Chubb Limited (NYSE:CB) Q1 2023 Earnings Call Transcript

Chubb Limited (NYSE:CB) Q1 2023 Earnings Call Transcript April 26, 2023

Chubb Limited misses on earnings expectations. Reported EPS is $4.41 EPS, expectations were $4.45.

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chubb Limited First Quarter 2023 Earnings Conference Call. Thank you. It is now my pleasure to turn today’s call over to Ms. Karen Beyer, Director of Investor Relations. Please go ahead.

Karen Beyer: Thank you, and welcome, everyone, to our March 31, 2023 first quarter earnings conference call. Our report today will contain forward-looking statements, including statements relating to company 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 supplements.

Now I’d like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer, and then we’ll take your questions. Also with us to assist with your questions today are several members of our management team. And now it’s my pleasure to turn the call over to Evan.

Evan Greenberg: Good morning. We had an excellent start to the year, highlighted by double-digit operating earnings growth that led to record results. We had double-digit premium revenue growth that was global, broad-based and driven by strong results in our commercial and consumer P&C businesses and our International Life business. World-class underwriting results with an 86.3% combined ratio, record net investment income and life income that more than doubled. North America P&C rate and price increases reaccelerated in the quarter, it was an word standout performance that I expect will continue. We grew operating income almost 12% to $1.8 billion, and that drove a 15% increase to $4.41 per share, both records. In context, of what was an active CAT quarter, our published combined ratio reflects simply outstanding underwriting performance from our P&C businesses.

The 83.4% ex-cat current accident year combined ratio was a record. On the Investment income side, record adjusted net investment income of $1.2 billion was up over 30%. Our portfolio yield is now 3.8% versus 3% a year ago, with our reinvestment rate averaging 5.5%. Our investment income run rate will continue to grow as we reinvest cash flow at higher rates. Life Insurance premium revenue more than doubled, while Life earnings doubled to $244 million, driven by our business in Asia and predominantly the addition of the Cigna operations which are mostly A&H and product makeup. In this time of economic and financial market volatility and uncertainty, Chubb is a safe haven. Our business model and the fundamentals of our business are very strong and broad-based.

Our earnings and revenue are growing. We have an exceptionally strong capital position and a conservative level of leverage and our operating cash flow of $11 billion in ’22 and over $2.25 billion this quarter speaks to our strong liquidity. Our unrealized loss as a percentage of tangible equity is 17% and will amortize back to par over a short period. Rising interest rates of our brand and most important, as you know, you can have a run on the bank in our business. So again, this speaks to an attractive profile that distinguishes Chubb. Peter is going to have more to say about financial items, including cats, prior period development, investment income, book value and a rising ROE. Now turning to growth and the pricing and rate environment.

Consolidated net written premiums for the company increased over 16.5% in the quarter on a published basis or over 18% in constant dollars, comprised of 11% growth in our P&C business globally and 129% growth in life premiums. P&C premium growth in the quarter was balanced and broad-based. North America, Europe and Asia, all produced double-digit growth. Beginning with North America, commercial premiums were up almost 12% or 6.2% excluding Agriculture. Adjusted for the impact of one-off loss portfolio transfers in our major accounts division, year-over-year North America regular commercial flow grew 7.6%, which is representative of the minimum rate growth we expect for the balance of the year. And by the way, the 7.6% is broken down as 10% growth in P&C and minus 2% growth in financial lines.

Our major accounts and specialty division grew 6.3% or 8.7% adjusted for the LPTs. And that was 11.4% P&C and minus 7% financial lines. In our middle market and small commercial business, premiums were up 6.5% or 7% in P&C and up 2% in financial lines. Renewal retention for our retail commercial businesses was 97%. On the consumer side in North America, our high net worth personal lines business was up almost 10%, an exceptionally strong result. And in fact, the strongest organic growth in over 15 years. Turning to our International General Insurance operations, net premiums were up 10% in constant dollars or 6% after FX impact with commercial up 10.8% and consumer up over 8.5%. Growth was led by our Asia Pacific region with premiums up over 18.5%.

And with commercial lines up about 15% and consumer lines up over 22%. And Europe produced overall growth of over 10%. In terms of the Commercial P&C rate environment, rate and price increases reaccelerated. Pricing for total North America Commercial P&C, which includes rate of 6.4% and exposure change of 4.5% increased 11.2% against a loss cost trend of 6.7%. Pricing for commercial property and casualty, excluding financial lines and workers’ comp was up 16.9%. Property pricing was up 27%, with rates up 16.4% and exposure change of 9.1%. Casualty pricing was up 9.9%, which includes 7.4% of rate and 2.3% of exposure. As I said last quarter, for professional lines and workers’ comp, which includes risk management, the competitive environment is aggressive and rates have continued to decline in recognition of favorable experience.

In the quarter, rates and pricing for North America, financial lines and aggregate were down about 2% and in workers’ comp, which includes both primary comp and risk management, pricing was up 6.4%, with rates down 0.5% and exposure up about 6.8%. Internationally, we continued to achieve improved rate to exposure across our commercial portfolio. In our international retail business, pricing was up about 8%, with rates up 4.8%, and exposure change of about 2.9%. While loss costs across our international commercial portfolio, or trending at 6.5%. Turning to our Consumer businesses. In North America, high net worth personal lines business, again, net written premiums were up almost 10%. With our true high net worth client segment, up over 15%.

Retentions were 104% on a premium basis and about 91% or on an account basis. We continue to benefit from a flight to quality and capacity. In our homeowners business, we achieved pricing of about 13%, while the homeowners loss cost trend is running about 10.5%. International consumer lines premiums again grew over 8.5% in the quarter in constant dollars. Our international A&H division had another strong quarter, with premiums up about 20%. Asia Pacific was up 34.5% while the U.K. was up over 12%. Premiums in our international personal lines business were down 1.5 points, and it was impacted by our business in Europe. In our International Life Insurance business, again, premiums and income overall more than doubled. Our business in Korea and the majority of Asia is off to a good start to the year.

I was just in Korea two weeks ago, our leadership, the franchise, the strategy, the execution and the growth are all in really good shape. And this is a very large business for Chubb. In summary, we had an excellent quarter and have had a strong start to the year with a lot of momentum heading into the second quarter. Looking forward, we are confident in our ability to continue growing revenue and operating earnings, which in turn drive EPS through the three engines of P&C underwriting income, investment income and life income. Add to that our business model, financial strength, stability and liquidity, and I believe you have in Chubb, both the reassurance of safety, and the attractive prospects of a long-term growth company. I’ll turn the call over to Peter, and then we’re going to come back and take your questions.

Peter Enns: Thank you, Evan, and good morning. Before we begin, I want to note that previously reported numbers in the financial supplement we just filed were adjusted to reflect the impact from the adoption of LDTI accounting, which primarily relates to our Life Insurance business. The cumulative impact of LDTI on our book value and overall results is immaterial. Please refer to Page 31 of the financial supplement for detailed information. Turning to our first quarter results. As you’ve just heard, we are starting out the year an exceptionally strong financial position. Our P&C divisions, expanding life business and strong investment performance produced operating cash flow of $2.3 billion. We grew our assets to over $200 billion, and this includes invested assets of about $116 billion that continued to benefit from the current rate environment and generated our fourth consecutive quarter of record net investment income.

I would note S&P and Fitch both reaffirmed our AA ratings and stable outlook, reflecting our strong financial position. Relative to capital-related actions in the quarter, we returned $772 million to shareholders, including $428 million in share repurchases at an average price of $212.81 per share and $344 million in dividends. Book value and tangible book value per share increased 5% and 8.7%, respectively, from last quarter. The increase reflects our record core operating income and net realized and unrealized gains of $1.7 billion in the investment portfolio, partially offset by the capital return to shareholders I already mentioned. Our core operating ROE for the quarter was 12.6%, and our core operating return on tangible equity was 19.4%.

A year ago, Evan stated our target for 2023 core operating ROE, excluding excess capital or on a deployed capital basis to be 13% and core operating return on tangible equity to be 20%. In this first quarter of 2023, we estimate the deployed capital ROE results to be in the range of 13.5% to 14% and 23% to 23.5%, respectively. Adjusted net investment income for the quarter was $1.2 billion and topped last year’s record quarter — last quarter’s record by over 7%, reflecting higher reinvestment rates that impact recurring income as well as certain items totaling approximately $35 million, including higher-than-expected private equity distributions that vary from quarter-to-quarter. We now expect our adjusted net investment income on a recurring basis to rise from this quarter’s 1.165 to 1.2 to 1.22 next quarter and we expect it to continue to rise from there for the remainder of the year given our positive cash flows, portfolio turnover and the current reinvestment rate environment.

Let me make a few more comments on investments given recent economic and market events. We continue to maintain our consistent conservative approach to our investment process and our portfolio remains high quality with an average rate A rating. Our overall exposure to banks is 8% of invested assets with two-thirds of that — two-thirds of that in G-SIFIs. We have no exposure to Silicon Valley Signature or First Republic Banks. We have no exposure to Credit Suisse contingent capital securities and do not invest in Tier 1 bank Cocos as an investment policy. Our exposure to regional banks is less than 1% of our portfolio and is in high-quality names. Our total direct exposure to commercial real estate is 4% of invested assets and 87% of that total is in investment-grade securities with an average rating of AA.

This portfolio is skewed to multifamily and industrial sectors with under 20% related to the commercial office segment. High-yield credit is currently 14% of our portfolio and is targeted to the upper tier of the high-yield market, rated BB with a current average rating of B+ broadly diversified with over 900 issuers and mandated to outperform in down markets. Back to our underwriting business. The quarter included pretax catastrophe losses of $458 million split 76% in the U.S. and 24% internationally. In the U.S., the loss activity consisted of winter-related storms and other severe weather events. Internationally, results were primarily impacted by storms in New Zealand and Australia. Prior period development in the quarter was a favorable $196 million.

Included in that total is adverse development of $6 million related to the 2022 accident year cat losses comprised of $119 million adverse development from Winter storm Elliott, and $113 million favorable from Hurricane Ian. Excluding cat-related development, we had favorable development of $202 million across all lines, commercial and consumer, with $228 million favorable related to short tail lines and an adverse development of $26 million in long tail lines, $10 million of which was from corporate runoff lines. Our paid-to-incurred ratio for the quarter was 92% or 82% after adjusting for cats prior period development and a large payment related to the Boy Scouts of America settlement. Our core operating effective tax rate was 18.1% for the quarter at the low end of our expected annual range.

I would highlight the first quarter often has a lower tax rate than the full year, and we continue to expect our annual core operating effective tax rate for this year to be in the range of 18% to 19%. Lastly, relative to Wati, we closed on some of our outstanding shares during the quarter, which brought our ownership interest to 64%. We continue to apply equity accounting for the first quarter, and we’ll consolidate Wati once we go over two-thirds ownership, which we think will likely occur in the second quarter when we anticipate exceeding 80%. I’ll now turn the call back over to Karen.

Karen Beyer: Thank you. At this point, we’re happy to take your questions.

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Q&A Session

Operator: Your first question comes from the line of David Motemaden with Evercore ISI. Your line is open.

Evan Greenberg: Good morning, David.

David Motemaden: Good morning, Evan. So really encouraging to see the reacceleration in North America commercial pricing. It sounds like most of that was rate versus exposure. I guess I also heard that you said you expect a 7.6% sort of minimum growth in North America commercial throughout the course of the year. So wondering if you could just unpack how you see that progressing between both rate on existing policies as well as just growth in terms of adding new incremental units of exposure?

Evan Greenberg: Yes. No. David, as you know, we don’t give forward guidance really. And I gave you a little flash, but I’m not going to go further than that. I was pretty clear, I expect the trend you see in pricing, and I expect the trend you see in sort of pattern and growth to continue. And you got a sense of P&C lines growing and you got a sense of professional or financial lines. And beyond that, it’s not simply about North America and look at the company globally, and frankly, look at the International P&C and I expect the pattern to continue, look at consumer lines, and I expect the pattern to continue. Look at life, and I expect the pattern to continue. Investment income, and I expect the pattern to continue.

David Motemaden: Okay. Great. I appreciate that. And then as my follow-up, Evan, in your letter, you spoke about how Chubb enhanced its ability to collect and assess loss cost at more quickly and accurately and then that helps you be more insightful in pricing and reserving. I was wondering if you could just elaborate on how you enhance the stability. And if that played in, I heard you may have ticked up the loss trend a little bit in North America commercial. Wondering what insight gave you to do or this enhanced ability to view loss trend data, how that played into potentially changing? How you’re viewing trend going forward?

Evan Greenberg: Yes. And I talked about this, you’re right in the letter and on previous calls, and that is like so many businesses. If you take a bigger picture view of it, insurance and among other financial companies and nonfinancial, we’re coming out of a — and have come out of a period of very low inflation. Zero cost of money fundamentally are overwhelmed by liquidity. And in the low inflation environment, you don’t have to be necessarily as insightful on loss cost any — at a particular moment in time, lag has less of an impact on you. You have to watch it very carefully, and we always — but the time element of date of when of data when you get it, you could be a little more relaxed. It’s a quarter old — two quarters old, less important.

In an inflationary environment, which we experienced and began while ago, that’s a killer. And for those of us who’ve experienced inflation at time values can mean everything in accuracy. And that’s where we really immediately when we saw it jumped on it and measured that time lag in data, which you have to get to the source of input when you’re looking at inflation, whether it’s on the physical side of when a repair is actually occurring to an automobile or a home or it’s on the liability side very quickly in the development of that. You have to be on top of the trend and you really have to unpack severity from frequency and then you had the impact of COVID on frequency. So — and then you add to that the tools we have available terms of external data and the use of it and our ability to manipulate and use data internal and external more insightfully and more quickly.

You add the capabilities and analytics of this organization with claims and actuarial and underwriting together, and I think it’s a competitive weapon and advantage particularly the speed at which we can react. And I think any modern financial organization that distinguishes itself. That’s part of the action.

David Motemaden: Great. Thank you.

Evan Greenberg: You’re welcome.