb’s WACC of 8.5%, and the Industry’s 7.3% average operating ROE.

•  Chubb has effectively used capital deployment to add value, and management has resumed a $1B buyback program for 2017. Management returns the additional capital the company generates, and have maintained a 20-year record of annual dividend increases.

 Key points:
Chubb finished off 2016 on a positive note posting 4Q EPS of $2.72, beating the consensus of $2.41. Chubb’s underlying combined ratio of 87.4% was better than expected, and a one-time pension benefit also aided the upside. A combined ratio above 100% is normally an indicator that insurance companies are paying out more money on claims then receiving in premiums.

Chubb’s combined ratio was a reassuring factor that the company could still make underwriting profits despite a competitive pricing environment. However, it is widely believed that the Insurance industry has reached an inflection point, and that insurance prices will continue to soften globally in future periods. Chubb’s Investment income and underwriting margins are still under pressure in 2017.
Chubb was not immune to the industry challenges during 2016 either, and had difficulties in premium revenue growth. Chubb’s total net premiums written for the year $29B, down 4.5%.

One bright spot for Chubb is that they are still benefitting from the Merger with ACE. The Integration between the two companies has gotten off to a very positive note. The company achieved all growth and cost containment success targets for the first fiscal year, and remains on track for 2017.  Chubb is well positioned for middle market client growth, and high-worth clients remain a driver for LT revenues. 2017-2018 accelerating synergies would allow for further cost savings, improving margins.

What has the stock done lately?
ACE was originally pitched with a price target of $121.43, and then formally became Chubb after the acquisition. The combination makes the new Chubb one of the world’s largest property and casualty insurers, and gives the company international exposure across most insurance lines. The stock is currently trading 12.6% higher than the original price target at $136.78 due to integration plans being ahead of schedule.

Past Year Performance:
Chubb’s total 12-month return has been strong at 16.01%. Given the recent uncertainty, the price has only increased 3.5% in 2017. These returns are underperforming the benchmark by around 3%. The company is reporting earnings on April 26. Positive earnings would serve as a sign of resiliency for Chubb when considering the struggles of the industry.

My Takeaway

Chubb offers a diverse stream of products globally, and could establish itself as an industry leader. The merger has led to increasing efficiency levels and opportunities for growth in the next few years. I believe Chubb makes an attractive investment relative to other insurance companies, and should be continued in the AIM International Portfolio. Insurance companies are expected to struggle, but Chubb’s focus on expanding margins should offer some protection against premium decreases. 

Premiums will likely decrease in 2017, but it will be interesting to see how Chubb will compete in the changing insurance environment. Also, the company posted a solid ROE of 10.5% in 2016 that ended up beating the peer group by a wide margin. In the annual letter to shareholders, Management was very pleased with the returns generated during a down year and expressed confidence for 2017. Management expects EPS to return to moderate growth next year despite the uncertainty. 

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