Chubb Is Enjoying a Harder Market

Senior Equity Analyst

Brett Horn

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In January 2016, ACE acquired Chubb in a deal valued at about $28 billion and assumed its name. The deal looked fairly valued and there were meaningful cost benefits involved, with management eventually exceeding its initial targets. However, from a long-term perspective, we are most enthusiastic about the fact that the combination created a moaty international insurer with exposure across most insurance lines for the first time, marking Chubb as potentially the most attractive long-term core holding in the space from a fundamental point of view.

In 2020, the coronavirus affected the industry's and Chubb's results, and the company's COVID-19 losses were roughly in line with peers' as a percentage of premiums. However, the impact at Chubb and peers was manageable and well within the range of events that the industry has successfully absorbed in the past. 

The future looks relatively bright. Pricing momentum picked up in primary lines in 2019, and this positive trend only accelerated in 2020 and has largely maintained its momentum over the next two years. More recently, pricing has started to level off, but the industry has enjoyed the highest increases it has seen in two decades. While higher pricing is necessary to some extent to offset a rise in social inflation and other claims trends, pricing increases appear to be more than sufficient to offset these factors. 

As a result, Chubb and peers are experiencing a positive trend in underlying underwriting profitability, and we see the potential for a truly hard pricing market, similar to the period that followed 9/11. In this scenario, we think narrow-moat and highly disciplined operators such as Chubb are positioned to earn very attractive returns. However, the industry remains well capitalized, which could put something of a lid on the magnitude and duration of any excess returns, and recent results suggest underwriting profitability is leveling off.

Business Strategy & Outlook

In general, insurers do not benefit from favorable competitive positions. Industry competition is fierce, and the products are essentially commodities. Furthermore, most participants do not know their cost of goods sold for a number of years, allowing them to underprice policies without knowing it. Firms are encouraged to chase growth without regard for profitability, a cycle that repeats itself as competitors are forced to match artificially low prices or risk losing business.

Despite the fact that Chubb is a large, diversified insurer, we think its underlying business is moaty. ACE and Chubb’s legacy businesses centered on commercial lines, but they served different segments. ACE historically focused on serving large, global clients. Often, these companies have risks that do not fit nicely into one country or one particular policy line. To service complex accounts, an insurance company must be able to match these unique and diverse risks with an equally diversified global network. Since its formation in 1985, ACE built a franchise with operations in more than 50 countries, and in so doing, carved out a strong position in this niche. Few have such a footprint, and ACE consequently benefited from strong relationships with many members of the Fortune 1000. ACE’s cost advantage showed up in its strong property and casualty combined ratio of approximately 91% over the decade before the merger. 

Chubb historically served middle-market commercial clients. While competitive barriers are lower in this area, we think Chubb’s middle-market business is moaty, as the company is an entrenched leader in the space. Further, the business contains a large portion of lines that we would consider specialty--for instance, its executive liability and surety business. Chubb’s moat in this area is demonstrated by an average combined ratio of about 89% over the 10 years before the merger. 

The personal lines business also primarily comes from the old Chubb business. We think that building a moat in personal lines is generally a bit tougher than in commercial lines, given the standardized nature of most personal policies. However, Chubb primarily targets high-net-worth individuals. Because of the high value of their assets and their sometimes unique nature (such as yachts or fine art), insurance companies require assessments on the current value of their property, which increases policyholder duration and lowers acquisition costs.

Furthermore, individual exposures are large, so an insurer needs substantial size for the law of large numbers to hold, which limits the number of carriers that can successfully operate in this area. Finally, Chubb's international presence is a plus in this line, as high-net-worth individuals often have insurable assets spread across multiple countries. Thus, its personal lines are a unique example of a niche noncommercial line, in our view. Chubb’s personal lines averaged a combined ratio of 89% over the 10 years before the merger, highlighting its strong position.

While we don’t believe the combined company’s smaller lines necessarily have moats, they have been solid performers, and the commercial and personal segments account for about 75% of premiums. As such, we believe a narrow Morningstar economic moat rating is appropriate for the firm as a whole.

Narrow

Economic Moat

Chubb

ACE Limited is an insurance comany rebranded as Chubb after its acquisition of Chubb Corporation for $28.3 billion in cash and ACE stock.

Chubb Ltd. operates as a holding company, which engages in the provision of commercial and personal property and casualty insurance, personal accident and accident and health (A&H), reinsurance, and life insurance. It operates through the following segments: North America Commercial Property and Casualty (P&C) Insurance, North America Personal P&C Insurance, North America Agricultural Insurance, Overseas General Insurance, Global Reinsurance, and Life Insurance. The North America Commercial P&C Insurance segment that includes the business written by Chubb divisions that provide P&C insurance and services to large, middle market and small commercial businesses in the U.S., Canada, and Bermuda. The North America Personal P&C Insurance segment offers affluent and high net worth individuals and families with homeowners, high value automobile and collector cars, valuable articles, personal and excess liability, travel insurance, and recreational marine insurance and services. The North America Agricultural Insurance segment is involved in comprehensive multiple peril crop insurance (MPCI) and crop-hail insurance, and Chubb agribusiness. The Overseas General Insurance segment caters both commercial and consumer P&C insurance and services in countries and territories outside of North America where the company operates. The The Global Reinsurance segment covers reinsurance business. The Life Insurance segment focuses on its international life operations. The company was founded in 1882 and is headquartered in Zurich, Switzerland.

Earnings data Q3 2023

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