Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues. The latest adherent to the "corporation, buy thyself" philosophy is large-cap property & casualty (P&C) insurer Chubb (NYSE:CB), which last Thursday announced an "up to 28 million"-share buyback of its own stock ... and saw the value of that stock fall 2% in response.

Huh?
That was my reaction, too. Ordinarily, investors think of share buybacks as a good thing. When a corporation wants to repurchase its shares, the logical assumptions are that: management views the shares as undervalued; whether they are or they aren't, the buybacks will help support the stock price; and management has the wherewithal to effect the buyback, so its business must be strong.

So why are the shares down? Could it be that in repurchasing stock amounting to more than 7% of all shares outstanding, Chubb is biting off more than it can chew? Or do investors disagree with management's assertion that conducting a buyback is "managing [its] capital efficiently" -- in short, that this is just a bad idea? These are the questions we'll look at today.

Can it pay?
No doubt. 28 million shares, at today's price, would cost Chubb a "mere" $1.5 billion. But Chubb carries $2.6 billion in cash on its balance sheet -- enough to pay for the authorized buyback tomorrow if it's of a mind to. Granted, Chubb also has $4.1 billion in debt, and is at constant risk of needing more cash to pay out insurance claims. (That is its business, after all.) But if you examine the firm's cash flow statement, you'll find that Chubb generated about $3.5 billion in free cash flow over the last 12 months. At that rate of cash production, it should be able to cover the buyback tab with ease.

Should it pay?
Moreover, the entire insurance industry is looking mighty cheap these days -- a consequence, no doubt, of the ongoing mortgage mess, and investor fear of what investments these companies may have been pouring their insurance premiums into.

Forward P/E

Projected Growth Rate

Average Combined Ratio Over Past 5 Years

Chubb

9

10%

94.7%

Travelers (NYSE:TRV)

8

9%

102%

ACE, Ltd. (NYSE:ACE)

8

12%

95.2%

Hartford Financial (NYSE:HIG)

9

10%

94.7%

AIG (NYSE:AIG)

8

13%

98.3%

Mercury General (NYSE:MCY)

12

5%

93.9%

The extent of Chubb's exposure to the subprime debacle is hard to gauge -- as is, I suspect, the exposure of Chubb's peers. That said, it seems to me there's an awful lot of damage already priced into these stocks. With the notable exception of Mercury General, they all look exceedingly cheap from a basic PEG perspective. And as far as the quality of the businesses that lie behind the stock tickers go, Chubb in particular looks to be tied (with Hartford) for second place in having the lowest combined ratio.

Foolish takeaway
I have to say, I'm as leery as the next Fool about what lies beneath the balance sheet of any company that I even suspect might have subprime exposure. But that fear is common, and it may well be what's giving us a chance to buy some Angus-grade cash cows at hamburger prices. When it comes right down to it, I'm inclined to agree with Chubb: Now's the time to be buying its stock.

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Fool contributor Rich Smith does not own shares of any company named above -- but he's giving it serious consideration. The Motley Fool has a disclosure policy.