Fiduciary Management, Inc recently released its Q3 2020 Investor Letter, a copy of which you can download here. In the third quarter, the FMI International portfolios continued to rebound, advancing approximately 4.7% (currency hedged) and 6.9% (currency unhedged), which compares with an MSCI EAFE Index gain of 1.22% in local currency (LOC) and 4.80% in U.S. Dollars (USD). You should check out Fiduciary Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the Q3 2020 Investor Letter, Fiduciary Management highlighted a few stocks and Chubb Ltd (NYSE:CB) is one of them. Chubb Ltd (NYSE:CB) is an insurance company. In the last one year, Chubb Ltd (NYSE:CB) stock gained 2.1% and on January 11th it had a closing price of $154.13. Here is what Fiduciary Management said:
“Description
Chubb is one of the largest publicly traded property and casualty (P&C) insurance companies globally. In aggregate, the company has operations in 54 countries and territories. Chubb provides commercial, personal property, casualty, personal accident, and supplemental health insurance to a diverse group of clients. Approximately 63% of premiums are from the U.S., 13% from Europe/Eurasia and Africa, 11% from Asia, 7% from Latin America, and 6% from Bermuda and Canada. By product, the mix is Commercial P&C 55%, Personal Lines 21%, Accident & Health/Life 17%, Agriculture 5%, and Reinsurance 2%. The Chubb brand is probably best known as the leading provider of insurance to high net worth individuals.
Good Business
• Chubb is a durable, differentiated multi-line insurer with an attractive small and middle market commercial book of business, as well as a respected high net worth personal lines customer base.
• For medium to larger-sized commercial enterprises, casualty insurance is a necessity coverage. This nondiscretionary attribute, along with Chubb’s emphasis on high service levels, results in strong customer retention and predictable revenues. The company’s renewal retention ratio generally ranges between 85 to 90% (it was 95% in 2019 for major accounts).
• Chubb’s disciplined risk selection and cycle management has led to conservative initial loss picks, underwriting stability, and a consistent return on equity (ROE).
• Over the past ten years the company’s underwriting combined ratio is 7.6% better than the industry.
• Operating expenses are over 4% lower than large cap peers.
• The company presently generates a 14% return on tangible equity. Incremental returns on invested capital are attractive.
• Chubb currently maintains industry-low balance sheet leverage metrics across the three most important indicators of net premiums to shareholder’s equity (0.6 times), invested assets to shareholder’s equity (2.0 times), and debt-to-total capital (22%). The company’s investment portfolio is purposefully “plain vanilla.”
• The investment portfolio duration is four years with an average credit quality of A/Aa.
Valuation
• Over the past 25 years, Chubb’s price-to-book multiple has averaged close to 1.5 times, ranging from a low of one times to a high of over two times, and it currently trades below book value. At 1.5 times book value per share, the stock would be valued at $182 per share.
• Over the past ten years, Chubb has grown book value per share at a 6% compound annual growth rate. The dividend yield is 2.7%.
Management
• Chubb has a diverse and highly respected management team led by Chairman and CEO Evan Greenberg, who personally owns $122 million in stock.
• Management is compensated based upon key financial metrics (75% overall weight) of tangible book value per share growth, core operating ROE, core operating income, and the P&C combined ratio. The residual quarter of incentive compensation is determined by operational and strategic goals.
• Mr. Greenberg’s management team has been a cohesive group with backgrounds tying back to legacy ACE Limited and supplemented by key individuals staying on from the legacy Chubb organization.
• Philip Bancroft has been the CFO of Chubb Limited since January 2002.
Investment Thesis
Chubb is one of the largest P&C insurers globally and has a specialty in high net worth personal lines. Chubb has industry-leading combined ratios and is led by one of the best insurance CEOs in the industry. The company is benefitting from the industry underpricing risks the last few years, which has led to firming pricing without the reserve charges taken by many of its peers. This has driven the best premium growth in many years. With regard to COVID specifically, there is talk about regulators or governments forcing insurance companies to pay business interruption claims even though the policies specifically exclude viruses and pandemics. There is no court ruling or other precedent for this complete disregard for contract law, and we view the probability that this intervention holds up in court as very low.”
Pixabay/Public Domain
In Q3 2020, the number of bullish hedge fund positions on Chubb Ltd (NYSE:CB) stock increased by about 13% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Chubb’s growth potential. Our calculations showed that Chubb Ltd (NYSE:CB) isn’t ranked among the 30 most popular stocks among hedge funds.
The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
Video: Top 5 Stocks Among Hedge Funds
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Disclosure: None. This article is originally published at Insider Monkey.
