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The Chubb Corporation NYSE:CB. Madhukar Ladha Sean Tse Le Xing. Agenda. Company Background Company Business Mix Chubb Performance vs Industry Impact of Hurricane Sandy Valuation and Recommendation. Chubb - Company Background. Stock Price: $77.5 (12/07/2012) Market Cap: $20.9bn

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the chubb corporation nyse cb

The Chubb Corporation NYSE:CB

MadhukarLadha

Sean Tse

Le Xing

agenda
Agenda
  • Company Background
  • Company Business Mix
  • Chubb Performance vs Industry
  • Impact of Hurricane Sandy
  • Valuationand Recommendation
chubb company background
Chubb - Company Background
  • Stock Price: $77.5 (12/07/2012)
  • Market Cap: $20.9bn
  • Net Debt: $3.5bn
  • Financial Ratings (Moody’s)
      • Corporate Senior Debt: A2
      • Property & Casualty Financial Strength: Aa2
chubb company background1
Chubb Company Background
  • Sector: Financial
  • Industry: Property & Casualty Insurance
  • Personal Insurance (Target high and ultra-high net worth clients) – 33.6%
    • Automobile (5.7%), homeowners (20.9%), supplemental accident and health insurance (7.0%)
  • Commercial Insurance Products – 42.5%
    • Multiple peril (9.7%), casualty (13.9%), workers compensation (7.1%), property, and marine insurance (11.8%)
  • Specialty Insurance Products – 23.8%
    • Professional liability (21.0%) and surety (2.8%)
  • US Based – headquartered in Warren, NJ
  • Employees: 11,000
  • International locations:
    • Canada, Europe, Latin America, Asia and Australia
chubb businesses mix
Chubb Businesses Mix

Source: Annual Report

chubb premium mix 2011
Chubb Premium Mix % (2011)

Source: Company Reports and Drexel Hamilton estimates

chubb value proposition
Chubb Value Proposition
  • Financial Strength
    • Willing to pay claims
    • Ability to pay claims
    • High credit rating
    • Conservative investment practices
  • Claim handling
    • Do not view customer as adversary
    • Earn customer loyalty
    • Quality and speed of service of claims processing
  • Base pricing on assessment of risk rather than market pricing
  • For customers: Employee expertise major differentiator – tailor products to customer’s needs
  • For shareholders: Content to be niche player – excel at risk selection and pricing
through 3q11 chubb lower combined ratio
Through 3Q11, Chubb Lower Combined Ratio

Source: Company Reports and Drexel Hamilton estimates

conservative investment philosophy
Conservative Investment Philosophy

Investments: 96% Fixed Income

4% Equities

chubb performance vs industry
Chubb Performance vs Industry
  • Chubb has strong stock buyback – increasing per-share earnings
  • Chubb has lower Combined Ratio than rest of P-C industry
  • Chubb underwriting discipline
    • Selective on new customers
    • Not renew unprofitable policies
    • Retain profitable customers
  • All - Low interest rate environment – low earnings from investment income
  • All - Industry record catastrophe losses during 2011 – improved prices in commercial and property lines of business
p c top 15 insured loss events
P&C Top 15 Insured Loss Events

Source: Swiss Re Sigma, Morgan Stanley Research

p c pricing power
P&C Pricing Power

Market Scout

p c industry comparison
P&C Industry Comparison

CR is Combined Ratio = (Incurred Losses + Expenses)/Earned Premiums

Cat LR is Catastrophe Loss Ratio

Source: Morgan Stanley Research

impact of hurricane sandy2
Impact of Hurricane Sandy
  • Chubb suspends stock buyback in Q4
  • 12% of premiums in NY/NJ areas – higher exposure than other carriers
  • Wipeout of earnings in Q4 manageable
  • Business Interruption (BI) insurance will not pay out unless damage to buildings
  • Insurance prices across industry will go up in 2013 and beyond
  • Industry losses expected to be $20B
recommendation
Recommendation
  • The Chubb Corporation (CB – NYSE)
  • Recommendation: BUY
  • Target Price: $90
  • Reasons:
    • Impact of Hurricane Sandy will spur industry rate increases – higher profits downstream
    • Share buybacks – higher EPS growth (temporarily halted)
    • Underwriting discipline: selective on new customers and on retaining existing customers
target price and methodology
Target Price and Methodology
  • We value the company on a P/ABV basis
  • Target multiple set at 1.4x which has been the historical trading average for the company
  • Reasonable multiple as company has RoEof ~11% and CoE of ~6.0%
  • At 1.4x FY13E ABV of $64.5 our valuation works out to $90/share
  • Our target price leaves an upside of 16%
chubb risks
Chubb Risks
  • Higher catastrophe – unable to predict impact of climate conditions
  • Foreign currency risks and credit risks
  • Low interest rate environment
    • Reinvestments at lower rates – up to 300 bp
  • Changes in regulatory environment
  • Availability of reinsurance
  • Intense competition