Reasons Behind Chubb Limited's Decline

On Wednesday, Chubb Limited (NYSE: CB) shares fell as much as 4.3% before recovering to 3.1% by 1:30 p.m. ET.

Chubb released profits Wednesday night, and shareholders had little to complain about. On Wednesday, economic fears drove down most insurance stocks. Chubb's premium value was too high for even solid earnings, by insurance stock norms.

"Quite favorable" underwriting Investors have soured on stocks due to sticky inflation, but insurance rates are trickier. Since 2020, severe catastrophe losses, economic inflation, and "social inflation," or a more litigious climate against insurers, have prompted several insurers to leave specific lines of business, allowing survivors to raise premiums dramatically.

With a long history of customer service, Chubb may charge greater rates than competitors. That showed in Q1 earnings, where net earned premiums rose 14.2% to $11.58 billion and non-GAAP (adjusted) core operational net earnings rose 22.7% to $5.41.

Both exceeded analyst estimates. The core operational return on equity and tangible equity increased from 12.6% to 13.7% and 19.4% to 21.9%, respectively.

Why down? Perhaps too high to clear, and economic clouds Given those results and good underwriting, some may question why the stock is down. One explanation is that Chubb was worth more than most insurance companies entering earnings. After removing unrealized investment portfolio gains and foreign currency fluctuations, the company trades at 2.3 times tangible book value, up from 1.7 times book value.

Chubb, a high-priced consumer insurer, is also economically sensitive. Late yesterday, the S&P Global Flash US Composite PMI, which measures manufacturing and service sector strength, was 50.9, below analyst estimates of 52. Higher interest rates are making firms wary about hiring and investing. Rate-driven headwinds persisted today as the 10-year Treasury bond yield rose 6 basis points to 4.66% at midday.

Still, increased long-term rates benefit insurance firms' fixed-income assets. If the economy stays strong despite increased interest rates, many insurance companies are solid buys on this retreat.