Pandemic, wildfires, flooding, hurricanes, civil unrest, and murder hornets. 2020 really had it all. And it proved to be a challenging year to those who provided insurance coverage for those risks.

According to a report by AIR Worldwide, a risk modeling and data analytics company, insured catastrophe losses could potentially balloon to $100 billion in when all is said and done. Payouts have skyrocketed due to the effects from the COVID-19 pandemic in addition to impacts from environmental disasters, including West Coast wildfires and the active Atlantic hurricane season.

Insurers felt the squeeze, and they responded by increasing premiums and cutting coverage on less profitable policies. Chubb (NYSE:CB), the world's largest property and casualty insurer, wasn't immune from these events. The company saw catastrophe losses eat away at its bottom line during the year. However, Chubb found itself in a better capital position than many of its competitors, while growing its premiums written during the year -- and this is why it's a company to watch going into 2021.

Notepad with disaster plan written on it

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2020 put pressure on insurers' profitability

In second and third quarters of 2020, Chubb found itself with $2.7 billion in catastrophe losses. As a result of these mounting losses, Chubb saw its combined ratio -- a measure of its profitability -- rise to 98.9% in the first nine months of 2020, up from 89.9% during the same period last year. A ratio below 100% indicates that the insurer is turning a profit, while a ratio above 100% means the insurer is losing money on its policies.

However, this wasn't as bad as some of its competitors. Markel, Cincinnati Financial, and AIG saw combined ratios in the first nine months jump to 101%, 101.8%, and 104.3%, respectively, indicating that those insurers struggled to find profitability on the coverage options they underwrote.

Travelers was one insurer that posted a similar combined ratio as Chubb, with a 97.9% ratio in the first nine months of 2020. But Chubb has shown a more favorable combined ratio trend over the long run, with a ratio in the low 90s in the past couple of years while Travelers has found its combined ratio in the mid-to-upper-90s range during this time.

In response to record payouts, many insurers responded by raising premiums. Many also looked to reduce or even eliminate those unprofitable coverage options altogether. These actions by insurers had an impact on the insurance market as a whole -- which experts in the industry call a hardening of the insurance market.

For Chubb, a hardening market is an opportunity

While some competitors have been forced to restructure their insurance books out of necessity due to large cat losses, Chubb is using the hardening market as an opportunity to cut less profitable coverage options while it's on solid financial footing. 

For example, one area management focused on was wildfire risk. According to Aon's global catastrophe report for September, five of California's largest fire events since 1932 were recorded in September and August of this year alone. For Chubb, which saw $110 million in catastrophe losses from wildfires in the third quarter, it made sense to cut some coverage options in these high-risk areas. And that's exactly what it did -- by reducing its fire-exposed home count by 21%.

Chubb is not unique in this aspect -- its next largest competitor, Travelers, also reduced its wildfire exposure by one-third compared to two years ago. However, Chubb has an advantage over Travelers, and its peers in general, because of it is expansive global reach.

As the world's largest publicly traded P&C insurer, Chubb has a massive global network, thanks to operations in 54 countries or territories across the world. Chubb's international presence means that almost 40% of its business comes outside of the U.S., while Travelers sees less than 10% of its business coming internationally . In addition, the insurer offers over 200 commercial and reinsurance products and services. For Chubb, a hardening market is a great opportunity to analyze and maintain only the most profitable of these coverages.

Chubb has steered through 2020 expertly, increasing premiums written while also shaping its insurance book to improve profit margins. The insurer saw strong commercial property and casualty growth globally, with net premiums written in this area increasing to $14.2 billion in the first nine months of 2020, almost 9% higher than the same period last year.  

What to watch for in 2021

According to a report by Willis Towers Watson, commercial insurance buyers can expect the hard market conditions to continue through 2021. For some insurers, this means a continuation of cutting coverage options to get back to profitability. For Chubb, a strong capital position puts it in place to continue to reap the benefits of a favorable market for insurers and could drive its stock higher into 2021.

Chubb's strong capital position can be seen in its robust combined ratio, in addition to growing its total capital growing to $73 billion in the third quarter, driven by strong growth in its cash and invested assets, which grew by $5 billion during the quarter. These are funds available to management to support business operations and far outpaces its next largest competitor, Travelers, which itself has a total capitalization of $35 billion.

Management showed its confidence in the capital position, lifting a moratorium on share repurchase activities that it had announced in early April. Share repurchases can be a way to return capital to investors as an alternative to dividends and has the effect of pushing stock prices higher in the short-term -- something that could help keep Chubb's stock up into 2021. Not only that, but Chubb is a respectable dividend stock, yielding 2% at Friday morning's prices.

Chubb navigated a hardening insurance market in 2020 that will likely continue into next year. This bodes well for the company, which could see favorable underwriting conditions drive the stock higher through 2021.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.