Chubb Limited — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; filed November 1, 2017. Chubb is a global insurance and reinsurance group operating across six segments, including North American and overseas P&C, agriculture, reinsurance, and life insurance. Amounts below are U.S. dollars unless noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net premiums written | $7.902B | $7.573B | $22.193B | $21.207B |
| Net premiums earned | $7.807B | $7.688B | $21.816B | $21.690B |
| Net investment income | $813M | $739M | $2.328B | $2.121B |
| Total revenues | $8.610B | $8.527B | $24.228B | $23.301B |
| Net income (loss) | $(70)M | $1.360B | $2.328B | $2.525B |
| Diluted EPS | $(0.15) | $2.88 | $4.94 | $5.44 |
| P&C combined ratio | 110.8% | 86.0% | 96.0% | 89.0% |
Q3 loss before tax was $155M; the reported income tax benefit was $85M. The Q3 P&C combined ratio excluding catastrophe losses and prior-period development was 88.5%, versus 88.9% a year earlier. Nine-month cash from operations was $3.411B, down from $3.837B; cash was $1.088B at quarter-end. Cash used in investing was $1.343B and cash used in financing was $1.970B.
At September 30, total assets were $167.578B, shareholders’ equity was $50.471B, and investments totaled $102.424B. Financial debt was $12.579B, including $1.020B short-term and $11.559B long-term debt; debt-to-capitalization was 19.9%, down from 21.3% at year-end 2016. Trust preferred securities were $308M, and repurchase agreements were $1.408B.
Material changes and operating drivers
- Catastrophe losses drove the quarterly reversal. Management reported Q3 pre-tax catastrophe losses of $1.893B, or 26.0 points of the combined ratio, and after-tax losses of $1.525B. Net losses included $650M from Hurricane Harvey, $891M from Hurricane Irma, $220M from Hurricane Maria, $25M from Mexico earthquakes, and $107M from other catastrophe events. The filing also presents $1.915B of catastrophe losses before related reinstatement-premium effects.
- Reported Q3 P&C combined ratio rose to 110.8% from 86.0%; the nine-month ratio increased to 96.0% from 89.0%. Nine-month catastrophe losses were $2.321B versus $798M in 2016. Favorable prior-period development was $270M for Q3 and $671M year to date, below the respective 2016 amounts of $349M and $897M.
- Premium growth was positive but affected by merger-related underwriting actions and prior-year accounting comparisons. Q3 written premiums increased 4.3%; nine-month reported growth was 4.7%. The 2016 nine-month comparison excludes 14 days of Chubb Corp activity before its January 14, 2016 acquisition; management cites a 0.9% constant-dollar increase for the nine-month comparison including that stub period, before specified adjustments.
- Investment income increased 9.8% in Q3 and 9.7% year to date. Management attributed growth partly to higher private-equity distributions, including a $44M final distribution from a co-investment, and a larger invested-asset base. Reported investment income includes acquisition-related fair-value adjustment amortization of $80M for Q3 and $256M year to date.
- Integration-related savings were $201M in Q3 and $530M year to date. Management said annualized and realized savings were expected to reach $875M and $845M, respectively, by the end of 2018. Integration expenses were $50M for Q3 and $233M year to date.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management said operating cash flows should cover cash outflows under most loss scenarios in the near term, while noting that results and cash flows for an interim period are not necessarily indicative of full-year results.
- California wildfires began in October 2017. At filing time, Chubb said it could not estimate potential losses because claim volumes and damage scope were uncertain.
- Catastrophe estimates remain subject to change as claims develop; recoveries depend on reinsurers and are subject to collection risk. Reinsurance recoverables on losses and loss expenses were $14.799B, up from $13.577B at year-end 2016.
- Chubb increased gross environmental reserves for Brandywine-managed operations by $186M in Q3; net loss reserves rose $77M. Corporate also recorded adverse development for environmental liabilities and other run-off exposures.
- The $1.0B junior subordinated capital securities reset from a 6.375% fixed rate to three-month LIBOR plus 2.25 percentage points effective April 15, 2017; the rate was 3.61% at filing. Chubb repaid $500M of senior notes and reclassified approximately $1.020B of 2018 maturities to short-term debt.
- On October 25, after quarter-end, Chubb replaced its $1.5B letter-of-credit/revolver facility with a facility of up to $1.0B, with conditional capacity to increase to $2.0B. The new facility runs through October 2022; the company reported compliance with financial covenants.
- Market risks include interest-rate and credit-spread movements, foreign exchange, catastrophe exposure, and variability in variable-annuity guarantee liabilities. Chubb estimated that a 100-basis-point increase in interest rates would reduce fixed-income portfolio valuation by approximately $4.1B. Disclosed guarantee-liability sensitivities depend on market and policyholder-behavior assumptions and are not directly additive.
- Management considered routine policy-coverage litigation and other business disputes unlikely to be material to consolidated financial condition or results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How final insured losses, reinsurance recoveries, and reinstatement premiums for the 2017 hurricanes and October California wildfires compare with initial estimates.
- Whether catastrophe-adjusted underwriting performance and premium growth persist, particularly in segments with elevated loss ratios.
- The development of environmental and other long-tail reserves, including the assumptions behind favorable prior-period releases.
- Whether investment-income growth is repeatable after accounting for the one-time private-equity distribution and acquisition-related amortization.
- The terms and availability of the replacement credit facility, near-term debt maturities, and the effect of repurchases and dividends on capital and liquidity.