Chubb Limited (CB) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Chubb Limited Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. For opening remarks and introductions, I would like to turn the conference over to Karen Beyer, Senior Vice President of Investor Relations. Please go ahead. Karen Beyer: Good morning, everyone, and welcome to our June 30, 2021, Second Quarter Earnings Conference Call. Our report today will contain forward-looking statements, including statements relating to company's performance, pricing and business mix, growth opportunities and economic and market conditions, which are subject to risks and uncertainties, and actual results may differ materially. Please see our recent SEC filings, earnings release and financial supplement, which are available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplement. Evan Greenberg: Good morning. As you saw from the number Chubb had an outstanding quarter, highlighted by record operating earnings and underwriting results, expanded margins and double-digit premium revenue growth globally, the best in over 15 years, powered by commercial P&C and supported by continued robust commercial P&C rate movement. Chubb was built for these conditions. We have averaged double-digit commercial P&C growth over the past 10 quarters. The breadth of our product and reach, combined with our execution-oriented underwriting culture, and our reputation for service and consistency enable us to fully capitalize on opportunity globally, and conditions such as these size and scale are our friend. Core operating income in the quarter was $1.62 billion or $3.62 per share, again, both records. On both the reported and current accident year ex-cat basis, underwriting results in the quarter were simply world-class. The published P&C combined ratio was 85.5% and current accident year was 85.4% compared to 87.4% prior year. The 2 percentage points of margin improvement were almost entirely loss ratio related. Current accident year underwriting income of $1.2 billion was up 27%. While on the other side of the balance sheet, adjusted net investment income of $945 million, also record, was up nearly 9.5% from prior year. Peter will have more to say about cat and prior period development, investment income and book value. Turning to growth and the rate environment. P&C premiums were up 15.5% globally, with commercial premiums excluding agriculture, up nearly 21%. The 15.5% growth for the quarter and 12.6% for the first six months were the strongest growth we have seen since 2004. Growth in the quarter was extremely broad-based, with contributions from virtually all commercial P&C businesses globally, from those serving large companies, to midsize, small, and most regions of the world and distribution channels. We continue to experience a needed and robust commercial P&C pricing environment in most all important regions of the world, with continued year-on-year improvement in rate to exposure on the business we wrote, both new and renewal. Based on what we see today, I'm confident these conditions will continue. Peter Enns: Thank you, Evan, and good morning. First, I'd like to acknowledge Phil Bancroft's almost 20 years of service and leadership with the company. I'm excited to be in my new position and build upon all that he has achieved -- all he has achieved under his leadership, and I'm honored to be leading the very strong team he has built going forward. Turning to our results, we completed the quarter in an excellent financial position and continue to build upon our balance sheet strength. We have over $75 billion in capital and a AA-rated portfolio of cash and invested assets that now exceeds $123 billion. Our record underwriting and investment performance produced strong positive operating cash flow of $3.1 billion for the quarter. Among the capital-related actions in the quarter, we returned $2.3 billion to shareholders, including $1.9 billion in share repurchases and $352 million in dividends. Through the six months ended June 30, we returned $3.1 billion, including $2.4 billion in share repurchases and dividends of $704 million. We recently announced a one-time incremental share repurchase program of up to $5 billion through June 2022. As Evan said, adjusted pretax net investment income for the quarter was a record $945 million, higher than our estimated range, benefiting from increased corporate bond call activity and higher private equity distributions. We increased the size of our investment portfolio by $2.4 billion in the quarter after buybacks due to strong operating cash flow and high portfolio returns, including $694 million in pretax unrealized gains from falling interest rates. At June 30, our investment portfolio remained in an unrealized gain position of $3.3 billion after-tax. During this challenging investment return environment, we will remain consistent and conservative in our investment strategy and do not expect to materially adjust the portfolio asset allocation over the near-term. We will be selective but active, and will continue to focus on risk-adjusted returns and we will not reach for yields. Karen Beyer: Thank you. At this point, we're happy to take your questions. Operator: We will begin with Michael Phillips with Morgan Stanley. Michael Phillips: Thanks. Good morning Evan and thanks for taking the question. First question is on growth, I guess, maybe specifically North America commercial lines. Are you pleased with the growth there relative to the rate you're getting? And I guess, what I'm implying is how much of the growth you're getting is true market share gains versus just all rate? Peter Enns: Well, I think it's a serious combination of both. You just heard me provide you new business growth rates and strong renewal retention rates, and that means exposure growth. And that means in your part and gaining market share. And so all in, very, very strong growth, fundamental growth in the business. And by the way, actual exposure growth was negative in the quarter. And – but new business and renewal retention and rate well overcame that. You saw a 21% growth in commercial P&C. Michael Phillips: Okay. And sticking with North America commercial lines. As a core loss ratio relative to 1Q was up a little bit, and was there some impact from portfolio transfer in the second quarter, or is that just a normal second quarter event that happened or what impact that was that in the quarter that maybe? Evan Greenberg: No, it's just normal. it's a normal quarter-on-quarter seasonalization. There wasn't some impact from LPT or that. And the mix of business changes quarter-on-quarter, and that's it. I think the thing you're more focused on is the year-on-year change, and it looks pretty strong. Michael Phillips: Yes, perfect. Okay. Thank you, Evan. Appreciate it and congrats on the quarter. Evan Greenberg: Thanks a lot. Operator: We will now take a question from David Motemaden with Evercore. David Motemaden: Hi thanks. Good morning. Just wanted to follow-up on that last question, Evan, just on the North American commercial loss ratio. How much of the 2.4 points year-over-year improvement was driven by mix versus rate in excess of trend? Evan Greenberg: Sure. You're really asking me the question, I want to help you with it, of LPTs and the impact of writing so much LPT last year versus this year, which can inflate loss ratio last year versus this year. If you adjust for the LPT impact and a little bit of other onetime noise, year-on-year combined ratio, adjusting for that, improved 1.8 points. It was 0.7 on expense and it was 1.1 loss ratio related. David Motemaden: Got it. That's perfect. That's exactly what I was looking for. Thanks. And that's good to see that accelerated a bit from the improvement last quarter. I guess just another question, just overall on the expense ratio. Maybe this is also for Peter. I think in the past, you've talked about some of the improvement being driven by some non-sustainable COVID-related impacts for T&E, things like that. Was it -- did that come back those one-time impacts, or are we still realizing some sort of benefit from that? Evan Greenberg: No, you're fundamentally looking overall at a pretty good run rate. And look, if things opened up more and as they open up more, there'll be more travel-related expense, a little more entertainment-related expense. We don't anticipate it to have a big impact. Still a pretty good run rate. And that's on the OpEx ratio. Remember, the acquisition ratio bounces around with mix of business. David Motemaden: Right. Yes. Perfect. Thank you. Evan Greenberg: You got it David. Operator: Our next question will come from Greg Peters with Raymond James. Greg Peters: Good morning. So, the first question we'll focus on just the pricing commentary. You really laid out some very robust results in terms of price achievement, not only in the recent quarter, but really for the last -- almost two years. And in your press release, I think you said you're confident these market conditions will continue. So, Evan you know where I'm going to go with this, which is there's growing-- Evan Greenberg: Don't actually Greg, There's a lot, but I don't know where you're going. Go ahead. Greg Peters: Well, it's going to -- listen, there's a lot of rhetoric in the market that the rate environment is going to start to soften. And so where I'm going with it is from where you sit today, you're producing an 85% combined ratio. That's pretty darn good. Is -- are we going to be in an environment, say, two years from now where we're back to negative rate increases across many lines of commercial, or talk about your views on how you see the market developing? Evan Greenberg: Look, I can't tell you what we're going to see 2 years from now. I can give you a sense of – in my own judgment because I don't have a crystal ball. Based on the current market conditions and where I think they're going over the medium term right now, I think loss cost – I think rates will continue to exceed loss costs. We're exceeding loss costs right now by a reasonable margin. And the industry overall -- forget Chubb, the industry overall has been, number one, achieving loss rates in excess of loss costs for just 2 years now. And secondly, the industry starts at a loss ratio that is quite high. And to achieve a reasonable risk-adjusted return, it has to continue to achieve rate in excess of loss cost for a prolonged period of time. Interest rates are so low, there's no joy on the other side. And then you have an external environment that is – that has risk around it, from cyber, to climate, to the litigation environment. And all that is baked into, I think, the mood and the thinking among those in the industry underwriting today. And so, in my judgment, from everything I see, it is natural that I gave you year-on-year movement in pricing and rate so that you would have a perspective. And as you think about the rate of increase declining going forward, that is natural, but it's well in excess of loss cost and I believe that will continue. But to a good question that I think deserve a fulsome response. Greg Peters: Well, I -- in your comments about loss costs are interesting because there's 2 -- and you mentioned litigation. So there's a perspective that the legal environment, because of COVID, was shut down last year, and that's going to come back in spades. And then the second piece on loss cost is, there's all this rhetoric about inflationary pressures, especially on things like auto. And do you see that sort of manifesting itself in terms of higher loss costs for the industry as we think about the next 12 months? Evan Greenberg: Yes. So here's how I see it. When we look at the long-tail lines, we're using a historic trend ignoring COVID and the shutdown, assuming a reversion to the mean and which was recognizing what I think is a relatively hostile legal environment and litigation environment. So there's – the actual at the moment is running better than the trended 6% we're using. But we think that's a head fake on a timing question in how we imagine trend and therefore, what you really need in pricing. On the short tail side of the business, I really gave you two numbers. I gave you homeowners. And I gave the homeowners running a double-digit observed inflation today. I gave you a long tail -- I gave you short-tail commercial that were trending at 4%. On the commercial property side, from all we see and all of our data, currently at the moment, it's actually running below that, both frequency and severity. But we see enough of what we see as inflation externally. We see enough of what we see in the homeowners book that we continue to trend it in both pricing and reserving at that 4% range. Greg Peters: Got it. Thank you for the thorough answers. Evan Greenberg: You got it. Operator: We will now move to Elyse Greenspan with Wells Fargo. Elyse Greenspan: Hi, thanks. Good morning. My first question, Evan, going back to some of the pricing commentary you gave, it seems like most lines still healthy levels above loss trend. So, we've heard from some folks in the industry as certain lines are getting to rate adequate and momentum is slowing. But it sounds like just really across the board, most lines are still in need of rate. I guess, would you characterize any lines as being rate adequate or just general kind of pushing consistently rate across the majority of your commercial lines? Evan Greenberg: I'm not sure, Elyse. I heard your commentary, but I'm not sure I got the question. Elyse Greenspan: I was just trying to get a sense, like broadly across commercial lines and you make your commentary about at still being a firm market. Do you see every line still in need of healthy, robust rate increases, or any lines may be more at adequate levels right now? Evan Greenberg: Elyse, it really varies across the board. When I look at the industry overall, I think, in many classes, the industry, in aggregate, if I rolled it all together, is one big portfolio, needs rate. When I look at it for the Chubb portfolio, most of our business is at or approaching risk-adjusted rate adequacy. Elyse Greenspan: Okay, that's helpful. Evan Greenberg: That's as far as I will go. Elyse Greenspan: That's helpful. Evan Greenberg: But it varies by line, by territory, by class. Elyse Greenspan: That's helpful. And then my second question, you guys outlined a pretty robust $5 billion capital share repurchase plan last week. As you think about the opportunities, your excess capital position, do you think that -- should we think about the capital return being prorated over the next year depending upon where your share price is maybe you could come sooner than later? How are you thinking about share repurchase, given the $5 billion understanding that you guys bought back a good amount that you shared in the second quarter as well? Evan Greenberg: Nice try Elyse. Stayed tuned. Elyse Greenspan: Okay. Thanks Evan. Evan Greenberg: You're welcome. Operator: Now we will hear from Ryan Tunis with Autonomous Research. Ryan Tunis: Good morning. Evan, one observation, I guess, we had is the Overseas General segment loss ratio improvement has actually been keeping up pretty well at the North America commercial loss ratio improvement. And I guess that's a little bit surprising to us, just given the mix. And I was just curious if that surprises you as well? Evan Greenberg: No. Not at all. Ryan Tunis: So when you think about overseas general North America or you think that they have pretty similar margin profiles at this point, given pricing conditions? Evan Greenberg: Well, they're running different combined ratios. It varies by segment of overseas general, by country, by the mix. It varies wholesale versus retail, but overseas general continues to improve at a pace that's very similar to North pace. Ryan Tunis: I got. Evan Greenberg: I'm a little confused beyond that, Ryan, and I want to help you if I can. Ryan Tunis: No. I -- just overseas general is not a segment where we've been used to seeing a lot of loss ratio growing for a long time. I thought that was more attributable to the ANH mix, but it's been impressive. I was just... Evan Greenberg: No. Here it is, Ryan. Over half the overseas general business is commercial business. And – but you haven't been in a market where you take Europe or you take the London market, both wholesale and retail. Those were soft markets for an extended period. And we were scratching dirt for growth, but we were getting growth. And -- but we are very disciplined in underwriting, and we were making good money and good margins, a decent return, Not off-the-charts risk-adjusted return, but it a decent return. And relative to the market, we were well outperforming. Ryan Tunis: Got it. Evan Greenberg: You've seen. And what you get is, particularly with Europe and then with the U.K., they're slower to react. But you see that reaction taking place, and that was just an opportunity for us to drive right now, both growth and rate. Ryan Tunis: Got it. And then a follow up on Elyse's question, your response for the Chubb book, so a lot of lines are approaching risk-adjusted rate adequacy. I guess just from a growth perspective, how much is that driving – when you -- the top line? Like when all of a sudden you see a line that a year ago wasn't rate adequate, and now it is. Is that a substantial marginal contributor to the top line growth we're seeing, or is it more incremental than that? Evan Greenberg: Hey, here's how it goes around here. Number one, underwriting will never destroy book value. So, if it's running over 100, you have to fix it or kill it immediately. In this kind of environment, if you have to strive in your business to achieve an adequate risk-adjusted return. If the market will allow an adequate risk-adjusted return on that cohort of business that you are underwriting, then I'll tell you what, more submissions, more quotes and more broker relations, more brokers and agents and drive to write that business. Ryan Tunis: Got it. Evan Greenberg: We know our minds clearly. And that's the point I was really trying to make. We've been growing commercial at double digit now for 10 quarters. No one's really noticed that. And that's because we saw an improving -- an improved environment. Short of that, how many years were people saying, show us the benefit of Chubb and ACE coming together and this and that? We said it's about underwriting discipline, and it's about a market environment. Now, you're surprised to see it. Don't be. Hey, you still there Ryan? Operator: We will now move to Tracy Benguigui. Tracy Benguigui: Good morning. I'm going to give you a breather on pricing and loss trends. There's a lot of market -- no problem. I don't know if you like this question, but there's a lot of market attention paid to your Century subsidiary with respect to the BSA bankruptcy since that entity has been run off, not made it, not guaranteed and not part of an intercompany pool. So, I'm not trying to box you in on the BSA side. But I'm wondering, structurally, you conceivably let that entity assets run dry, or could there be circumstances that you may theoretically be under any obligation to contribute capital? I mean I recognized that Century is regulated by Pennsylvania, which is also your group supervisor? Evan Greenberg: Tracy, in our 10-K, we have fulsome disclosure around Century and our obligation. It is under a statutory order negotiated and consummated between Cigna and the State of Pennsylvania before ACE purchased Cigna's P&C business, which included Century. And that 10-K disclosure around our obligation to Century speaks for itself. It's quite clear. And it is a limited obligation, and I will leave it at that. Tracy Benguigui: Okay. Great. I also recognized that Bermuda is opposing the G7 tax proposal in theory, is this a minimum 15% global tax rate floor holds? How would you be thinking about Chubb's seating arrangement versus affiliate? Evan Greenberg: I would -- how would I think about what? What about affiliate? Tracy Benguigui: Your seating arrangement. Yes, your seating arrangements with-- Evan Greenberg: Our seating arrangement. Tracy Benguigui: Yes. Evan Greenberg: We see risk for pooling and capital efficiency purposes. That's the reason we do it. We don't do it for tax purposes. I'll give you a very simple example so you'll get it really clearly. Imagine that on Chubb's balance sheet, I can take $10 million net per risk on a given class of business. But imagine that in all the countries we do business in around the world, I can't take that kind of retention because of my limited amount of capital. If I tried to take it in each jurisdiction and I had a loss in Malaysia or a loss XYZ country, I'd have to be dividending out of one place, contributing capital in another, it's the most inefficient way to run a business. So the pooling of risk and internal reinsurance is what allows you to leverage a global balance sheet to the benefit of local operations and it provides in one place the stability of spread of risks an amount of capital. So that's the fundamental reason that you start with that Chubb uses internal reinsurance. Thanks for the question, Tracy. Tracy Benguigui: Thanks Evans. Operator: Our next question will come from Brian Meredith with UBS. Brian Meredith: Yes, thanks. Evan, just curious. The big $5 billion share repurchase authorization you announced, does that all indicate kind of what your view is of inorganic kind of growth opportunities here, be it opportunities or at least your appetite? : No. Nothing has changed, steady as she goes. The -- we're disciplined. Everything I've ever said about M&A. We're disciplined. Money doesn't burn a hole in our pocket. It has to advance what we're doing strategically. It has to be good for shareholders in terms of value creation. All of that, nothing changes. Our earnings generation power, as we see it. Our current capital position and surplus capital together, led us to the decision that the right thing to do and the prudent thing to do just in the talk, we've said about we'll hold full capital and have capital flexibility for risk and growth, organic and inorganic, and we'll return other than that to shareholders. That's all we're doing. Brian Meredith: Great. Thank you. And Evan, another question here. You all are fairly meaningful player in the cyber insurance marketplace. I'm just curious, can you give us kind of your thoughts on that marketplace right now? I know there were some issues with losses last year, but I understand that the pricing environment is pretty good right now. And just your view of opportunities there? Evan Greenberg: Yes. Look, the pricing environment is pretty good. The – but that's not it. That is not addressing by itself, the fundamental issue that the industry has to wrestle. And Chubb is beginning to respond to, but others are slow to react to that are the fundamentals around cyber. Like pandemic, cyber has a catastrophe profile to it and the nature of cat potential that has no time nor geographic boundary to it. And you take the growing digital interconnection of the world today in everything, personal and business, and that potential for catastrophe, the concentrations of exposure are only growing. And you see the spector of risk raising its head and all the cyber-attacks we see, malicious cyber-attacks, both nation state and non-nation-state actors for various reasons; one, to disrupt society, another, to make money. And so you have a frequency of loss on one hand and rate -- and some adjustment to coverage can manage that. On the other side of the coin, you have a systemic nature of this. And I can tell you, in the way Chubb underwrites, we are facing it and we are beginning to address it. And then on the -- in underwriting. And now on the other side are the real public policy questions, and we are involved in raising our voice in the public policy arena. Number one, when you look at ransomware, while I don't think the government should outlaw ransom, where payments at this time, I do think that we ought to be looking at whether we allow payments. I do think the nature -- because who are you paying? Terrorists? Secondly, treasury right now, you should require -- you should be obligated under current law, anti-money laundering laws, to get permission to make a ransomware payment. We should be removing the incentive out of the system for ransomware attacks, which are all about money for the most part. And on mask what is the social or the intention to disrupt our country politically and unmask that part of it and show it. Secondly, there are all kinds of things that the private sector and public sector could be doing together. Sharing of information is one of them right now and understanding where systemic risk aggregations are is another. So I'll stop right there, but it is more than about achieving rate in cyber today. Brian Meredith: Thanks Evan. Evan Greenberg: Sorry, Brian, more than you expected, but we have clear views about this. Operator: We'll now hear from Meyer Shields with KBW. Meyer Shields: Good morning. Two, I guess, mobile questions. Evan, you talked about the general expense ratio, but I was hoping you could give us a little color on what drove the actual decrease in administrative expenses in North American commercial year-over-year? Evan Greenberg: Meyer, how about we take that one offline with you, we'll go through the accounting of it. Meyer Shields: Okay. Evan Greenberg: There was nothing substantial. Meyer Shields: Okay, fair enough. In the same sort of tone, other income or expenses in North America Commercial? That was negative 14%. Is there anything unusual in terms of what's building up to that number? Evan Greenberg: No, nothing unusual. I'm within that. It's just noise, quarter-to-quarter noise. Meyer Shields: Okay, perfect. Thank you. Evan Greenberg: You're welcome. Operator: And with no additional questions in the queue, I will turn the call back over to your host for any additional or closing remarks. Karen Beyer: Thanks, everyone, for your time and attention this morning. We look forward to speaking with you again next quarter. Have a great day. Operator: Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation, and you may now disconnect.CB Ratings Summary
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Chubb is Well Positioned For the Next Phase of Pricing
RBC Capital provided a review of Chubb Limited (NYSE:CB), noting that it is well-positioned for the next phase of pricing. According to the analysts, the company is a best-in-class underwriter who prices for risk and return, not growth and consistently reserves conservatively - critical attributes when pricing is adequate and more critical should pricing begin to wane.
Management commented that the pricing environment remains strong as the market transitions to reinsurance led hard-market from an insurer-led one. The company noted a 51.3% cumulative rate increase since the beginning of 2019 and showed every intention of maintaining rate increases at or above loss cost inflation going forward.
The capital return has been good and the analysts see an ROE in the low to mid-teens with recent accretive acquisitions and rising investment income key drivers in addition to already strong underwriting margins. The analysts raised their price target to $250 from $230 while maintaining their Outperform rating.
Chubb Limited’s Q1 Preview by RBC Capital
Analysts at RBC Capital provided their views on Chubb Limited (NYSE:CB) ahead of Q1 results (exp. April 26), updating their estimates and raising the price target to $239 from $230, while reiterating their outperform rating.
The analysts lowered their Q1 operating EPS estimate to $3.58 from $3.71. This principally reflects an expectation for higher catastrophe losses in the Overseas General unit as a result of catastrophe losses in Europe and Australia, partly offset by modestly lower US catastrophe assumptions. For the full year, the analysts’ estimate is reduced to $14.57 from $14.70.
