Business context and reporting period
Chubb Limited is a Switzerland-incorporated 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 Form 10-Q covers the quarter and six months ended June 30, 2018; dollar amounts are U.S. dollars.
Financial performance and position
- Revenue and premiums: Second-quarter total revenue was $8.510 billion, up 5.0% year over year; net premiums written rose 5.7% to $8.015 billion and net premiums earned rose 5.9% to $7.664 billion. For the first half, revenue was $16.341 billion, up 4.6%; written premiums increased 5.8% to $15.119 billion and earned premiums increased 4.9% to $14.691 billion.
- Profit: Second-quarter net income was $1.294 billion versus $1.305 billion; diluted EPS was $2.76 versus $2.77. First-half net income was $2.376 billion versus $2.398 billion; diluted EPS was $5.07 versus $5.08.
- Underwriting and margins: The P&C combined ratio was 88.4% for Q2 versus 88.0%; first-half ratio was 89.2% versus 87.8%. Ratios below 100% indicate underwriting profit. Q2 catastrophe losses were $211 million, while favorable prior-period development was $191 million; first-half figures were $591 million and $400 million, respectively. First-half catastrophe losses exceeded management’s expected level by $161 million.
- Investment income: Net investment income increased 7.4% to $828 million in Q2 and 7.8% to $1.634 billion for the first half. Management attributed the increase principally to a higher average invested-asset base and higher earnings on short-term investments and other interest income.
- Cash flow and liquidity: First-half operating cash flow was $2.197 billion, compared with $1.640 billion; investing activities used $1.260 billion, versus $123 million provided; financing activities used $649 million, versus $1.443 billion used. Cash and restricted cash ended June at $1.101 billion. Management said operating cash flows should cover near-term outflows under most loss scenarios.
- Balance sheet and debt: At June 30, total assets were $167.534 billion and shareholders’ equity was $50.971 billion. Financial debt was $12.784 billion; debt to total capitalization was 20.0%, versus 19.6% at year-end 2017. Long-term debt was $12.184 billion and short-term debt was $600 million.
Material changes versus the prior comparable period
- Premium growth was broad-based, though reported growth exceeded constant-dollar growth: first-half written premiums increased 5.8% reported and 3.9% constant-dollar.
- First-half P&C combined ratio worsened by 1.4 percentage points. The loss ratio rose 2.0 points, partly offset by lower acquisition and administrative expense ratios. Management cited higher catastrophe losses and the effect of large structured transactions; integration-related expense savings provided some offset.
- North America Personal P&C’s first-half combined ratio rose to 96.3% from 86.9%, with higher catastrophe losses and non-catastrophe homeowners weather losses and large fires cited as contributing factors. Global Reinsurance’s Q2 combined ratio increased to 79.3% from 60.2%, reflecting higher catastrophe losses, less favorable prior-period development, and a shift toward casualty business.
- Net income was nearly flat despite premium growth. Realized investment gains fell to $18 million in Q2 from $101 million and to $16 million for the first half from $94 million. First-half comprehensive income declined to $730 million from $3.082 billion, including a $1.646 billion other comprehensive loss, largely reflecting investment and foreign-currency movements. Shareholders’ equity decreased slightly from $51.172 billion at year-end.
- Operating cash flow increased year over year, while investing cash flow shifted to a use of funds, including higher private-equity contributions. Chubb issued €1.8 billion of senior notes in March, repaid or redeemed maturing debt, and redeemed $1.0 billion of subordinated securities, recording a $36 million extinguishment loss.
Outlook, management commentary, risks and unusual items
- No earnings or revenue guidance is provided. The company approved an annual dividend of up to $2.92 per share for the following year, expected in quarterly installments of $0.73; the Board retains discretion over distributions. Chubb repurchased $324 million of shares in the first half and reported $576 million of authorization remaining at July 31, 2018.
- Management estimated full-year 2018 interest expense of $656 million, including amortization of acquired debt fair-value adjustments. Estimated purchased-intangible amortization for the remainder of 2018 was $164 million.
- Key risks include catastrophe severity and frequency, uncertainty in loss-reserve estimates and claims settlements, reinsurance recoverability, investment-market and interest-rate movements, foreign exchange, and regulatory, legal, economic, and cyber risks. Catastrophe models are inherently uncertain and do not represent maximum potential losses. A 100-basis-point increase in interest rates was estimated to reduce fixed-income portfolio value by approximately $4.0 billion.
- At June 30, alternative-investment funding commitments were $3.441 billion and fixed-maturity purchase commitments were $948 million. Legal and regulatory matters are described as arising in the normal course; management believes their ultimate liability is not likely to be material.
- Accounting changes adopted in 2018 require fair-value changes on certain equity investments to flow through net income; adoption increased beginning retained earnings by $417 million after tax. The 2017 Tax Act transition estimate remained provisional at a $450 million tax benefit, with no change recorded in this quarter. Other unusual items included a $22 million lease-impairment loss.
Important facts for investors to verify
- Whether premium growth and rate increases are keeping pace with loss-cost trends, especially in personal homeowners and casualty lines.
- How catastrophe experience and the $400 million of first-half favorable reserve development affect underlying underwriting results and reserve adequacy.
- The investment portfolio’s sensitivity to interest rates, unrealized losses, and the liquidity and funding profile of alternative investments.
- Debt issuance, maturities, repurchases, dividends, and available liquidity, including the terms and continued availability of credit facilities.
- Subsequent updates to the provisional Tax Act accounting estimate and the potential effect of outstanding commitments and reinsurance recoverables.