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UBS Securities: Chubb not sufficiently leveraged to E&S or Lloyd's market

UBS Securities analyst Brian Meredith downgraded Chubb Ltd. to "neutral" from "buy," saying the company is not sufficiently leveraged to the excess and surplus or Lloyd's of London market to benefit from improved pricing and underwriting discipline.

Chubb has exposure to the E&S and Lloyd's markets through its Westchester and Syndicate 2488 businesses, which are responsible for about 10% of companywide gross premiums, Meredith wrote. Although he considers them industry-leading franchises, Meredith said the businesses have both narrowed by approximately 30% in the past decade, and he wrote that UBS does not view Chubb as having enough exposure "to generate meaningful EPS revisions and/or warrant upward share re-rating" to maintain a buy rating.

Meredith noted that he prefers the shares of American International Group Inc. and AXIS Capital Holdings Ltd. because of his belief that they will benefit more from the improving E&S pricing environment. The shares also have the potential for upward re-rating, he said.

Meredith raised his price target for Chubb to $154.00 from $146.00, and his EPS estimates to $10.75 from $10.65 for 2019, to $11.55 from $11.35 for 2020 and to $12.11 from $11.90 for 2021. Chubb closed down 0.64% at $147.07 in May 23 trading.

The increase of the 2019 and 2020 EPS estimates takes into account the benefit of improved pricing in the E&S market, improved underwriting discipline at Lloyd's, and a more positive view that the company's North American personal lines underwriting margins will be able to come back to targeted profitability by 2020.