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Morningstar | Chubb’s 4Q Is a Little Soft

Chubb’s fourth-quarter results were a little soft, but at this point we’re willing to accept management’s view that this is just normal variation in quarterly results. On an absolute basis, the franchise’s performance remains strong. We estimate annualized tangible ROE at 14% for the full year, a level that supports our narrow moat rating. We will maintain our $140 fair value estimate.

Underwriting results in North American commercial insurance deteriorated a bit, with the underlying combined ratio increasing to 88.2% from 87.3% last year, and Chubb recording its worst result of the year. However, management attributed the increase to an unusually high level of large losses, which can be volatile quarter to quarter. The variance is not major, and we’ve seen this phenomenon historically at Chubb and other insurers, so we’re inclined to accept this explanation at this point, although we will be watching this to see if this is the start of a negative trend. But Chubb’s results remain impressive compared with peers, and we think the franchise is holding up fairly well given the current industry environment.

North American personal lines also showed some further deterioration in the quarter, with the underlying combined ratio increasing to 85.5% from 80.5% last year, and the trend of lower underwriting margins since the start of the year continued. Management attributes this to homeowners lines, and is clear that they need to address pricing in this area. The need to do this on a state-by-state basis will likely lead to a drag in this flowing through results, but we think management’s track record inspires confidence that they will exercise discipline and that results will mean revert over time.

Net premiums written were up 4% year over year, in line with the pace for the full year. Management noted that they see the overall pricing environment as improving, a trend that is likely necessary given current loss cost trends. This might boost growth a bit in the near term, but we continue to expect only modest growth for Chubb long term, given its size and the maturity of the industry. We remain somewhat skeptical of the growth synergies management pointed to at the time of the merger, although we think the cost synergies that have already been realized justify the deal.