Chubb Limited — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Amounts are in U.S. dollars. Chubb completed its acquisition of The Chubb Corporation on January 14, 2016; accordingly, reported 2016 results include the acquired business only from that date, while the 2015 reported comparison is legacy ACE. The filing also provides supplemental pro forma comparisons for the combined companies.
Business context and key financial metrics
- Revenue and premiums: Total revenues were $6.877 billion, up 56.7% year over year. Net premiums written were $5.995 billion, up 47.1%, and net premiums earned were $6.597 billion, up 68.0%; increases primarily reflect the acquisition. On a pro forma constant-dollar basis, net premiums written declined 1.0%, while net premiums earned rose 3.0%.
- Profit: Net income was $439 million, down 35.6% from $681 million; diluted EPS was $0.97 versus $2.05. Income before tax was $563 million. Supplemental pro forma net income was $534 million for Q1 2016 versus $959 million for Q1 2015; these figures are informational and not necessarily indicative of future results.
- Underwriting and margins: The reported P&C combined ratio was 90.0%, compared with 88.4%. Reported P&C underwriting income was $612 million. On a pro forma basis, P&C underwriting income was $720 million, up 23.2%, and the combined ratio was 88.9%. The reported loss ratio was 57.3%, acquisition-cost ratio 21.2%, and administrative-expense ratio 11.5%.
- Investment income and realized results: Net investment income was $674 million, up 22.3%; it included $93 million of purchase-accounting amortization. Excluding that amortization, it was $767 million. Net realized losses were $394 million, versus $89 million a year earlier, including substantial investment and variable-annuity guarantee-related losses.
- Cash flow: Operating cash flow was $1.020 billion, versus $1.075 billion. Investing activities used $1.615 billion, including $14.262 billion of net cash paid for the acquisition, largely offset by portfolio sales and short-term investment reductions. Financing activities used $102 million. Cash ended the quarter at $1.091 billion, down from $1.775 billion at year-end.
- Balance sheet and liquidity: Total assets were $156.644 billion and shareholders’ equity $45.897 billion. Total investments were $97.586 billion. Debt was $13.136 billion, plus $308 million of trust preferred securities; debt-to-capitalization was 22.1%. The company reported $1.403 billion of repurchase agreements and $500 million of short-term debt. It had a $1.5 billion letter-of-credit/revolver facility, with $725 million used; financial covenants were met.
Material changes versus the prior comparable period
- The $29.8 billion acquisition consideration included $14.3 billion cash, $15.2 billion of newly issued shares, and assumed equity awards. The transaction added $10.4 billion of goodwill and substantial acquired intangible assets; purchase accounting also affected underwriting expenses and investment income.
- Reported catastrophe losses, including reinstatement premiums, were $258 million, compared with $51 million. Favorable prior-period development was $247 million, versus $83 million. These items materially affect reported underwriting comparisons.
- Integration expenses were $148 million in the quarter; interest expense rose to $146 million from $68 million, primarily reflecting acquisition financing and assumed debt. The effective tax rate increased to 22.1% from 15.0%.
- Reported premiums and earnings are not directly comparable with the prior year because the acquired company is included only after closing. On a combined pro forma constant-dollar basis, Global P&C written premiums declined 1.0%; management cited declines in commercial and reinsurance portfolios, partly offset by personal lines growth.
Outlook, commentary, and risks
- Management said insurance pricing was becoming incrementally more competitive, particularly in shorter-tail lines, and that casualty pricing was not keeping pace with loss-cost trends. Chubb expected to reduce premiums in selected portfolios during 2016 and 2017 where underwriting returns were inadequate or catastrophe exposure was to be reduced.
- Management projected annualized integration savings of approximately $750 million by year-end 2018, exceeding its original $650 million target. Expected total one-time integration and merger-related costs were $811 million. Management cautioned that savings may not be fully achieved or may take longer.
- By Q4 2016, management expected a $100–$120 million improvement in annual investment-income run rate from portfolio-management improvements, without significant additional risk.
- Risks include catastrophe severity and reinsurance collectability; reserve-estimation uncertainty; competitive pricing and loss-cost trends; acquisition integration and synergy execution; market, interest-rate, equity and foreign-exchange movements; and policyholder behavior affecting variable-annuity guarantees. A modeled 100-basis-point interest-rate increase would reduce fixed-income portfolio value by approximately $3.6 billion before tax, although corresponding liability movements may partly offset the economic effect.
- Variable-annuity guarantee liabilities are model-dependent and sensitive to markets and policyholder assumptions. Their reported liability was $1.1 billion at quarter-end, versus $888 million at year-end; related fair-value changes contributed to realized losses. Management said A&E reserves had no significant activity during the quarter and considered ordinary-course legal matters unlikely to be material to consolidated financial condition or results.
- Disclosure-control effectiveness was concluded based on an evaluation that excluded the acquired company, which represented approximately 36% of consolidated revenue, 60% of pretax income, and 41% of assets for the period. Integration into the controls evaluation was still in progress.
Important facts for investors to verify
- Track combined-company results on a consistent pro forma basis, including premium growth, combined ratios, catastrophe losses, and reserve development; distinguish these from legacy-ACE reported comparisons.
- Assess whether the projected $750 million annualized savings and $811 million total one-time costs remain on schedule, and whether integration execution affects retention, service, or underwriting.
- Monitor reserve adequacy, especially favorable prior-period development, acquired loss reserves, crop-related estimates, and reinsurance recoverables.
- Review realized investment and variable-annuity guarantee results alongside market assumptions, hedge performance, and the sensitivity of reported earnings to interest rates and equity markets.
- Verify debt servicing, capital and liquidity, including the use of the revolver, subsidiary dividend restrictions, and the effect of acquisition financing on interest costs and capital flexibility.