Chubb Limited 2018 Form 10-K Summary
Business context and reporting period
Chubb is a Switzerland-incorporated global insurer and reinsurer operating in 54 countries and territories. Its six segments cover North American commercial, personal and agricultural property and casualty insurance, overseas general insurance, global reinsurance, and life insurance. This Form 10-K reports the fiscal year ended December 31, 2018; it is an annual filing, not a standalone fourth-quarter report. Financial figures are in U.S. dollars.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net premiums written | $30.579 billion | $29.244 billion |
| Net premiums earned | $30.064 billion | $29.034 billion |
| Total revenues | $32.717 billion | $32.243 billion |
| Net investment income | $3.305 billion | $3.125 billion |
| Net realized gains (losses) | $(652) million | $84 million |
| Net income | $3.962 billion | $3.861 billion |
| Diluted EPS | $8.49 | $8.19 |
| Operating cash flow | $5.480 billion | $4.503 billion |
| P&C combined ratio | 90.6% | 94.7% |
Net income rose 2.6% and diluted EPS rose 3.7%. Net premiums written grew 4.6% (4.1% on a constant-dollar basis); net premiums earned rose 3.5% (3.1% constant-dollar). The P&C combined ratio below 100% indicates underwriting profit. The current-accident-year combined ratio excluding catastrophe losses increased to 88.0% from 87.6%.
Pre-tax catastrophe losses, including reinstatement premiums, were $1.626 billion, down from $2.746 billion in 2017; favorable prior-period development was $896 million versus $829 million. Net investment income increased 5.8%, with higher reinvestment rates partly offset by lower private-equity distributions. The effective tax rate was 14.9%; 2018 included a $25 million benefit related to the U.S. Tax Cuts and Jobs Act, compared with a $450 million benefit in 2017.
At year-end, total assets were $167.771 billion, shareholders’ equity $50.312 billion, and book value per share $109.56, down from $110.32. The balance sheet reported $100.968 billion of investments and $1.247 billion of cash. Financial debt was $12.596 billion, comprising $509 million short-term and $12.087 billion long-term debt; debt was 19.9% of total capitalization. Separately, repurchase agreements totaled $1.418 billion. The filing describes liquidity as adequate, citing operating cash generation, liquid investments, reinsurance and credit facilities.
Material changes versus the prior year
- The P&C combined ratio improved by 4.1 percentage points, principally because catastrophe losses were lower. However, the underlying current-accident-year ratio excluding catastrophe losses worsened by 0.4 percentage points, and management cited elevated homeowners losses and high North American property loss activity.
- Net income increased modestly despite net realized losses of $652 million, compared with realized gains of $84 million in 2017. The 2018 result included a $248 million loss from fair-value changes in variable-annuity reinsurance liabilities, among other items.
- Comprehensive income fell to $1.242 billion from $4.718 billion. Other comprehensive loss was $2.720 billion, reflecting, in part, investment depreciation and foreign-currency translation losses; shareholders’ equity declined by $860 million.
- Operating cash flow increased by $977 million, which management attributed principally to higher premiums collected, net of catastrophe claim payments, and lower taxes paid.
- Chubb repurchased $1.021 billion of shares and paid $2.90 per share in dividends during 2018. Long-term debt rose year over year, while total financial debt was broadly stable.
Outlook, commentary, risks and unusual items
Management said it was optimistic about 2019, citing business momentum and an improving pricing and underwriting environment. It expected quarterly 2019 net investment income of $825–$835 million, including approximately $55 million of quarterly amortization of acquired-investment fair-value adjustments; adjusted quarterly investment income excluding that amortization was projected at $880–$890 million. These estimates are subject to market conditions, bond calls, portfolio duration and foreign exchange.
- Reserve and reinsurance exposure: Management considers reserves adequate but emphasizes uncertainty in long-tail claims, asbestos and environmental liabilities, and reinsurance recoverability. Net unpaid losses and loss expenses were $48.271 billion. Reinsurance recoverables on losses and loss expenses were $15.993 billion, net of a $323 million uncollectible provision. About $1.5 billion of intercompany recoverables were due from run-off affiliate Century; impairment was not recognized, but insolvency could put recovery at risk.
- Catastrophes and climate: Severe weather, wildfires, hurricanes, other catastrophes and changing climate conditions could produce losses beyond modelled or reinsured expectations. Estimated net U.S. hurricane loss at a 1-in-100 return period was $2.730 billion; management cautions that catastrophe models are uncertain and do not represent maximum exposure.
- Investments and markets: Rising interest rates contributed to substantial unrealized fixed-income losses; a hypothetical 100-basis-point rate increase would reduce fixed-income portfolio value by an estimated $3.5 billion before tax. Equity markets, credit quality, foreign exchange and policyholder behavior also affect results, including the legacy variable-annuity guarantee portfolio, which is closed to new business.
- Other risks and contingencies: The filing highlights competition and pricing cycles, broker and counterparty concentration, regulatory and privacy/cybersecurity requirements, tax-law uncertainty, and Brexit-related uncertainty. Chubb moved its European headquarters to France effective January 1, 2019; 2018 relocation and Brexit-related costs were $11 million, with 2019 costs expected to be immaterial. Management said ordinary-course business litigation was not likely to be material.
- Quarterly context: Fourth-quarter 2018 net income was $355 million, versus $1.533 billion in fourth-quarter 2017. The 2018 quarter included $687 million of net realized losses and $506 million of after-tax catastrophe losses; fourth-quarter 2017 included the $450 million U.S. tax-law transition benefit.
Important facts for investors to verify
- Whether premium growth and pricing gains persist, and whether the deterioration in the current-accident-year ratio excluding catastrophes reverses.
- Reserve development trends, particularly long-tail casualty, homeowners claims, asbestos/environmental liabilities and the $1.5 billion Century recoverable.
- The collectability and timing of reinsurance recoverables, catastrophe exposure net of reinsurance, and changes in collateral requirements.
- The drivers and volatility of realized investment losses, accumulated other comprehensive losses, and the legacy variable-annuity guarantee liability.
- Whether 2019 investment-income guidance is achieved and how capital returns, debt maturities and regulated-subsidiary dividend capacity affect holding-company liquidity.