Chubb Limited — Q1 2019 Form 10-Q
Business context and period: Chubb is a global insurance and reinsurance group operating across six segments. This unaudited filing reports the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are compared with December 31, 2018. Amounts are in U.S. dollars.
Financial performance and condition
- Premiums and revenue: Net premiums written rose 2.9% to $7.313 billion (5.1% on a constant-dollar basis); net premiums earned increased 1.6% to $7.137 billion (3.6% constant-dollar). Total revenue increased 0.6% to $7.876 billion.
- Earnings: Net income declined 3.9% to $1.040 billion; diluted EPS was $2.25 versus $2.30. Income before tax rose 0.9% to $1.228 billion, while tax expense increased to $188 million from $135 million. The effective tax rate was 15.3%, up from 11.1%.
- Underwriting and margins: The P&C combined ratio improved to 89.2% from 90.1%, indicating underwriting profitability. However, the current-accident-year combined ratio excluding catastrophe losses worsened to 88.5% from 87.6%; management attributed this to earned rate changes modestly below loss trends. Catastrophe losses were $250 million, down from $380 million, while favorable prior-period development was $204 million, slightly below $209 million.
- Investment results: Net investment income rose 3.7% to $836 million. Net realized losses were $97 million versus $2 million, including losses on investment and embedded derivatives. By contrast, pre-tax other comprehensive income was $2.009 billion, principally reflecting unrealized investment appreciation; comprehensive income was $2.718 billion versus $453 million.
- Cash flow and liquidity: Operating cash flow was $1.322 billion, up from $551 million. Investing activities used $673 million; financing activities used $630 million, including $367 million of share repurchases and $336 million of dividends. Cash and restricted cash ended at $1.393 billion. Management said operating cash flows should cover outflows under most loss scenarios in the near term; the $1.0 billion credit facility had $669 million of letter-of-credit usage, and Chubb met its financial covenants.
- Capital and debt: Total assets were $171.347 billion and shareholders’ equity $52.355 billion. Financial debt was $12.580 billion, little changed from year-end; financial debt to total capitalization was 19.3%, versus 19.9%. Total investments were $103.260 billion on the balance sheet. Repurchase agreements outstanding were $1.419 billion.
Material changes versus Q1 2018
- Premium growth was broad-based, led by North America Commercial P&C, up 5.0%, and Agriculture, up 19.9%; consolidated growth was 5.1% on a constant-dollar basis.
- The consolidated P&C combined ratio improved, helped by lower catastrophe losses. The current-year underlying combined ratio excluding catastrophe losses nevertheless deteriorated by 0.9 percentage points.
- North America Personal P&C returned to underwriting income of $98 million from a $48 million loss, with its combined ratio improving to 91.5% from 104.2%, largely due to lower catastrophe losses and favorable development.
- Overseas General and Global Reinsurance segment income fell to $292 million from $336 million and to $104 million from $122 million, respectively. Their combined ratios worsened to 92.3% and 76.8%, from 90.4% and 69.5%.
- Net income fell despite higher premiums, investment income, and operating cash flow, reflecting higher tax expense and substantially greater net realized investment losses.
Outlook, commentary, risks and unusual items
- No specific full-year earnings or revenue guidance is provided. Management expected positive operating cash flow to cover obligations under most near-term loss scenarios. It estimated $228 million of purchased-intangible amortization for the remainder of 2019 and total 2019 interest expense of approximately $554 million, based on stated assumptions.
- Chubb planned to redeem a $500 million, 5.9% senior note on June 15, 2019. Its April 1, 2019 property catastrophe reinsurance renewal included modest coverage enhancements. The filing describes modeled catastrophe loss estimates as uncertain and not a measure of maximum exposure.
- Key exposures include natural and man-made catastrophes, reserve-estimation uncertainty, collection and credit quality of reinsurance recoverables, investment-market and interest-rate movements, foreign exchange, competition and pricing, and legal, regulatory, cyber and geopolitical developments. A 100-basis-point rise in interest rates was estimated to reduce the fixed-income portfolio valuation by approximately $3.5 billion. Management also cautions that variable-annuity guarantee results are sensitive to equity markets, interest rates and policyholder behavior.
- Unpaid losses and loss expenses were $63.143 billion gross and $48.436 billion net of reinsurance. Q1 prior-period reserve development was favorable by $204 million; favorable results included crop and catastrophe-related development, but homeowners also had adverse development from elevated non-catastrophe claims.
- Legal claims and regulatory matters are described as arising in the normal course of business; management believes they are not likely to be material to consolidated financial condition or results. The filing reports no significant A&E reserve activity and no material change in risk factors from the 2018 Form 10-K.
- New lease accounting recognition added a $608 million right-of-use asset and a $653 million lease liability; management said adoption did not materially affect results, financial condition or liquidity. A $12 million after-tax opening retained-earnings adjustment was recorded for new callable-debt premium amortization guidance.
Most important facts for investors to verify
- Whether premium rate increases continue to keep pace with claims trends, given the deterioration in the current-year combined ratio excluding catastrophe losses.
- Whether favorable reserve development persists and how homeowners non-catastrophe claims and crop results develop.
- The impact of catastrophe activity, reinsurance recoverability and the April 2019 catastrophe reinsurance program on future underwriting results.
- Drivers of net realized losses, tax-rate changes and variable-annuity guarantee sensitivity, alongside the stronger investment-related OCI result.
- Cash generation, use of the remaining share-repurchase authorization, debt redemption and capital returned through dividends.