Chubb Limited — Q3 2018 Form 10-Q
Business context and period. Chubb is a global insurer and reinsurer operating across commercial and personal property and casualty, agriculture, overseas general insurance, global reinsurance, and life insurance. This unaudited filing covers the three and nine months ended September 30, 2018; amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net premiums written | $8.110bn | $7.902bn | $23.229bn | $22.193bn |
| Net premiums earned | $7.908bn | $7.807bn | $22.599bn | $21.816bn |
| Total revenues | $8.750bn | $8.610bn | $25.091bn | $24.228bn |
| Net income (loss) | $1.231bn | $(70)m | $3.607bn | $2.328bn |
| Diluted EPS | $2.64 | $(0.15) | $7.71 | $4.94 |
| P&C combined ratio | 90.9% | 110.8% | 89.8% | 96.0% |
| Operating cash flow | Not presented for the quarter | $3.897bn | $3.411bn |
- Q3 premiums written rose 2.6% and revenues 1.6%; nine-month premiums written rose 4.7% and revenues 3.6%. On a constant-dollar basis, nine-month written premiums increased 3.6%.
- Q3 underwriting results improved substantially as catastrophe losses fell from the prior-year period. P&C combined ratio was 90.9%; the current-accident-year ratio excluding catastrophe losses was 88.2%, versus 88.5% a year earlier. Nine-month P&C combined ratio was 89.8%, compared with 96.0%.
- Net investment income was $823m in Q3, up from $813m, and $2.457bn for nine months, up from $2.328bn. The nine-month average investment yield, excluding acquired-asset fair-value amortization, was 3.5%, versus 3.4%.
- Nine-month net cash from operations was $3.9bn; investing used $2.1bn and financing used $1.4bn. Operating cash flow increased from $3.4bn, principally reflecting higher premiums collected and lower taxes paid, partly offset by catastrophe payments.
Financial position and capital
- At September 30, 2018, total assets were $167.684bn, total liabilities $116.750bn, and shareholders’ equity $50.934bn. Equity declined from $51.172bn at year-end 2017; accumulated other comprehensive loss was $2.159bn, versus accumulated other comprehensive income of $543m.
- Total investments were $101.163bn; cash was $1.053bn and restricted cash $104m. Fixed-maturity unrealized losses were principally attributed to rising interest rates. The filing reports a $1.9bn pre-tax nine-month unrealized loss on fixed maturities.
- Financial debt was $12.649bn, including $500m short-term and $12.149bn long-term debt; trust preferred securities were $308m. Financial debt to total capitalization was 19.8%. Repurchase agreements of $1.414bn were separately reported and fully collateralized.
- Chubb issued €1.8bn of senior notes in March, redeemed $1.0bn of junior subordinated securities, and repaid maturing notes. The debt redemption generated a $36m loss. The company repurchased $703m of shares and paid $1.001bn of dividends during the first nine months.
- Management said operating cash flows should cover near-term outflows under most loss scenarios. The $1.0bn letter-of-credit/revolver facility had $377m in use; covenants were met. Access remains subject to lender funding and regulatory restrictions on subsidiary distributions.
Changes, outlook, risks, and unusual items
- Q3 net income improved from a loss in 2017, chiefly alongside much lower catastrophe losses and lower expenses. Chubb reported Q3 pre-tax catastrophe losses of $454m in detailed disclosures; its highlights state $450m after reinstatement premiums. The prior-year comparison is also presented on differing bases in the filing, so the precise like-for-like figures should be checked.
- Nine-month favorable prior-period reserve development was $643m, compared with $671m in 2017. Q3 favorable development was $243m, versus $270m. Favorable development included older commercial casualty and property reserves; adverse items included homeowners and valuables, environmental liabilities, and some newer casualty and financial-lines claims.
- Homeowners losses were a concern: management cited higher-than-expected non-catastrophe frequency and severity, including water claims and large fires. Q3 included $80m adverse development in homeowners and valuables and $54m adverse development in environmental liabilities. Nine-month environmental and run-off casualty exposures also affected results.
- After quarter-end, Hurricane Michael made landfall in Florida. Chubb’s preliminary pre-tax loss estimate, net of reinsurance and reinstatement premiums, was $150m–$250m, subject to change; the impact was expected in Q4 2018.
- Management provided limited near-term outlook items, not formal earnings guidance: Q4 interest expense was expected to be $154m, including acquired-debt fair-value amortization; lower use of cash-pooling programs was expected to reduce both interest expense and investment income by $10m–$15m. Q4 amortization of purchased intangibles was estimated at $83m; other income/expense was expected to be flat to a net $5m expense, with investment returns variable.
- The 2017 Tax Act benefit remained provisional. Chubb increased its estimated benefit by $20m in Q3 to $470m and said the final amount could change as guidance developed. The nine-month effective tax rate was 12.9%.
- Market and catastrophe exposures remain material. A modeled 100-basis-point rise in interest rates was estimated to reduce fixed-income portfolio value by about $3.7bn. Catastrophe models are inherently uncertain and exclude some perils, including wildfire and flood, from worldwide modeled estimates. Reinsurance collectability, reserve estimates, foreign exchange, and variable-annuity guarantees are additional risks.
- Routine insurance-related litigation is included in reserves; management said other business litigation and regulatory matters were not likely to be material. The filing reported no material change in previously disclosed risk factors or critical accounting estimates.
Important facts for investors to verify
- Reconcile the differing catastrophe-loss presentations and confirm the effect of Hurricane Michael as claims develop.
- Assess the durability of favorable reserve development and monitor adverse homeowners, environmental, and recent-year casualty trends.
- Review the investment portfolio’s sensitivity to rates, the large unrealized fixed-income losses, and the resulting changes in accumulated other comprehensive income.
- Track debt maturities, repurchase-agreement funding, credit-facility availability, and regulatory limits on subsidiary dividends.
- Confirm final tax accounting for the provisional Tax Act benefit and compare realized underwriting results with management’s limited Q4 outlook assumptions.