Is It Safe? Chubb's Price Is Right

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Chubb ( CB) is known for its conservative approach, with "never compromise integrity" being one of its slogans.

That means the insurer doesn't depend on investment income to buttress earnings. Nevertheless, it still disappointed investors with poor first-quarter results, a whopping 43 cents a share below expectations. Chubb is scheduled to release second-quarter results Thursday.

Policy income is expected to have risen slightly for the second quarter and be flat for the year, but reduced expenses could have improved net income. Cash and cash equivalents of $56 billion were at an all-time high in March, and investments had risen. Those are indications that Chubb is making wise decisions and selling only profitable policies, unlike some other insurers, notably American International Group ( AIG).

Another indicator is that by the end of May, 20 insurers, including Chubb, had announced dividend increases this year, according to SNL Financial. That could be interpreted as a sign of optimism from the Chubb board. Analysts expect Chubb to book earnings of $1.31 a share for the second quarter, up 4 cents from a year earlier.

Chubb's belief in integrity was evident when CEO John D. Finnegan led the Merrill Lynch compensation committee. When John Thain was negotiating with Bank of America ( BOA) over the details of Merrill's takeover, he made a $40 million bonus request. Finnegan is said to have been incensed by the insensitivity, and Thain ultimately withdrew his requests for a bonus.

Two elements -- ethics and underwriting profitably by pricing appropriately for risk -- came together when Chubb Chief Operating Officer John Degnan criticized the practice of "buying" insurance business with low renewal rates, which he believes aren't profitable or sustainable.

If Chubb meets expectations for the remainder of the year, the stock would carry a low estimated price-to-earnings ratio of 8. Currently, the P/E ratio is a fair 10.7. This puts the company at the higher end of the largest insurers, with Principal Financial Group ( PFG) leading with a P/E of 11.5. Value is more obvious with Unum ( UNM) and XL Capital ( XL).

Insurance stocks have recorded modest gains over the past month. Chubb, trading at around $40, is about a fifth less than analysts' mean target price for the year.

Chubb's stock price may be suffering following Barclays Capital ( BCS) analyst Jay Gelb's indication that the insurer will need to increase reserves to meet an estimated $2 billion in additional losses. The losses are based on Chubb's market share of directors and officers coverage and potential litigation.

The estimate appears pessimistic, based on Chubb's conservatism. With an average price-to-book value of 103.7%, below Prudential's ( PRU) 128.2% and similar to Humana's ( HUM) 105.3%, it could be argued that Chubb's price is right.

Of the largest insurers, the short interest in Chubb, with a ratio of 0.78 and a beta of 0.87, is only bettered by Aetna ( AET). That's a sign of stability.

TheStreet.com Ratings gives Chubb a "hold" recommendation.

TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.

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