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Despite high cat losses from Hurricane Irene along with a slew of other storms, the property and casualty insurer, Chubb Corp. (CB - Analyst Report) managed to report better than the Zacks estimates.

The EPS of 88 cents for the third quarter was 6 cents ahead of the Zacks Consensus estimate of 82 cents, led by higher premium written, favorable reserve release and a lower share count. Earnings however were very low compared to $1.69 per share in the last year quarter, a period which was marked by benign cat activity.  

Combined ratio (a measure of insurer’s profitability, lower the better), deteriorated to 102.6%, compared to 86.2% in the prior year quarter. Adjusting for cat losses, combined ratio was 88.2% in 2011, compared with 84.1% last year.

Significant damage done by Hurricane Irene in the northeast U.S., where Chubb has a substantial business exposure, along with a slew of other storms, led to losses of $420 million, seven times higher than $58 million recorded in the prior year quarter.

Property and casualty investment income after tax was up 1% year over year to $321 million led by an increase in average invested assets and a favorable effect of currency fluctuations, partially offset by a decline in investment yield.

Management expects a flat property and casualty investment income after taxes for FY11, due to a decline of about 3% in net investment income in the fourth quarter which will be brought about by a decrease in invested assets, as well as lower reinvestment rates.

Adjusted book value per share, a measure of net worth, was $51.11 compared to $49.05 at 2010 year end and $47.25 a year ago.

Segment Update

At Chubb’s Commercial Insurance (CCI), net written premiums climbed 9% year over year to $1.2 billion during the reported quarter led by rate increase and strong retention levels. The combined ratio was 101.1% versus 89.1% in the prior year quarter. Excluding the 11.2% impact of catastrophes, the segment’s second quarter combined ratio stood at 89.9%, worse than 87.1% last quarter.

Chubb's Specialty Insurance (CSI) net written premiums inched down 1% year over year to $665 million led by lower premium written in D&O lines, Surety lines partly offset by an increase in business in professional liability lines. CSI's combined ratio was 88.3% as against 83.3% in third quarter 2010.

Chubb’s Personal Insurance (CPI) net written premiums grew 5% year over year to $1.0 billion. This represented the seventh consecutive quarter of growth, with particularly strong premium increases outside the U.S.

Reduced FY11 Outlook

Given the high level of catastrophe losses incurred in the third quarter and management’s outlook for the fourth quarter, FY11 operating income per share guidance was pulled down to a range of $5.10 to $5.20 from the previous range of $5.55 to $5.85.

Despite reduced profitability in the quarter, we hold a favorable outlook on the company over the longer term. We respect the company for its ability to maintain shareholders’ return by deploying its excess capital for stock buybacks and dividend payments in a weak market environment of the past several years.

The recent record high catastrophe losses, low investment yields and a prolonged soft property and casualty market are all set to turn the underwriting cycle toward a hard insurance market. Any such turn in the industrial cycle is going to greatly benefit the high quality insurer, which boasts an industry leading specialty franchise. 

Property and Casualty industry conditions are affecting the carriers alike. Chubb’s close competitor, The Travelers Companies. (TRV - Analyst Report) also reported third quarter earnings miss on the back of high cat losses. We expect similar results from other insurers such as XL Group Plc (XL - Analyst Report), The Allstate Corp. (ALL - Analyst Report), W.R. Berkley Corp. (WRB - Analyst Report). 

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