Chubb Corp (NYSE: CB), long known for its conservative approach to both underwriting and investment, has largely avoided the problems plaguing many of its brethren.

American International Group (NYSE: AIG) is barely clinging to solvency, almost wholly dependent on government handouts to keep it afloat under the crushing weight of billions of dollars of credit default swaps (CDS). Chubb made a brief foray into writing CDS contracts, but completely exited the business in 2003 after finding it too difficult to assess the risk the contracts posed.

On the investment side of its business, the company’s portfolio has taken heavy hits over the past year and a half just like everyone else’s. But unlike many other insurance companies, Chubb has zero direct exposure to subprime mortgage-backed securities or other derivatives. Its investment portfolio consists primarily of plain-vanilla stocks and bonds, a collection that’s in line with the company’s focus on generating underwriting profits rather than portfolio returns.

That conservative bent didn’t do Chubb any favors during the boom years as investors flocked to the industry’s highflying Icaruses, but it has positioned the company to move up from its current ranking as the eleventh largest property and casualty insurer.

Last year profits suffered across the industry, and Chubb wasn’t immune to these weaknesses. On the domestic front, total net written premiums decreased by 1 percent to $11.8 billion as premiums fell by 3 percent. That was partially offset by 6 percent premium growth in overseas markets, which account for more than 20 percent of Chubb’s total business. However, currency headwinds associated with a stronger US dollar effectively halved these gains.

Catastrophes also ate into profits, primarily because of Hurricane Ike and the havoc it wreaked on the Gulf Coast. The company’s combined ratio, which measures the percentage of premiums allocated to covering expenses and claims, rose to 88.7 percent last year–about average for the industry.

These factors combined with investment losses of 66 cents per share to push full-year net income down 36 percent to $1.8 billion and operating profit down to $5.58 per share, both of which handily beat analyst estimates.

Several developments suggest that the company’s fortunes will improve this year. For one, given its size and relative strength, Chubb finds itself in a position to poach business from its weaker peers. At the same time, premium rates are expected to improve industry-wide; heavy catastrophe losses should push up residential and commercial rates, while the financial crisis is already driving up rates on professional liability insurance.

Overall, Chubb is in excellent financial shape. The company’s debt load is a bit less than the industry’s average; with a debt-to-equity ratio of 29 percent, it hasn’t aggressively financed its operations. It also appears attractive on a valuation basis, trading at just 1.1 times its book value–its lowest point in years. Price-to-earnings also fell to 8.1 times, the lowest point in recent memory and below the industry average.

And Chubb’s conservative investment portfolio provides $40 billion in liquidity, including $2 billion in cash.  Meanwhile, with a payout ratio of just 26.4 percent, the firm’s quarterly dividend of 35 cents is at little risk. Steady income and moderate growth potential make Chubb an excellent play for a wide range of investors.

WHY TO BUY
CHUBB CORP (NYSE: CB)

*Conservative approach has minimized losses
*Steady dividend growth
*No exposure to problematic derivatives