Chubb Ltd quarterly report, Q3 FY2020

Business context and reporting period

Chubb Limited is a global insurance and reinsurance holding company, operating across six segments spanning North American and overseas property and casualty, agriculture, reinsurance, and life insurance. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. All amounts are U.S. dollars unless noted.

Financial results and condition

• Net premiums written increased 5.3% in Q3 and 4.7% year to date (6.0% and 5.6%, respectively, in constant dollars). Growth was concentrated in commercial P&C; pandemic-related economic contraction and reduced travel weighed on exposures and consumer, automobile, and accident-and-health business.
• P&C combined ratio was 95.2% in Q3 versus 90.2% and 98.9% year to date versus 89.9%. Catastrophe losses were 11.3 percentage points of the Q3 ratio and 12.9 points year to date. The current-accident-year combined ratio excluding catastrophes improved to 85.7% from 89.5% in Q3 and to 86.8% from 89.0% year to date.
• Operating cash flow was $7.241B for the first nine months, versus $4.913B; management attributed the increase mainly to higher premiums collected and reduced claim payments during the pandemic slowdown. Investing activities used $6.729B and financing activities used $234M. Cash and restricted cash totaled $1.873B at September 30.
• At September 30, total assets were $187.786B, shareholders’ equity $56.413B, and investments $116.047B. Unpaid losses and loss expenses were $67.905B, up from $62.690B at year-end 2019.
• Financial debt was $16.130B, versus $14.858B at year-end; financial debt to total capitalization was 22.1%, up from 21.1%. Chubb also had $308M of trust preferred securities and $1.413B of repurchase agreements outstanding. It issued $1B of 1.375% senior notes due 2030 in September.
• Chubb reported $4.0B of credit and letter-of-credit facility capacity, including a $1.9B revolving-credit sublimit; $1.7B was used for letters of credit. It reported compliance with financial covenants.

Material changes versus the prior period

• Q3 net income rose 9.4%, while nine-month net income fell 66.0%. The year-to-date decline reflects much larger net realized losses ($1.069B versus $475M), higher catastrophe losses, and weaker underwriting results; unrealized investment appreciation recorded in other comprehensive income does not offset realized losses in reported net income.
• Pre-tax catastrophe losses were $925M in Q3, principally from severe weather and wildfires. Year-to-date catastrophe losses were $2.950B, including $1.378B related to COVID-19. Prior-period development remained favorable, but was lower: $189M year to date versus $559M.
• Net realized losses were $141M in Q3 and $1.069B year to date. The nine-month result included $456M of realized losses on variable-annuity guarantee reinsurance derivatives and $519M of foreign-exchange losses; investment-portfolio gains were partly offset by impairments.
• Net investment income declined 3.8% in Q3 and 1.6% year to date, mainly because of lower reinvestment rates, partly offset by higher average invested assets.
• Loss reserves increased amid catastrophe claims, premium growth, and slower claim payments during the pandemic. Favorable prior-year reserve development included significant favorable commercial workers’ compensation results, partly offset by $254M adverse development for U.S. child-molestation claims and adverse environmental development.
• Chubb acquired an additional 15.3% interest in Huatai Group in July, bringing its ownership to 46.2%. A further 7.1% purchase, subject to conditions expected to be completed by year-end 2021, would give Chubb majority ownership and is expected to result in consolidation.

Outlook, commentary, risks and unusual items

• The filing provides no specific earnings or premium guidance. Management said operating cash flows should generally cover near-term outflows under most loss scenarios, while cautioning that interim results are not necessarily indicative of full-year results.
• Management cited positive commercial pricing, retention, and new business, with earned rate increases exceeding loss-cost trends and improving underlying claims experience. Pandemic-driven exposure reductions and business limitations tempered premium growth.
• Key uncertainties include further COVID-19 claims and reserve development, natural catastrophes, the severity and timing of claim payments, reinsurance collectability, low interest rates and market volatility, currency movements, and legal or regulatory changes. The company specifically warned that pandemic-related claims may exceed current estimates and that legislative or regulatory responses could affect reserves.
• Modeled U.S. hurricane net probable maximum loss was $2.720B at a 1-in-100 return period, assuming reinsurance is fully collectible; management cautioned that catastrophe models are uncertain and actual losses may differ materially.
• Other notable items: Chubb adopted CECL in January 2020, reducing opening retained earnings by $72M after tax; it recorded $50M of unrecognized tax benefits and disclosed an IRS examination of 2016–2018 returns. Share repurchases were suspended during Q2 and Q3 because of the economic environment and resumed October 29, 2020.
• Management stated that ordinary-course litigation and regulatory matters were not considered likely to be material to consolidated financial condition or results. The filing reported no material changes to previously disclosed risk factors and no material changes to critical accounting estimates.

Important facts for investors to verify

• How COVID-19 and catastrophe claims develop against the $1.378B pandemic loss estimate, and whether reserve increases or slower payments reverse.
• Whether favorable reserve development persists, especially in light of adverse child-molestation, environmental, personal-homeowners, and selected commercial casualty developments.
• Whether premium growth and improved underlying loss ratios can offset catastrophe volatility and elevated combined ratios in segments such as North America Personal P&C and Global Reinsurance during Q3.
• How lower reinvestment yields, investment impairments, foreign-exchange movements, and variable-annuity guarantee exposures affect earnings and capital.
• Whether the contingent Huatai purchase closes on expected terms and timing, and its resulting effects on consolidation, capital, and reported earnings.
• Debt and liquidity trends, including the use of credit facilities, repurchase agreements, restricted assets, and the resumed share-repurchase program.