Chubb Limited — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Chubb completed its $29.5 billion acquisition of The Chubb Corporation on January 14, 2016; acquired results are included only from that date, so reported comparisons with 2015 are not like-for-like. Unless noted, figures are U.S. dollars.
Financial results and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net premiums written | $7.573bn | $4.709bn | $21.207bn | $13.569bn |
| Net premiums earned | $7.688bn | $4.719bn | $21.690bn | $13.006bn |
| Total revenue | $8.527bn | $4.871bn | $23.301bn | $14.308bn |
| Net income | $1.360bn | $528m | $2.525bn | $2.151bn |
| Diluted EPS | $2.88 | $1.62 | $5.44 | $6.53 |
| Net investment income | $739m | $549m | $2.121bn | $1.662bn |
| P&C combined ratio | 86.0% | 85.9% | 89.0% | 87.2% |
Q3 reported net income benefited from $100 million of net realized gains versus $397 million of losses a year earlier, principally reflecting changes in fair value of variable-annuity living-benefit reinsurance liabilities. Nine-month net realized losses were $510 million versus $360 million. Net investment income included $91 million of acquired-investment fair-value amortization in Q3; excluding it, management reported $830 million.
At September 30, total assets were $161.810 billion, total investments $101.036 billion, and shareholders’ equity $48.372 billion. Unpaid losses and loss expenses were $61.347 billion, including $12.676 billion of reinsurance recoverables. Cash was $870 million. Debt was $13.121 billion, plus $308 million of trust preferred securities; debt was 21.2% of total capitalization, or 21.7% including trust preferred securities.
Nine-month operating cash flow was $3.837 billion, compared with $2.699 billion in 2015. Investing cash outflow was $4.274 billion, including $14.248 billion paid for the acquisition, largely offset by investment portfolio activity. Financing cash outflow was $510 million; cash declined $905 million to $870 million. A $1.5 billion letter-of-credit/revolver facility had $457 million in use, and the company reported compliance with its financial covenants.
Changes and comparability
- Reported premium and revenue growth primarily reflects the acquired business. On management’s constant-dollar “As If” basis, combining legacy ACE and legacy Chubb, Q3 net premiums written declined 2.9% and nine-month net premiums written declined 2.8% year over year.
- The comparable unaudited pro forma figures show nine-month 2016 revenue of $23.758 billion and net income of $2.591 billion, versus $24.387 billion and $3.194 billion, respectively, in 2015. Pro forma diluted EPS was $5.50 versus $6.78. These figures are illustrative, not reported GAAP results.
- Reported P&C combined ratio rose to 89.0% for the first nine months from 87.2%. Catastrophe losses were $798 million versus $247 million; favorable prior-period development was $897 million versus $446 million. Q3 catastrophe losses were $144 million, while favorable prior-period development was $349 million, net of a $52 million Brandywine environmental charge.
- Acquisition-related balance-sheet growth included $10.530 billion of goodwill and $7.655 billion of identified intangible assets recorded in the preliminary purchase-price allocation. Integration expenses were $361 million for the first nine months.
Outlook, commentary and risks
- Management said merger-related underwriting actions, including additional reinsurance, would continue through 2016 and 2017 but at a reduced level. It cited competitive insurance markets and weak global economic conditions, while maintaining underwriting discipline.
- Management raised its expected annualized integration savings target to $800 million by the end of 2018, from an earlier $750 million target, and said savings were ahead of schedule. It cautioned that savings may not be fully achieved or may take longer. Expected integration and merger-related expenses total $809 million across 2015–2018, including $525 million expected in 2016.
- Key exposures include catastrophe losses, reserve-estimation uncertainty, reinsurance collectability, investment and foreign-exchange volatility, and market-sensitive variable-annuity guarantees. The reported GLB liability was $1.2 billion; its valuation depends on interest rates, equity markets and policyholder behavior. A modeled 100-basis-point interest-rate increase would reduce fixed-income portfolio fair value by approximately $3.8 billion before tax.
- The filing identifies uncertainty following the UK vote to leave the EU, including potential effects on market conditions and the ability of UK insurers and Lloyd’s to access the EU single market. Other disclosed risks include acquisition integration, competition, regulation, litigation and information-security risks.
- Management concluded disclosure controls were effective, but its evaluation excluded Legacy Chubb, which represented approximately 40% of assets at quarter-end; the company was working to incorporate the acquired business into its controls evaluation.
Important facts for investors to verify
- Assess underlying premium trends using the filing’s “As If” and constant-currency measures, rather than reported growth alone.
- Review the sustainability of favorable reserve development and catastrophe experience, including the Brandywine environmental reserve review.
- Track integration savings against the $800 million annualized target and the projected integration-cost schedule.
- Monitor debt, liquidity, restricted assets and the timing of the $500 million senior notes due February 2017.
- Evaluate the sensitivity of GLB results and reserves to market movements and policyholder behavior, and the potential UK/EU regulatory effects.
- Confirm progress in incorporating Legacy Chubb into disclosure and internal-control evaluations.