Bloomberg News

Chubb Third-Quarter Profit Plunges 48% on Catastrophe Claims

October 20, 2011

(Updates with comment in eighth, ninth paragraphs, accounting change in 13th, 14th.)

Oct. 20 (Bloomberg) -- Chubb Corp., the insurer of commercial property and high-end homes, said quarterly profit fell 48 percent on costs from catastrophes including Hurricane Irene. The insurer trimmed its forecast for full-year earnings.

Third-quarter net income declined to $298 million, or $1.04 a share, from $572 million, or $1.80, a year earlier, the Warren, New Jersey-based company said today in a statement. Operating profit, which excludes some investment results, was 88 cents a share, compared with 77 cents, the average estimate of 21 analysts surveyed by Bloomberg.

Catastrophe costs rose to $420 million pretax from $58 million a year earlier, Chubb said. Irene pounded the U.S. East Coast in August with flooding rains and high winds. The storm may cost insurers as much as $5.5 billion, modeling firm Risk Management Solutions Inc. said in a September statement.

“This is the biggest loss they’ve taken in quite some time,” Mark Dwelle, an analyst at RBC Capital Markets, said in a phone interview before full results were announced. “They have a relatively higher market presence in the Northeast and New England,” areas that suffered losses from Irene. He rates Chubb “sector perform.”

Chubb, led by Chairman and Chief Executive Officer John Finnegan, advanced 72 cents, or 1.1 percent, to $65.35 on the New York Stock Exchange. It has climbed 9.6 percent this year as the 24-company KBW Insurance Index fell 18 percent.

Chubb’s Forecast

The insurer said operating income for the year may be $5.10 to $5.20 a share, down from its July forecast of $5.55 to $5.85. Storms may cut further into earnings of insurers including Northbrook, Illinois-based Allstate Corp. that had second- quarter losses on tornado costs.

Chubb, which gets about a quarter of revenue from outside the U.S., incurred first-quarter costs from flooding and a tropical cyclone in Australia, and earthquakes in Japan and New Zealand. It faced U.S. storms including tornados that killed more than 150 people in Joplin, Missouri, and leveled parts of Tuscaloosa, Alabama in the second quarter.

The insurer’s growth is focused on areas outside the U.S. Northeast and Florida, regions that are prone to storm-related claims, Chubb said today.

“We’re even practicing triage and reducing business in the cat-prone areas,” Finnegan said on a conference call. “That is the core of our business so all of the growth really has to come from the non-cat areas.”

Profit Decline

Profit fell to the lowest since Chubb posted net income of $246.4 million for the third quarter of 2005, when Hurricanes Katrina and Rita slammed the U.S. Gulf Coast.

“Rates will need to continue to increase to offset the negative impact on industry earnings attributable to the prolonged soft market, record level of catastrophe losses and significantly lower yields currently available on investments,” Finnegan, 62, said in the statement.

Travelers Cos., the lone insurer in the Dow Jones Industrial Average, had $253 million in Irene-related claims and total third-quarter catastrophe costs of $394 million. The New York-based company said yesterday that net income for the period slipped 67 percent to $333 million from a year earlier.

Chubb said book value climbed to $56.23 a share from $55.23 as of June 30. Premium revenue rose to $2.9 billion from $2.8 billion a year earlier on an increase in commercial-policy sales and home and auto coverage.

Chubb spent 2.6 cents for every premium dollar, compared with earning 13.8 cents a year earlier.

Accounting Change

Compliance with new rules governing how insurers account for costs of acquiring or renewing policies may lead to a $250 million to $300 million reduction in Chubb shareholder’s equity at the end of this year. So-called deferred acquisition costs will decline about 22 percent to 27 percent, Chief Financial Officer Richard Spiro said on a call with analysts after earnings were announced.

“The new guidance requires that only costs that are directly related to the successful acquisition of new or renewal insurance contracts are eligible for deferral,” he said. “The amount of acquisition costs we will defer upon adoption of the new guidance will be less than the amount deferred under our current accounting practice.”

--Editors: Dan Reichl, Peter Eichenbaum

To contact the reporters on this story: Maryellen Tighe in New York at mtighe6@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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