Chubb Limited

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Chubb Limited is a global insurance company providing a wide range of insurance products and services including property and casualty, life, and accident & health insurance, as well as reinsurance operations, primarily to commercial customers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Chubb’s moat is a moderate one. Let’s start with its business, Chubb is a global leader in insurance, providing a wide array of property and casualty (P&C) insurance, accident and health (A&H) insurance, reinsurance, and other related services, primarily to commercial clients, often in high-net-worth or specialized areas. They are a well-established company with a history going back to 1792. While it doesn’t have a dominant brand like Coca-Cola, its high-net-worth customer base and tailored products provide some degree of defensibility, as it can charge more for similar products due to these factors. They have an expansive global distribution network and a history of strong underwriting results, allowing it to price its premiums competitively. Chubb’s size gives it a certain scale advantage that allows it to underwrite the risks much more effectively than many of its competitors, which leads to sustainable returns on capital. Finally, due to the complex nature of insurance contracts, switching costs for clients can be reasonably high and switching between insurance providers will be costly and time-consuming for clients. Their investment returns and long-term stability give investors a degree of confidence. All of these characteristics combined create a relatively strong moat. However, there isn’t one single factor that will keep competitors at bay. While the company doesn’t face the same level of competition as smaller retailers, the barriers to entry aren’t insurmountable and established insurers can and do make an entry. This is why I rated it only as a moderate, instead of a wide, moat.

Specifically, the primary areas for Chubb’s business are:

North America Commercial P&C Insurance: Primarily a large and middle-market business insurance, but includes some small-commercial business, and a diverse range of P&C, specialty, and financial lines. This segment represents 42% of the total premium (based on 2022 figures).
North America Personal P&C Insurance: Provides insurance solutions to high-net-worth families and individuals. This segment was 14% of their premiums in 2022.
North America Agricultural Insurance: Provides insurance to the agriculture market in the US and Canada. This segment was 7% of total premiums in 2022.
Overseas General Insurance: A mix of commercial and consumer P&C insurance business in many regions, including EMEA, Latin America, and Asia Pacific. This segment comprised 27% of premiums in 2022.
Global Reinsurance: Reinsurance operations. This is approximately 10% of the total premiums.
Life Insurance: Provides life and accident & health insurance, primarily in the Asia-Pacific region. It accounted for 12% of the premiums in 2022.

As per Chubb’s Q3 2024 earnings call:

They are experiencing elevated levels of attritional activity.
They stated, “P&C business is resilient.” and reiterated that they are seeing growth above the baseline trend.
For P&C, they are seeing double-digit rate increases in 3 segments. They expect continued rate increases to be sustainable.
In the life insurance segment, they have grown at high rate, and expect that business to grow moving into 2024 and beyond.
They are seeing increasing claims severity, but not in frequency.
The combined ratio for Q3 was 86.7 percent.
Chubb’s investment portfolio is positioned with a relatively low duration. They are taking advantage of the high interest rates to make investments at attractive yield.
They have implemented technology investments for better claims and underwriting capabilities.
They indicated that there may be some pressure on commercial real estate going forward, but overall, their portfolio appears fine.
They have improved their underwriting models based on the data received so far and expect better results moving forward.
They are still working on the acquisition of Huatai, where they expect to realize synergies from cross selling.

Chubb’s key strengths include strong financial performance, a global scale of operations, strong underwriting, an extensive distribution network, and a stable management team. However, this is an industry where competition is constantly present, and companies need to be adept at finding newer and better ways to underwrite risk and provide services to customers.

The main value drivers for Chubb come from:

Net premiums written: The volume of premiums a company writes, net of reinsurance. A larger and faster growing pool of premiums provide both opportunity to grow income from underwriting operations as well as the larger float available for investment.
Underwriting quality: How effectively the company is managing to balance premiums and claims. Measured with their combined ratio, the effectiveness of underwriting operations, and the ability to predict future losses can be determined.
Investments: How profitably a company invests the float (the cash received as premiums). Insurance companies generate income by both underwriting as well as investment of the premium amounts.
Operating Expenses: The ability to control operational costs across the different divisions and geographies is a big factor determining the profitability of the insurance business.

The major risks to Chubb include:

Competition: Although having a moat based on their wide network and specialized product lines, insurance is a competitive industry where multiple new players have the capacity to reduce premiums and squeeze profitability.
Catastrophic Events: Insurance companies are exposed to natural or man-made disasters that may have wide impacts on their earnings and reduce profitability for a given period. For example, they are heavily exposed to hurricanes and large storms, so they need to take that into consideration while writing insurance policies and managing exposure.
Changes in Regulation: Regulatory changes may lead to increased capital costs, reduced capacity, or pricing restrictions. There is also an increasing risk of liability for data security and related issues which is a new risk for insurers.
Changes in Technology: Technology is also a source of potential risk. As everything moves to digital, legacy processes and the way insurance has been traditionally handled is getting outdated. The companies that cannot keep up with this may face a difficult future ahead.
Economic Slowdowns: Economic downturns can lead to reduced premium volumes and increase the rate of defaults on loans, reducing profitability. For example, the high inflation environment leads to higher claims values, and a contraction in the market may lead to reduce sales and revenues for both commercial and personal lines insurance.
Interest rate risk: Rising interest rates will reduce the value of bond holdings. Since insurance portfolios are typically heavy with fixed income securities, fluctuations in interest rates will have an immediate and direct impact.
Claims inflation: Inflation in labor and materials, and especially medical, increases claims expenses.

Looking at the financials, for the nine months ending September 30, 2024, Chubb generated a net income of $5.1 billion, while net premiums written increased 10.3 percent. For the same period, the combined ratio was 86.7%. Chubb’s investments yielded positive results due to high interest rates on the fixed income side. The company is managing to grow premium income while controlling costs at the same time. For these reasons I gave it a balance sheet health rating of 4, because they look pretty well-capitalized and should be resilient.

It is important to note that insurance is a volatile business, since catastrophic losses are not possible to predict, and they are difficult to model. Therefore, their net income can be impacted by large payouts. Investors should be aware of the volatile nature of the insurance business and the potential impact on their earnings. Also, companies will often use reinsurance to smooth their performance in case they have large claims or losses.

Based on the above, I would rate Chubb a 3/5 in understandability. The basic business is easy to understand: collect premiums, pay claims, and invest the float. However, the underlying economics, regulatory aspects, and the effects of macro factors such as interest rates make it somewhat complex. Additionally, understanding their risk management practices and reinsurance contracts requires specific industry knowledge. Also, evaluating a company such as Chubb involves understanding financial statements and some underlying complicated and non-explicit information, which means it is not as simple as other businesses. For all these reasons I think a rating of 3 out of 5 is appropriate.

Finally, the overall conclusion is that Chubb is a well established insurer that provides a variety of services across different geographies. It has a decent moat, is profitable, and manages its financials quite well. It could face some problems due to increasing competition, industry consolidation, interest rates, and major catastrophe events, and while its stock price is affected by them, there is a solid base of fundamentals which should protect their business for long periods of time.