Rising Competition And Rate Fluctuations Threaten Earnings And Profit Margins

Key Takeaways

• Increased competition in London and pricing pressure in property segments threaten future growth and profitability, potentially compressing underwriting margins.
  
• Reliance on investment income amid economic fluctuations poses risks, while managing casualty pricing discipline is crucial for maintaining margins and earnings.
  
• Chubb's strong underwriting performance, diversified global presence, and investment income growth support stable earnings and challenge beliefs in decreasing share prices.

Catalysts

Provides insurance and reinsurance products worldwide.

• Chubb's international business faces increased competition, particularly in the London wholesale market, which may impact future growth and profitability if underwriting standards deteriorate. This could affect revenue and net margins.
  
• Increased pricing competition in certain property segments, especially within large accounts and the E&S market, could potentially limit future top-line growth and compress underwriting margins, affecting earnings.
  
• The company's reliance on investment income growth amid potential rate fluctuations poses a risk. A steepening yield curve might benefit reinvestment rates, but shifts in economic conditions could affect future earnings positively or negatively.
  
• The delay in finalizing adjustments to underperforming North American casualty classes might slow momentum in casualty premium growth, impacting revenue and potentially compressing margins if corrections are not adequately managed.
  
• With casualty pricing seeing significant increases, maintaining pricing discipline amid potential rate competition and ensuring that rates exceed loss costs will be crucial. Failure to manage this could affect net margins and earnings.

Chubb Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chubb's revenue will decrease by -2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 18.3% today to 17.5% in 3 years time.
• Analysts expect earnings to reach $8.9 billion (and earnings per share of $24.24) by about November 2027, down from $10.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2027 earnings, up from 11.4x today. This future PE is greater than the current PE for the US Insurance industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 3.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.15%, as per the Simply Wall St company report.

Chubb Future Earnings Per Share Growth

Risks

• Chubb's strong underwriting performance, with a combined ratio of 87.7% and significant growth in P&C underwriting income, indicates robust profitability, potentially supporting stable or increased earnings. This challenges the belief in a share price decrease.
  
• The company’s diversified global presence, with premium growth in North America, Europe, Asia, and Latin America, suggests resilience and the ability to maintain or grow revenues even amidst challenging economic conditions.
  
• Chubb's investment income growth, supported by the ability to reinvest cash at favorable rates and an anticipated steepening yield curve, could further enhance earnings and financial performance.
  
• Significant growth in new business, as evidenced by the 18% increase over the prior year and high renewal retention rates, could boost future revenue streams and operating performance.
  
• Life Insurance segment income surpassing targets, combined with ongoing growth in this division, indicates additional revenue and profit opportunities, challenging the view of declining share prices.

Valuation

• The analysts have a consensus price target of $298.91 for Chubb based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $349.0, and the most bearish reporting a price target of just $245.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $50.7 billion, earnings will come to $8.9 billion, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 6.1%.
• Given the current share price of $283.87, the analyst's price target of $298.91 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.