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The Chubb Corporation NYSE:CB

The Chubb Corporation NYSE:CB. Madhukar Ladha Sean Tse Le Xing. Agenda. Company Background Company Business Mix Chubb Performance vs Industry Impact of Hurricane Sandy Valuation and Recommendation. Chubb - Company Background. Stock Price: $77.5 (12/07/2012) Market Cap: $20.9bn

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The Chubb Corporation NYSE:CB

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  1. The Chubb Corporation NYSE:CB MadhukarLadha Sean Tse Le Xing

  2. Agenda • Company Background • Company Business Mix • Chubb Performance vs Industry • Impact of Hurricane Sandy • Valuationand Recommendation

  3. Chubb - Company Background • Stock Price: $77.5 (12/07/2012) • Market Cap: $20.9bn • Net Debt: $3.5bn • Financial Ratings (Moody’s) • Corporate Senior Debt: A2 • Property & Casualty Financial Strength: Aa2

  4. Chubb Company Background • Sector: Financial • Industry: Property & Casualty Insurance • Personal Insurance (Target high and ultra-high net worth clients) – 33.6% • Automobile (5.7%), homeowners (20.9%), supplemental accident and health insurance (7.0%) • Commercial Insurance Products – 42.5% • Multiple peril (9.7%), casualty (13.9%), workers compensation (7.1%), property, and marine insurance (11.8%) • Specialty Insurance Products – 23.8% • Professional liability (21.0%) and surety (2.8%) • US Based – headquartered in Warren, NJ • Employees: 11,000 • International locations: • Canada, Europe, Latin America, Asia and Australia

  5. Chubb Businesses Mix Source: Annual Report

  6. Chubb Premium Mix % (2011) Source: Company Reports and Drexel Hamilton estimates

  7. Chubb Value Proposition • Financial Strength • Willing to pay claims • Ability to pay claims • High credit rating • Conservative investment practices • Claim handling • Do not view customer as adversary • Earn customer loyalty • Quality and speed of service of claims processing • Base pricing on assessment of risk rather than market pricing • For customers: Employee expertise major differentiator – tailor products to customer’s needs • For shareholders: Content to be niche player – excel at risk selection and pricing

  8. Through 3Q11, Chubb Lower Combined Ratio Source: Company Reports and Drexel Hamilton estimates

  9. Conservative Investment Philosophy Investments: 96% Fixed Income 4% Equities

  10. Chubb Performance vs Industry • Chubb has strong stock buyback – increasing per-share earnings • Chubb has lower Combined Ratio than rest of P-C industry • Chubb underwriting discipline • Selective on new customers • Not renew unprofitable policies • Retain profitable customers • All - Low interest rate environment – low earnings from investment income • All - Industry record catastrophe losses during 2011 – improved prices in commercial and property lines of business

  11. IMPACT OF HURRICANE SANDY

  12. P&C Top 15 Insured Loss Events Source: Swiss Re Sigma, Morgan Stanley Research

  13. P&C Pricing Power Market Scout

  14. Impact of Hurricane Sandy

  15. P&C Industry Comparison CR is Combined Ratio = (Incurred Losses + Expenses)/Earned Premiums Cat LR is Catastrophe Loss Ratio Source: Morgan Stanley Research

  16. Impact of Hurricane Sandy • Chubb suspends stock buyback in Q4 • 12% of premiums in NY/NJ areas – higher exposure than other carriers • Wipeout of earnings in Q4 manageable • Business Interruption (BI) insurance will not pay out unless damage to buildings • Insurance prices across industry will go up in 2013 and beyond • Industry losses expected to be $20B

  17. Recommendation and Valuation

  18. Recommendation • The Chubb Corporation (CB – NYSE) • Recommendation: BUY • Target Price: $90 • Reasons: • Impact of Hurricane Sandy will spur industry rate increases – higher profits downstream • Share buybacks – higher EPS growth (temporarily halted) • Underwriting discipline: selective on new customers and on retaining existing customers

  19. Target Price and Methodology • We value the company on a P/ABV basis • Target multiple set at 1.4x which has been the historical trading average for the company • Reasonable multiple as company has RoEof ~11% and CoE of ~6.0% • At 1.4x FY13E ABV of $64.5 our valuation works out to $90/share • Our target price leaves an upside of 16%

  20. Comps

  21. Projections and Valuation

  22. Key Assumptions

  23. Chubb Risks • Higher catastrophe – unable to predict impact of climate conditions • Foreign currency risks and credit risks • Low interest rate environment • Reinvestments at lower rates – up to 300 bp • Changes in regulatory environment • Availability of reinsurance • Intense competition

  24. THE END

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