Sandy to Mar Chubb's 4Q Earnings

The U.S. property and casualty insurer Chubb Corp. ( CB - Analyst Report ) fears that Hurricane Sandy will damage its fourth quarter earnings by approximately $880 million before tax or $570 million after tax ($2.14 per share after tax). New York and New Jersey – the areas most affected by Sandy – are two of the five states where the company has largest exposure.

These loss estimates are net of reinsurance. Chubb’s significant reinsurance protection has reduced the net loss position. Under its reinsurance programs Chubb retains losses up to $500 million. Its North American catastrophe treaty, supplemental catastrophe reinsurance, and catastrophe bond provide coverage for roughly 65% of losses between $500 million and $1.65 billion for each occurrence.

Prior to reaching the rough estimates for the cat loss, Chubb had ceased its share repurchase program to pay for claims. Since the company has a fair idea of the amount of loss it will incur from Sandy it has resumed the share buyback program. Chubb will be unable to complete the targeted buyback of $1.2 billion worth of shares by January 2013, as earlier scheduled.

Despite being subjected to cat loss volatility, Chubb remains one of our favored stocks in the property and casualty insurance coverage. Its strong balance sheet, potential for solid book value growth, and better-than-average underwriting performance has shielded its earnings.

Sandy, one of the top-10 most expensive U.S. hurricanes for insurers, has also hit The Travelers Companies Inc. ( TRV - Analyst Report ) , having a significant homeowners and commercial property exposures throughout the East Coast. Furthermore, The Allstate Corp. ( ALL - Analyst Report ) , the second largest homeowners’ insurance underwriter, has substantial exposure to Sandy.

Despite causing huge insured losses, Superstorm Sandy will not be able to change the industry pricing trend. Losses caused by it are not large enough to reduce the huge surplus capital base of the industry. Although the event will increase insurance pricing for the affected lines in the impacted areas, a broad-based hardening of rates is nowhere to be seen.

Additional details on the impacts of losses due to Sandy and consequent update on share repurchase will be provided by the company during its fourth quarter earnings release. Till then, we maintain our long-term Neutral recommendation on the shares. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.