Chubb Earnings: Hard Market Continues to Drive Strong Results

Chubb CB continued to benefit from the hard market in commercial lines during the first quarter. We view the reported annualized return on equity of 15% (or 19% on a core tangible basis) as a strong result for the insurer, supporting our view that relatively disciplined underwriters such as Chubb have more leverage to a harder market. We will maintain our $208 fair value estimate for the narrow-moat company and view the shares as being about fairly valued.

Net written premiums for property and casualty lines were up 11% year over year on a constant-currency basis during the first quarter (or 8% excluding agriculture lines), staying roughly in line with the growth rate we’ve seen in recent quarters. On the call, management said it believes that pricing actually accelerated a bit in the March quarter, and that pricing appears to be the main driver of premium growth at the moment.

Stronger pricing continues to benefit underwriting margins. Chubb did, however, see a modest pickup in catastrophe losses, with the reported combined ratio for P&C lines increasing to 86.3% in the quarter from 84.3% last year. The underlying combined ratio (which excludes catastrophe losses and reserve development) was 83.4%, though, an improvement from 83.5% last year and also sequentially.

We’ve seen underwriting margins start to flatten out for peers in recent quarters, and Chubb appears to be following the same trend. As we move deeper into the hard market, we don’t think investors should count on much improvement in margins going forward. But with underwriting profitability at an attractive level on an absolute basis, we think the near-term outlook for Chubb remains bright.