Chubb Profit Declines 49% on Investments, Lower Sales (Update2)

By Andrew Frye
Bloomberg News
April 21, 2009

April 23 (Bloomberg) -- Chubb Corp., the insurer of corporate boards and high-end homes, said first-quarter profit fell 49 percent on investment losses and lower premium revenue from clients pinched by the recession.

Net income dropped to $341 million, or 95 cents a share, from $664 million, or $1.77, in the year-earlier period, the Warren, New Jersey-based insurer said today in a statement. Operating income, which excludes some investment results, was $1.43 a share, beating the $1.37 average estimate of 18 analysts surveyed by Bloomberg.

Chubb is competing with American International Group Inc., Travelers Cos. and Hartford Financial Services Group Inc. for a greater portion of an insurance market that's in decline. Last year, U.S. property and casualty carriers posted the biggest sales drop in half a century as corporations and individuals scaled back on insurance purchases.

"People are buying less coverage," Mark Dwelle, an analyst with RBC Capital Markets who has an "outperform" rating on Chubb shares, said in an interview before results were released. "As the economy begins to stabilize they'll have a lot of business opportunities. It's just hard to know when to call a bottom."

Chubb has fallen 21 percent in New York trading this year, worse than the 15 percent decline of the 25-stock Standard & Poor's Supercomposite Property & Casualty Insurance Index. That's after slipping just 6.6 percent last year, compared with the 97 percent collapse of New York-based AIG and the 81 percent drop of Hartford, based in the Connecticut city of the same name.

LBO Funds, Distressed Debt

Chubb, which sidestepped subprime investments, has been hurt by souring holdings in buyout funds and distressed debt. Declines in these investments and other so-called alternative holdings accounted for the biggest part of Chubb's $266 million in realized investment losses in the first quarter. That compares with $68 million in gains in the year-earlier period.

Chubb expects losses on alternative holdings won't exceed $50 million in the second quarter, Chief Financial Officer Richard Spiro said today on a conference call.

Book value per share, a measure of assets minus liabilities, advanced 2.8 percent in the first three months of the year to $39.20.

Chubb has announced a share buyback and dividend increase in the past six months while most of its largest competitors have been cutting their quarterly payouts or scaling back repurchases. The insurer is looking to add business customers as competitors slash prices to maintain sales.

Competing on Price

Chubb Chief Operating Officer John Degnan told investors on a Jan. 29 conference call that AIG, which posted a $99 billion loss last year and needed four federal bailouts to stay afloat, was offering "irresponsible" prices to persuade clients to renew policies.

Business insurers have been cutting prices for four years and slashed rates 5.1 percent in the first quarter, according to the Council of Insurance Agents and Brokers.

John Finnegan, Chubb's chief executive officer, said in the statement that customers of commercial and professional liability businesses renewed policies at a higher rate for the first time in five years. Still, the recession is hurting sales of jewelry, fine art and home insurance, and price cuts by competitors limited Chubb's ability to win new business, Finnegan said on the conference call.

Protecting Price

"For some of us who expected you to gain market share because of the AIG issue, I'm just curious why that has not been faster," Vinay Misquith, an analyst with Credit Suisse AG, told Finnegan and the other Chubb executives on the call.

"We're not taking business where we can't get the price we require," Degnan said. Finnegan said that one competitor, which he declined to name, is "routinely" cutting renewal rates by 30 percent to 40 percent to maintain business.

Chubb made less money underwriting as overall sales from both individuals and corporate clients declined. After paying claims and expenses, the insurer kept 11.9 cents of every dollar of premium collected in the quarter compared with 16.1 cents a year earlier. That included a decline in profitability from management liability policies, which yielded 8.7 cents for every dollar, compared with 16.3 cents in the first quarter of 2008.

Management Liability

Chubb is facing an increase in management liability claims as investors in bankrupt lenders turn to the courts for retribution. U.S. securities class-action lawsuits increased by 19 percent in 2008 to the highest level in four years on a surge of litigation against financial firms, according to a review by Stanford Law School and Cornerstone Research.

Chubb, which generates about a fifth of its insurance sales from management liability, is part of a group of U.S. carriers that may pay "significant litigation costs" tied to the financial crisis, Moody's Investors Service said on April 16. The ratings firm placed U.S. commercial insurers on "negative" outlook, also citing investment declines and losses tied to natural disasters.

Chubb plans to maintain a "conservative" approach to capital management amid market volatility, Finnegan said in response to analyst questions. Finnegan declined to comment specifically about a unit that Hartford is said to be selling, while saying that Chubb prefers expansion by writing more business.

"We've said in the past that we're more looking at organic growth than M&A, and I think at this point we'll stick to that view," Finnegan said. "Capital is king in this environment so we're still taking a conservative position."

Hartford, led by CEO Ramani Ayer, is seeking bids from rivals including Travelers Cos. for its flagship property and casualty business, said people familiar with the matter.

Chubb said commercial-insurance sales declined 6 percent to $1.26 billion in the quarter. Home coverage, car insurance and other policies sold to individuals slipped 3.9 percent to $843 million.

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