Business context and reporting period
Chubb Limited is a Switzerland-incorporated global insurance and reinsurance holding company. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons below are with the corresponding 2018 periods unless noted. All amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net premiums written | $8.343bn | $8.015bn | $15.656bn | $15.119bn |
| Net premiums earned | $7.891bn | $7.664bn | $15.028bn | $14.691bn |
| Total revenues | $8.527bn | $8.510bn | $16.403bn | $16.341bn |
| Net investment income | $859m | $828m | $1.695bn | $1.634bn |
| Net realized gains (losses) | $(223)m | $18m | $(320)m | $16m |
| Net income | $1.150bn | $1.294bn | $2.190bn | $2.376bn |
| Diluted EPS | $2.50 | $2.76 | $4.75 | $5.07 |
- Underwriting: Q2 P&C combined ratio was 90.1% (90.2% including the reported company measure); six-month P&C combined ratio was 89.6%. A ratio below 100% indicates underwriting income. Current accident-year P&C combined ratio excluding catastrophe losses was 88.9% in Q2 and 88.7% for the half, versus 88.1% and 87.8% in 2018.
- Claims and reserves: Catastrophe losses were $275m in Q2 and $525m year to date, compared with $211m and $591m. Favorable prior-period development was $188m and $392m, compared with $191m and $400m. For the half, net losses incurred included $411m of favorable prior-year development.
- Cash flow: Operating cash flow was $1.386bn in Q2 versus $1.646bn. For the six months, operating cash flow was $2.708bn versus $2.197bn; investing activities used $2.287bn and financing activities used $431m. Cash and restricted cash totaled $1.368bn at June 30.
- Balance sheet and liquidity: Total assets were $174.516bn and shareholders’ equity $53.802bn, up from $167.771bn and $50.312bn at December 31, 2018. Investments totaled $105.739bn. Unpaid losses and loss expenses were $63.205bn; reinsurance recoverable on losses was $15.445bn.
- Debt and capital: Financial debt was $13.380bn, including $13.371bn of long-term debt; trust preferred securities were $308m. Financial debt was 19.8% of total capitalization. The company issued €1.15bn of senior notes in June and repaid $500m of notes at maturity.
- Shareholder returns: Chubb repurchased $743m of shares in the first half and paid $671m in dividends. The annual dividend approved for the coming year was up to $3.00 per share.
Material changes versus the prior comparable period
- Q2 net income fell 11.1% and first-half net income fell 7.8%; diluted EPS declined to $2.50 and $4.75, respectively. Revenue was nearly flat in Q2 and up 0.4% for the half, while premiums written grew 4.1% and 3.5% on a reported basis.
- Reported net realized losses of $223m in Q2 and $320m year to date contrasted with gains in 2018. The filing attributes significant current-period volatility to derivative and investment fair-value movements. First-half unrealized investment appreciation in OCI was $3.129bn, compared with $1.708bn of depreciation in 2018.
- Q2 P&C combined ratio increased to 90.1% from 88.4%, reflecting higher catastrophe losses and a higher loss ratio. The six-month ratio rose to 89.6% from 89.2%.
- Net investment income increased 3.8% in both comparison periods, primarily from higher average invested assets. Interest expense declined 16.4% in Q2 and 13.7% for the half.
- Segment results were mixed: North America Commercial P&C underwriting income declined; Overseas General and Global Reinsurance segment income also decreased. Life Insurance segment income improved, while North America Personal P&C first-half underwriting results improved substantially against a catastrophe-affected prior year.
Outlook, management commentary, risks and unusual items
- Management stated that positive operating cash flows from underwriting and investment income should cover cash outflows under most loss scenarios in the near term. The filing does not provide specific earnings or premium guidance.
- Management said written price changes exceeded loss trends in Q2 and the first half, but earned price changes were modestly below loss trends in North America, pressuring current-year loss ratios.
- Risks highlighted include natural and man-made catastrophes, uncertainty in reserving and claim settlements, reinsurer collectability, investment and interest-rate volatility, foreign exchange, competitive pricing, legal and regulatory developments, cyber and technology risks, and economic conditions. Modeled net U.S. hurricane PML was $2.684bn for a 1-in-100 annual aggregate return period; management cautioned that models are inherently uncertain and actual losses may differ materially.
- Investments were sensitive to interest rates: management estimated that a 100-basis-point increase would reduce fixed-income portfolio valuation by approximately $3.8bn. Variable-annuity guarantee liabilities also expose earnings to equity markets, interest rates, volatility, and policyholder behavior.
- The company held $1.4bn of repurchase agreements, with maturities over the next nine months, and had $423m of letter-of-credit usage under its credit arrangements. Alternative-investment commitments could require up to $3.6bn of funding over several years; fixed-income purchase commitments were $904m.
- Chubb acquired an additional 6.2% of Huatai Insurance Group for $329m, bringing its ownership to approximately 26.2%. Legal and regulatory matters were described as arising in the normal course; management said material ultimate liability was not likely. No material changes to previously disclosed risk factors or critical accounting estimates were reported.
Important facts for investors to verify
- How much of earnings and underwriting performance depends on favorable prior-period reserve development, and whether current accident-year loss trends are improving or worsening.
- Drivers and potential persistence of the large realized investment and derivative losses, including the effect of market movements on variable-annuity guarantee liabilities.
- Catastrophe exposure, reinsurance recoverability and counterparty quality, and the sensitivity of actual losses to modeled PML estimates.
- Whether premium growth and rate increases continue to outpace loss-cost trends, especially in North America and Global Reinsurance.
- Liquidity and capital deployment, including alternative-investment funding commitments, debt issuance, repurchases, dividends, and access to credit facilities.