Zacks_Analysts' Blog : Chubb Fears Irene Impact - Analyst Blog

After bearing a high catastrophe loss in the second quarter 2011, property and casualty insurer Chubb Corp. (CB) is again set to incur further pre-tax cat losses of $400 million to $475 million in the upcoming quarter due to Hurricane Irene, which battered the East Coast in August 2011.

The catastrophe losses, incurred during the third quarter, could drain Chubb’s earnings by 55 cents to $1.07 per share after tax.

Chubb’s geographic concentration in calamity-prone areas (the north-eastern U.S) exposes it to cat losses. The company is still analyzing and incorporating the new RMS model with its own model as well as other vendor models, and will reduce its exposure in states and regions if required.

Consequently, the company has already purchased more reinsurance, including $200 million for the Northeast U.S. This is in addition to a $100 million increase on its catastrophe reinsurance program, which the company had previously mentioned. Chubb also purchased $100 million of additional reinsurance coverage for non-U.S. catastrophes.

During the second quarter, total cat losses primarily stemming from the U.S. winter storms came in at $329 million pre-tax, or about $0.72 per share, contributing 11.3% to the loss ratio. In spite of some of the heaviest second quarter 2011 U.S. catastrophe events on record, Chubb continued to post an excellent underwriting result, generating a 94.9% combined ratio for the quarter.

Regardless of the external factors, Chubb has a business mix that continues to perform exceptionally well, even in the face of large first half storm losses that pushed many of its peers into losses in the quarter. Chubb also raised its 2011 guidance, even after taking into account the high level of H1 2011 catastrophe losses. It now expects operating EPS in the range of $5.55- $5.85 (up from $5.35-5.75). Chubb raised its 2011 catastrophe load to 7.5 points, up from the previous 3.5 points.

Other carriers, likely to suffer cat losses in the third quarter, include companies like Allstate Corp. (ALL) and Travelers Companies Inc. (TRV), which compete closely with Chubb.

Chubb holds a Zacks #3 Rank, which translates into a Hold rating over the short-term (1-3 months). The company is slated to release its third quarter earnings on October 20, 2011 after the market closes. We have a Neutral recommendation on the stock and may revisit our recommendation after the third quarter earnings release.