Chubb Limited — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Chubb is a Swiss-incorporated global insurer and reinsurer operating across property and casualty, reinsurance, and life insurance. Figures are in U.S. dollars unless noted.
Financial performance and position
- Q3 revenue and earnings: Total revenue was $9.045 billion, up 3.4% from $8.750 billion. Net income fell 11.4% to $1.091 billion from $1.231 billion; diluted EPS was $2.38 versus $2.64.
- Nine-month results: Revenue was $25.448 billion, up 1.4%; net income declined 9.1% to $3.281 billion from $3.607 billion. Diluted EPS was $7.13 versus $7.71.
- Premiums and investment income: Q3 net premiums written increased 6.3% to $8.622 billion; nine-month premiums rose 4.5% to $24.278 billion. On a constant-dollar basis, nine-month written premium growth was 6.2%. Net investment income increased 6.0% in Q3 to $873 million and 4.5% year to date to $2.568 billion.
- Underwriting and catastrophe experience: Q3 P&C combined ratio improved to 90.2% from 90.9%; the nine-month ratio was 89.9% versus 89.8%. The Q3 current-accident-year combined ratio excluding catastrophes worsened to 89.5% from 88.2%; nine-month, it was 89.0% versus 88.0%. Management reported Q3 pre-tax catastrophe losses of $232 million, down from $450 million, and favorable prior-period development of $167 million, down from $243 million. Nine-month figures were $757 million of catastrophe losses and $559 million of favorable development.
- Cash flow: Nine-month operating cash flow was $4.913 billion, compared with $3.897 billion. Investing activities used $3.561 billion and financing activities used $1.124 billion. Cash and restricted cash ended at $1.589 billion. Management attributed part of the operating cash-flow increase to a roughly $350 million deferral of crop-premium remittances until Q4.
- Balance sheet and debt: At September 30, total assets were $175.148 billion, investments $107.178 billion, and shareholders’ equity $54.572 billion. Financial debt was $13.295 billion, including $13.285 billion of long-term debt; the financial-debt-to-capitalization ratio was 19.5%. Long-term debt increased from $12.087 billion at year-end 2018, while short-term debt fell from $509 million to $10 million. The company issued €1.15 billion of senior notes in June 2019, with maturities in 2027 and 2031.
- Capital returns: Chubb repurchased $1.203 billion of shares and paid $1.014 billion of dividends during the first nine months. The approved annual dividend was up to $3.00 per share, subject to Board determination and discretion.
Material changes versus the prior comparable period
- Premium growth was broad-based, supported by rate increases and new business, especially in commercial P&C and overseas operations. Personal-lines growth was partly offset by increased cessions under a homeowners quota-share treaty.
- Q3 net income was pressured by $155 million of net realized investment losses, compared with $19 million of gains a year earlier. Nine-month realized losses were $475 million versus gains of $35 million, including losses on derivatives and insurance-related fair-value movements. Lower rates also increased the fair value of guaranteed-living-benefit liabilities.
- Favorable reserve development remained substantial but declined year over year: $559 million for nine months versus $643 million. Q3 commercial P&C underwriting income softened, while North America Personal P&C results improved markedly from the prior-year period.
- North America Agricultural Insurance was a notable weakness: Q3 underwriting income fell to $1 million from $79 million, reflecting adverse weather-related revisions to the 2019 crop-year margin estimate.
- Net investment unrealized appreciation improved substantially: nine-month OCI was $2.969 billion, compared with a $2.285 billion loss in 2018. Shareholders’ equity increased to $54.572 billion from $50.312 billion at year-end 2018.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific full-year earnings or premium guidance. Management said operating cash flows should cover outflows under most loss scenarios in the near term; results for an interim period are not necessarily indicative of full-year performance.
- Management cited catastrophe exposure, crop yields and commodity prices, claims severity and inflation, reserve-estimation uncertainty, reinsurance recoverability, interest rates, equity and credit markets, foreign exchange, and changing legal, regulatory, and coverage conditions as risks. The company estimated a 1-in-100 annual aggregate U.S. hurricane loss of $2.671 billion net of reinsurance; catastrophe models are uncertain and do not represent maximum exposure.
- Management increased Brandywine environmental reserves by $27 million in Q3. It also reported adverse development in run-off casualty and environmental exposures. Management said ordinary-course litigation and regulatory matters are not likely to be material to consolidated financial condition or results, while acknowledging liability could be material.
- A new risk-factor disclosure highlights emerging coverage issues, including state “reviver” laws that may permit otherwise time-barred abuse and molestation claims against policyholders, creating uncertainty over long-tail liability.
- Other items to note: $3.5 billion of maximum future funding commitments for alternative investments; $799 million of commitments to purchase fixed-income securities; and $13 million of unrecognized tax benefits. The company reported effective tax rates of 17.4% for Q3 and 16.0% for nine months, higher than the comparable 2018 periods.
Important facts for investors to verify
- Whether premium rate increases are keeping pace with loss-cost trends, given the deterioration in the current-accident-year P&C combined ratio excluding catastrophes.
- How much reported earnings depend on favorable reserve development, and whether recent commercial-property, crop, environmental, and long-tail claim trends persist.
- The sources and sustainability of investment returns, including derivative and guaranteed-benefit fair-value volatility and sensitivity to lower interest rates.
- The crop business’s eventual 2019 results after harvest-price and yield information becomes available, and the effects of weather and the revised crop-margin estimate.
- Liquidity and capital flexibility after share repurchases, debt issuance, restricted-asset requirements, and alternative-investment funding commitments.