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Chubb Gets Insurance

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By Bill Mann (TMF Otter)
June 19, 2003

Property and casualty insurer Chubb (NYSE: CB) had to do it to keep credit agencies happy. It has been smacked hard in the past year with more than $700 million paid out in asbestos claims and another $100 million set aside as reserves to pay expected lawsuits from director and officer insurance policies the company holds in force. These amounts have chewed up its equity.

One way to replenish an equity account is to sell new shares. That's what Chubb did yesterday, selling a combined $1.2 billion in common stock and convertible debentures. Total amount of potential dilution from the offering? Nearly 30 million shares, or about 17.6% of the total current float. It also announced that it may offer an additional 4 million shares to meet demand.

Investors are excited about the firmness of pricing in many insurance lines over the last few years, Chubb being the latest in a line of companies to have secondary offerings. Hartford Financial Services (NYSE: HIG), Ace (NYSE: ACE), and Arch Capital (Nasdaq: ACGL) are among those that have benefited from investment inflows.

Insurance pricing tends to soften just as quickly as it firms. In Chubb's case, this secondary offering shows not so much a drive to take on additional opportunity, but rather a defense against a run on claims in several lines of coverage. Its shareholder's equity still stands in excess of $7 billion, but higher-than-normal claims and necessary reserve strengthening have weakened the company's position.

This equity offering squarely takes care of any questions about equity sufficiency. But it does come at a cost to existing shareholders in the form of massive dilution. Fortunately, the company is playing it right and selling equity when it has run up substantially in price. Unfortunately, there are now 30 million more claimants on future earnings, something that existing shareholders cannot possibly be happy about, particularly since it comes not so much out of opportunity but from duress.

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