Chubb (CB) Could Stand Firm Going into FY10 - Barron's (AIG, TRV, ACE)

Chubb (NYSE: CB), the venerable insurer to the wealthy in the U.S., shares get no respect on Wall Street even though the company has conservative underwriting and investment strategy, a Barron's article reports.

Shares of CB are trading around $50 recently, about 1.1x their book value of $46.50, relatively cheap compared to the 1.5x they were trading at just a few years ago. CB also trades for about 8x FY09 EPS and 9x FY10 estimated EPS. Chubb also has paid out a dividend annually for 27 years. The most recent dividend yielded 2.8%, and could rise up to 10% for FY10.

CB has executed $5.5 billion in stock buyback since 2005, and $564 million for the first nine months of 2009.

Chubb trades with a relative premium to other insurers, such as Travelers (NYSE: TRV), and Ace (NYSE: ACE). Travelers trades below their book value of $52 [recently $49.39], and Ace is at $48.88 versus their FY09 year-end book value of $57.

The article notes that Buffett might pick up Chubb as a company if it were available.

A mild hurricane season combined with the market rebound in 2009 provided ample profits for Chubb.

Criticisms against P&C insurers is that their earnings and return on equity may be under pressure in 2010 from weak pricing and falling returns from bond portfolios in a low-rate environment.

Chubb had reserve releases in 2009's first nine months of $545 million, which boosted their profits by $1 per share. Outlook has reserve releases tapering off in 2010.

Although FY10 profit may beworse than the potential $6/share earned for FY09, even at $5 CB would have about a 10% return on equity and the book value could be over $50 per share.

Chubb has the wherewithal to capitalize on an increase in premium pricing. As such, the stock, with its low valuations, might have limited downside risk.

Concerns for Chubb may be lawsuits against directors and officers of public companies, the exposure of which is covered by D&O insurance. Chubb and AIG (NYSE AIG) are the two largest writers of D&O in the country, suggesting increased exposure in this area. Chubb claims to be adequately equipped, having $7.5 billion in reserves for such a scenario.

Barron's also notes that Chubb saw an underwriting margin of 13% in 2009, which ia very good for a P&C insurer. However, because it is so good, the number may not be able to be maintained through 2010. Industry wide, P&C insurers typically break-even on underwriting and make money on investments.

Chubb looks to be a nice defensive stock among all the turmoil of the sector lately. Though it may not post a year as good as 2009 was, Chubb certainly could be a showpiece in any portfolio.

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