Chubb Limited — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited U.S. GAAP results. Chubb is a global insurer and reinsurer operating across six segments: commercial, personal and agricultural P&C in North America, Overseas General, Global Reinsurance and Life Insurance. Comparisons below are with 2016 unless noted. The prior-year period is affected by the January 2016 Chubb Corporation acquisition and, for some six-month comparisons, a 14-day period not included in 2016 reported results.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net premiums written | $7.581B | $7.639B | $14.291B | $13.634B |
| Net premiums earned | $7.237B | $7.405B | $14.009B | $14.002B |
| Total revenue | $8.108B | $7.897B | $15.618B | $14.774B |
| Net investment income | $770M | $708M | $1.515B | $1.382B |
| Net income | $1.305B | $726M | $2.398B | $1.165B |
| Diluted EPS | $2.77 | $1.54 | $5.08 | $2.53 |
| P&C combined ratio | 88.0% | 91.2% | 87.8% | 90.6% |
Q2 premiums written declined 0.8% reported and 0.2% on a constant-dollar basis; management said merger-related underwriting actions and reinsurance changes reduced P&C written-premium growth by $198M. Excluding those actions, P&C written premiums grew 2.6% in constant dollars. Six-month reported written premiums rose 4.8%, but on a comparable constant-dollar basis including the prior-year stub period they declined 0.9%. Net income growth benefited from higher investment income, favorable realized results and lower expenses; it should not be read as solely underlying underwriting growth.
The Q2 combined ratio improved 3.2 percentage points. Management attributed expense-ratio improvement to integration savings, lower employee-benefit costs and other adjustments, while noting that the underlying loss and loss expense ratio increased. Excluding catastrophe losses and prior-period development, the consolidated loss ratio was 58.6% in Q2 versus 58.4% a year earlier, and 58.4% for the first half versus 57.9%.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $1.640B, down from $2.153B. Management cited higher taxes paid and claims payments.
- Investing activities generated $104M, compared with $2.672B used in the prior-year period, which included the Chubb Corp acquisition. Financing used $1.443B, including $500M of debt repayment, $475M of share repurchases and $646M of dividends. Cash ended June at $1.297B.
- At June 30, total assets were $162.988B and shareholders’ equity was $50.349B. Total investments were $100.208B; unpaid losses and loss expenses were $60.394B.
- Financial debt was $12.589B, versus $13.110B at year-end 2016; trust preferred securities were $308M. Financial debt was 19.9% of total capitalization, down from 21.3%. Short-term debt increased to $922M, partly reflecting reclassification of $900M of notes due in 2018; $11.667B remained long-term debt.
- Chubb reported a $1.5B letter-of-credit/revolver facility, with $376M of letter-of-credit usage. The facility was due to expire in November 2017; the company said it met its covenants and had not experienced difficulty accessing it. Repurchase agreements outstanding were $1.408B and collateralized.
Material changes, outlook and risks
- Integration: Management said integration was on or ahead of schedule and raised the expected annualized savings target by the end of 2018 to $875M from $800M. Estimated integration and merger-related expenses increased to $903M from $809M. Management cautioned that savings may be delayed or not fully achieved.
- Underwriting and reserves: Q2 catastrophe losses were about $200M; the detailed MD&A table reports $396M for Q2 2016, while the highlights cite $390M. Favorable prior-period development was $170M versus $301M. For the first half, catastrophe losses were $406M versus $654M and favorable development was $401M versus $548M. Personal P&C had adverse prior-period development of $34M for the first half; several other segments reported favorable development. Favorable releases therefore supported reported results.
- Investment and unusual items: Q2 net realized gains were $101M versus losses of $216M a year earlier; first-half gains were $94M versus losses of $610M. Results included gains from a lower fair value of variable-annuity guarantee liabilities (GLB), including an approximately $94M Q2 gain following an interest-rate model update, and gains from partially owned investment companies. The company also recorded $183M of integration expenses in the first half and $129M of purchased-intangible amortization.
- Segment and market factors: Global Reinsurance premiums declined amid falling rates and competition. Life underwriting income fell 27% in Q2, partly reflecting an updated variable-annuity benefit ratio. Management cited catastrophe exposure, reserve uncertainty, reinsurance collectability, interest-rate and equity-market movements, foreign exchange, competition, regulation, and acquisition-integration execution among the risks to results.
- Capital returns: The 2017 annual dividend approved was up to $2.84 per share, expected in quarterly installments of $0.71, subject to Board discretion. Chubb repurchased $475M of shares in the first half; $525M remained authorized at June 30.
- No formal earnings or premium guidance is provided in the supplied filing text. Management said operating cash flows should cover cash needs under most near-term loss scenarios. It reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of earnings and combined-ratio improvement is sustainable after separating catastrophe losses, reserve releases, GLB fair-value effects, investment-company gains and integration savings.
- Whether the underlying loss ratio, particularly in North America Personal P&C, improves, and how reserve development evolves across long-tail lines.
- Progress toward the $875M integration-savings target, the increased $903M expense estimate and the timing of expected savings.
- Exposure to variable-annuity guarantees under changes in interest rates, equity markets and policyholder behavior; management’s sensitivity estimates are model-based and not additive.
- Refinancing and liquidity plans around the November 2017 facility expiry and 2018 note maturities, plus the collectability of reinsurance recoverables and catastrophe-model assumptions.