Chubb
Ltd. (CB, $136.78): “Not quite done yet - Integration still paying off”
By:
Joe Flynn, AIM student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Chubb Limited (NYSE:CB) is a holding company that functions as a
global insurance and reinsurance organization. The company offers a wide
variety of insurance solutions which include commercial, personal, property and
casualty, and supplemental health insurance. The company is headquartered in
Zurich, Switzerland and has 31,000 employees.
• The company was founded
in January of 2016 after the finalization of a merger between ACE Ltd. and
Chubb Ltd., a deal valued at $28B dollars. Management expects synergies of
$800M annually by 2018, and further acceleration would boost EPS growth.
• Chubb produced a 2016
ROE of 10.5% despite headwinds from softening property and casualty prices. The
figure compares favorably against Chubb’s WACC of 8.5%, and the Industry’s 7.3%
average operating ROE.
• Chubb has effectively used capital deployment
to add value, and management has resumed a $1B buyback program for 2017.
Management returns the additional capital the company generates, and have maintained
a 20-year record of annual dividend increases.
Key
points:
Chubb finished off 2016
on a positive note posting 4Q EPS of $2.72, beating the consensus of $2.41.
Chubb’s underlying combined ratio of 87.4% was better than expected, and a
one-time pension benefit also aided the upside. A combined ratio above 100% is
normally an indicator that insurance companies are paying out more money on
claims then receiving in premiums.
Chubb’s combined ratio
was a reassuring factor that the company could still make underwriting profits
despite a competitive pricing environment. However, it is widely believed that
the Insurance industry has reached an inflection point, and that insurance
prices will continue to soften globally in future periods. Chubb’s Investment
income and underwriting margins are still under pressure in 2017.
Chubb was not immune to
the industry challenges during 2016 either, and had difficulties in premium
revenue growth. Chubb’s total net premiums written for the year $29B, down
4.5%.
One bright spot for Chubb
is that they are still benefitting from the Merger with ACE. The Integration
between the two companies has gotten off to a very positive note. The company
achieved all growth and cost containment success targets for the first fiscal
year, and remains on track for 2017. Chubb
is well positioned for middle market client growth, and high-worth clients
remain a driver for LT revenues. 2017-2018 accelerating synergies would allow
for further cost savings, improving margins.
What
has the stock done lately?
ACE was originally
pitched with a price target of $121.43, and then formally became Chubb after
the acquisition. The combination makes the new Chubb one of the world’s largest
property and casualty insurers, and gives the company international exposure
across most insurance lines. The stock is currently trading 12.6% higher than
the original price target at $136.78 due to integration plans being ahead of
schedule.
Past
Year Performance:
Chubb’s total 12-month
return has been strong at 16.01%. Given the recent uncertainty, the price has
only increased 3.5% in 2017. These returns are underperforming the benchmark by
around 3%. The company is reporting earnings on April 26. Positive earnings
would serve as a sign of resiliency for Chubb when considering the struggles of
the industry.
My
Takeaway
Chubb offers a diverse
stream of products globally, and could establish itself as an industry leader. The
merger has led to increasing efficiency levels and opportunities for growth in
the next few years. I believe Chubb makes an attractive investment relative to
other insurance companies, and should be continued in the AIM International
Portfolio. Insurance companies are expected to struggle, but Chubb’s focus on expanding
margins should offer some protection against premium decreases.
Premiums will
likely decrease in 2017, but it will be interesting to see how Chubb will
compete in the changing insurance environment. Also, the company posted a solid
ROE of 10.5% in 2016 that ended up beating the peer group by a wide margin. In
the annual letter to shareholders, Management was very pleased with the returns
generated during a down year and expressed confidence for 2017. Management
expects EPS to return to moderate growth next year despite the uncertainty.
