Chubb Limited — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Chubb is a global insurance and reinsurance group with six operating segments. All amounts are U.S. dollars. The 2016 comparison is affected by the January 14, 2016 acquisition of The Chubb Corporation: the prior-year quarter excludes its pre-close 14-day results unless otherwise noted.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net premiums written | $6.710 billion | $5.995 billion | Up 11.9% reported; down 1.7% on a constant-dollar comparison including the prior-year acquisition stub period. |
| Net premiums earned | $6.772 billion | $6.597 billion | Up 2.6% reported; down $216 million including the stub-period comparison. |
| Total revenues | $7.510 billion | $6.877 billion | Up 9.2%, with comparisons influenced by acquisition timing and much smaller investment losses. |
| Net investment income | $745 million | $674 million | Up 10.5% reported. Excluding acquisition-related fair-value amortization, $836 million versus $767 million including the 2016 stub-period comparison. |
| Income before tax | $1.221 billion | $563 million | Up 116.9%. |
| Net income / diluted EPS | $1.093 billion / $2.31 | $439 million / $0.97 | Net income up 149.2%; comparison reflects lower realized investment losses and acquisition-period differences. |
| P&C combined ratio | 87.5% | 90.0% | Improved 2.5 percentage points; below 100% indicates underwriting profit. |
| Operating cash flow | $1.013 billion | $1.020 billion | Substantially unchanged. |
Financial position, liquidity and capital
- At March 31, 2017, total assets were $160.967 billion, shareholders’ equity was $49.224 billion, and cash was $1.063 billion.
- Total investments were $99.491 billion, primarily fixed maturities. Gross unpaid losses and loss expenses were $60.579 billion; reinsurance recoverables on losses and loss expenses were $13.769 billion.
- Financial debt was $12.6 billion, down from $13.110 billion at year-end 2016. Debt-to-total-capitalization was 20.3%, versus 21.3%. The quarter included repayment of $500 million of senior notes; $300 million due in March 2018 was classified as short-term debt. Repurchase agreements of $1.404 billion are separately reported and collateralized.
- Cash used in investing was $60 million, compared with $1.615 billion in 2016, which included the acquisition payment. Cash used in financing was $858 million, including $500 million of debt repayment, $128 million of share repurchases and $324 million of dividends paid.
- Management said operating cash flow, routine investment sales and financing arrangements should cover near-term cash needs under most loss scenarios. The $1.5 billion letter-of-credit/revolver facility had $458 million in use; the facility expired in November 2017, and Chubb met its financial covenants at quarter-end.
Material changes and operating drivers
- Premiums and acquisition comparisons: Reported premium growth largely reflects the prior-year acquisition stub period. Including that period, constant-dollar net premiums written declined 1.7%; merger-related underwriting actions and premium-recognition alignment reduced growth by 4.1 percentage points. Excluding these actions and adjustments, management reported P&C written premiums up 2.2%.
- Underwriting: The combined ratio improved from 90.0% to 87.5%. Catastrophe losses were $206 million, down from $258 million. Favorable prior-period development was $231 million, compared with $247 million, and included a $41 million charge related to the U.K. Ogden discount-rate change. Adjusted for catastrophe losses and prior-period development, the loss ratio was 58.1%, up 0.7 percentage points, with higher non-catastrophe large losses partly offset by claims-handling savings.
- Integration and expenses: Chubb recorded $111 million of integration expenses, down from $148 million. Management cited $124 million of incremental integration-related savings recognized in the quarter; its broader savings table reports $152 million of total savings, including claims, acquisition and administrative expense savings. The reported administrative expense ratio declined to 9.6% from 11.5%.
- Investments and realized results: Net realized losses narrowed to $7 million from $394 million. Net investment income increased, although it includes $91 million of amortization of the acquired-investment fair-value adjustment. Investment portfolio fair value increased $456 million during the quarter.
- Segment variation: North America Personal P&C segment income rose to $222 million from $64 million, helped by fewer catastrophe losses and lower expense ratios. Overseas General segment income fell to $229 million from $308 million, and its combined ratio increased to 95.3% from 91.4%. Global Reinsurance segment income declined to $96 million from $114 million, with its combined ratio rising to 82.1% from 77.3%.
- Tax and equity: The effective tax rate was 10.5%, versus 22.1%. The quarter included approximately $25 million of tax benefit from an accounting election on certain investments and $25 million from adopting stock-compensation guidance. Chubb repurchased $140 million of shares during the quarter.
Outlook, commentary and risks
- Management said integration was on track or ahead of schedule and expected merger-related premium impacts to lessen through the year.
- Management expected quarterly net investment income of $830 million to $840 million, excluding acquired-investment fair-value amortization. It expected an effective tax rate of 16% to 18% for the remainder of 2017, excluding specified acquisition-related amortization, integration expenses and realized gains or losses.
- Management expected approximately $25 million of quarterly postretirement-benefit harmonization benefits for five years, approximately $17 million of quarterly impact from the higher variable-annuity long-term benefit ratio for the rest of 2017, and about $65 million of quarterly purchased-intangible amortization for the rest of 2017.
- Effective April 15, 2017, the rate on $1.0 billion of junior subordinated capital securities reset from 6.375% to three-month LIBOR plus 2.25 percentage points. Management estimated annual pre-tax interest savings of $30 million at the then-current LIBOR.
- Material risks include catastrophe severity and modeled-loss uncertainty; reserve and claims-estimation uncertainty; collectability of reinsurance; market, interest-rate, credit and currency movements; variable-annuity guarantee exposure to markets and policyholder behavior; regulatory and legal developments; and successful integration of the acquired business. Management noted catastrophe models are uncertain and actual losses could differ materially from modeled estimates.
- Management said ordinary-course claims litigation is reflected in reserves and that other business litigation or regulatory matters were not likely to be material. The filing reported no material changes to the risk factors in the 2016 Form 10-K.
Most important facts for investors to verify
- Assess premium growth using the acquisition-stub and constant-dollar comparisons, and distinguish underlying growth from merger-related underwriting and accounting actions.
- Evaluate underwriting quality excluding catastrophe losses and favorable prior-period reserve development; review the Ogden-rate impact, agricultural crop-year adjustments and large-loss trends.
- Track whether management’s $830–$840 million quarterly investment-income range, tax-rate outlook and projected integration savings are achieved.
- Monitor reserve adequacy and reinsurance recoverable collectability, including the extent to which favorable reserve development persists.
- Review debt maturities, the November 2017 credit-facility expiration, capital returns and the effect of the floating-rate reset on the junior subordinated securities.
- Consider market sensitivity in the investment portfolio and variable-annuity guarantees; management estimated that a 100-basis-point rise in interest rates would reduce fixed-income portfolio value by approximately $4.0 billion.