Chubb Corp Kept at Neutral

We are reiterating our Neutral recommendation on Chubb Corp. (CB - Analyst Report) prior to its second-quarter results, scheduled for release after the market closes on July 26 The Zacks Consensus Estimate for second quarter earnings is currently pegged at $1.42 per share, reflecting year-over-year growth of 12%. The company performed favorably during the first quarter of 2012.

Our recommendation reflects the gradually improving property and casualty pricing cycle, which will directly benefit Chubb’s Personal and Commercial lines of businesses. A continued global weakness and a low interest rate environment are also some of the macroeconomic headwinds, which force us to maintain a cautious outlook on the company.

Chubb is witnessing rate improvements in both the Commercial as well as Personal lines of businesses. Its Commercial segment has stabilized after declining continuously since the fourth quarter of 2008. The segment has been witnessing low single-digit increase in average renewal rates since the second quarter of 2011. Retention ratio is stable as well. An increasing portion of the segment’s U.S. business is witnessing a flat-to-positive rate increase. The segment’s international business is also experiencing rate hikes as a result of the recent catastrophes, which have increased the demand for insurance. Along with the rate increases and a stable retention level, additional premium received via mid-term endorsement activity and from premium audits also indicate an improving market environment.

Chubb’s Personal Insurance segment is also witnessing a gradual market improvement. In the first quarter, the segment recorded a 5% increase in net premium written. This represented the tenth consecutive quarter of growth, primarily led by strong premium increases from its international business.

Chubb has significant international operations as approximately 27% of 2011 revenues were generated from operations outside the U.S. The company also stands to gain from its international business, which benefits from better pricing conditions than its domestic operations. We believe Chubb’s strategy to expand internationally will position it well for long-term growth.

Combined ratio, an important measure of Chubb’s profitability has also shown favorable trends over the past five years. The average remained 88.4% from 2007-2011, reflecting strong underwriting results, which further point toward the company’s disciplined business practice.

Chubb pursues active share repurchase activity, which has been a boon to bottom-line earnings. In the absence of organic growth, the company has tried to maintain its bottom-line earnings by aggressively repurchasing shares over the past four years. The company also scores strongly with rating agencies.

However, the company’s profitability is offset by headwinds such as a low interest rate environment, declining reserve position and a weak Specialty line of business.

Chubb currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Its competitors W.R. Berkley Corp. (WRB - Analyst Report), The Travelers Companies Inc. (TRV - Analyst Report), and Assurant Inc. (AIZ - Analyst Report), all carry a Zacks # 3 Rank and a long-term Neutral rating.