Chubb Limited — Q1 2018 Form 10-Q
Business context and reporting period. Chubb is a global insurance and reinsurance group operating across six segments: North America Commercial P&C, North America Personal P&C, North America Agricultural, Overseas General, Global Reinsurance, and Life Insurance. This unaudited filing covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise stated. Amounts are U.S. dollars.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net premiums written | $7.104 billion | $6.710 billion; up 5.9% reported and 3.5% constant currency |
| Net premiums earned | $7.027 billion | $6.772 billion; up 3.8% reported |
| Total revenue | $7.831 billion | $7.510 billion; up 4.3% |
| Net investment income | $806 million | $745 million; up 8.2% |
| Income before tax | $1.217 billion | $1.221 billion |
| Net income / diluted EPS | $1.082 billion / $2.30 | $1.093 billion / $2.31 |
| P&C combined ratio | 90.1% | 87.5% |
| Operating cash flow | $551 million | $1.013 billion |
| Total assets / shareholders’ equity | $168.781 billion / $51.287 billion | $167.022 billion / $51.172 billion at Dec. 31, 2017 |
| Financial debt | $14.455 billion | $12.569 billion at Dec. 31, 2017 |
Reported net investment income includes $71 million of amortization expense on acquired investment assets; excluding that amortization, it was $877 million versus $836 million, up 4.9%. The P&C current-accident-year combined ratio excluding catastrophe losses was 87.6%, compared with 88.0%.
Pre-tax catastrophe losses were $380 million, or 5.8 percentage points of the combined ratio, versus $206 million and 3.3 points in Q1 2017. Favorable prior-period development was $209 million, or 3.3 points, versus $231 million and 3.8 points. Higher catastrophe losses and less favorable development contributed to the combined-ratio deterioration. Personal P&C recorded a 104.2% combined ratio, chiefly reflecting $284 million of catastrophe losses, including California mudslides and Northeast winter storms; Overseas General improved to 90.4% from 95.3%.
Comprehensive income was $453 million, down from $1.407 billion. Other comprehensive loss was $629 million, largely reflecting $1.234 billion of pre-tax unrealized depreciation on investments, partly offset by foreign-currency translation gains.
Material changes, liquidity and capital
- Operating cash flow declined to $551 million, which management attributed principally to higher net claims paid, including payments for 2017 catastrophe events. Investing used $881 million; financing provided $1.567 billion, including debt issuance.
- Cash and restricted cash totaled $2.113 billion at quarter-end, including $1.988 billion of cash. Total investments were $102.105 billion. Management said operating cash flows should cover cash outflows under most loss scenarios in the near term.
- Chubb INA issued €1.8 billion of senior notes in March 2018, reported as approximately $2.2 billion at issuance, with maturities in 2028 and 2038. It repaid $300 million of notes at maturity. Financial debt to total capitalization rose to 21.9% from 19.6%. The $1.0 billion junior subordinated securities classified as short-term were redeemed on April 6, 2018.
- The company reported $1.4 billion of repurchase agreements outstanding, fully collateralized. Its $1.0 billion letter-of-credit/revolver facility had $305 million in use; it reported compliance with financial covenants.
- The quarterly common dividend was $0.71 per share. No shares were repurchased under the public authorization in Q1; the reported 650,879 share purchases were employee-related tax withholding/option activity.
Outlook, commentary and risks
The filing provides no specific full-year earnings or premium-growth guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It expected 2018 purchased-intangible amortization of approximately $252 million for the remaining three quarters and estimated full-year interest expense of $630 million, including acquired-debt fair-value amortization.
Management cited premium growth across most segments, rate increases in some commercial lines, and integration-related claims and expense savings. It also noted planned portfolio management in certain commercial lines, declines in large-account business overseas, and that no new life reinsurance business was being written. The 2018 catastrophe reinsurance program renewed effective April 1 with no significant change in coverage.
Key risks include catastrophe severity and accumulation, uncertainty in loss reserves and claims settlement, reinsurer collectability, investment-market and interest-rate movements, foreign exchange, competition and pricing, regulation, and technology and cybersecurity. The filing estimates that a 100-basis-point rise in interest rates would reduce the fixed-income portfolio’s valuation by approximately $4.1 billion. Catastrophe models are inherently uncertain and exclude certain non-modeled perils; actual losses could differ materially. Variable-annuity guarantee results are sensitive to markets and policyholder behavior. Management said routine legal and regulatory matters were not likely to be material and reported no material changes to the risk factors in its 2017 Form 10-K.
Accounting items include adoption of guidance requiring fair-value changes in certain equity investments to flow through net income; adoption increased opening retained earnings by $416 million after tax, with an offset to accumulated other comprehensive income. The provisional $450 million tax-transition benefit recorded in 2017 under the Tax Cuts and Jobs Act was unchanged in Q1 2018. The effective tax rate was 11.1%, versus 10.5%.
Important facts for investors to verify
- Whether catastrophe losses and reserve development remain within expectations, and how much current earnings benefit from favorable prior-period development.
- Personal P&C loss trends after Q1’s severe weather losses, and the sustainability of underwriting results across segments.
- Reinsurance recoverables, counterparty quality and collateral, including the timing of collections for catastrophe claims.
- Investment portfolio sensitivity to interest rates and credit spreads, and the effect of new equity-investment accounting on earnings volatility and AOCI.
- Debt levels, planned debt redemptions, liquidity-facility availability, and the impact of catastrophe or market stress on capital and cash flows.
- Key assumptions and sensitivities in variable-annuity guarantee liabilities, particularly interest rates, equity markets, lapse rates and annuitization.