Chubb Limited (NYSE:CB) Q1 2024 Earnings Call Transcript

Chubb Limited (NYSE:CB) Q1 2024 Earnings Call Transcript April 24, 2024

Chubb Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator:

Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chubb Limited First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Karen Beyer, Senior Vice President, Investor Relations. Please go ahead.

Karen Beyer: Good morning, everyone. Welcome to our March 31, 2024 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 risk and uncertainty, and actual results may differ materially. Please see our recent SEC filings, earnings release, and financial supplements, 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.

I’d like to introduce our speakers this morning. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Peter Enns, our Chief Financial Officer. We’ll then take your questions. Also with us to assist with your questions 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. Core operating income was up double digit driven by all three sources of income. P&C underwriting income was up over 15% with a published combined ratio of 86%. Investment income was up more than 23%, and life insurance income was up almost 10%. We produced double digit premium revenue growth from across the globe with strong results in our commercial and consumer P&C and international life businesses. Core operating income was up over 20% to $2.2 billion, and operating EPS was up nearly 23%, $5.41. As you saw, our earnings and EPS benefited modestly from two one-time items that partially offset each other. Adjusting for these, they were up 18.6% and nearly 21%, $5.33.

Again, our P&C underwriting income was up over 15% to $1.4 billion driven by strong earned premium growth and great underwriting margins. The ex-CAT current accident year combined ratio was 83.7%. On the investment side, adjusted net investment income of nearly $1.5 billion was up 23.5%. We now have more than $140 billion in invested assets, up over 19% the last two years, and our fixed income portfolio yield is 4.9% versus 4.4% a year ago. Our reinvestment rate is currently averaging 6.1%. Our liquidity is very strong and investment income will continue to grow well as we reinvest cash flows at higher rates. Life segment income of $268 million was up 9.8%. Our annualized core operating ROE was 13.7% with a return on tangible equity of nearly 22%.

Peter will have some more to say about financial items. Turning to growth, pricing, and the rate environment. Consolidated net premiums for the company increased over 14%. For Global P&C, which excludes agriculture, net premiums increased 13.3% in the quarter with commercial up over 11% and consumer up over 19%. P&C premium growth in the quarter again was balanced and broad based globally between areas of the globe and commercial versus consumer, reflecting favorable underwriting and market conditions overall. Life insurance premiums and deposits were up over 39% driven by our business in Asia and came from a number of countries and distribution channels. Huatai contributed 2.9% and 20.6 percentage points respectively to the Global P&C and life growth results.

In terms of the commercial P&C rate environment, overall conditions were quite favorable in both property and casualty, and price increases exceeded loss costs while rate decreases in financial lines slowed. So, starting with North America, premiums excluding agriculture were up over 10% and consisted of 12.3% growth in personal insurance and about 9.5% growth in commercial. P&C lines up 13% and financial lines down about 7.5%. If we adjust the P&C growth to the net impact from two items in the major accounts division, P&C lines normalized growth was a very strong 11.6%. The two items were an unusually large structured transaction we wrote, partially offset by the previously discussed corrective underwriting actions in primary and excess casualty that are continuing to wind down over the next few quarters.

By the way, that large structured transaction negatively impacted North America commercials combined ratio by over a half a point, but the loss ratio impacted by over a point. Excluding this impact, unmasks the current accident year combined ratio run rate. Supporting North America P&C growth was record new business of over $1.2 billion and a very strong renewal retention on a policy count basis of 84.7%. Both speak to the tone of the market and our excellent operating performance. Premiums in our major accounts and specialty division increased 12%. With our large account retail business up 12% and our E&S business up about 10.5%. Premiums in our middle market division increased about 7% with P&C lines up 10.6% and financial lines down 6.5%.

Again, the P&C market environment in North America overall is quite favorable and rational, financial lines aside. Pricing increased 12.8% including rate of 9.4%, an exposure change that acts like rate of 3.1%. From our very large middle market business to small commercial to personal lines, and driven by both property and casualty, we saw the best rates in pricing overall that we’ve seen in the last four to five quarters. It was one of the best quarters for large account casualty pricing. In our North America business, rate increases for property and casualty exceeded loss cost trends, let alone pricing which was even stronger. So, let me provide a bit more color around rates and pricing. Property pricing was up 13% with rates up 7.8% and exposure change of 4.8%.

Casualty pricing in North America was up 13.1% with rates up 10.9% and exposure up 2%, and in workers comp, which includes both primary comp and large account risk management, pricing was up 4.8% with rates up 0.2% and exposure up 4.6%. Loss costs in North America are relatively stable and in line with what we contemplate in our loss specs. We are trending loss costs at 6.8%, short tail classes at 5.3%, and long tail excluding comp at 7.6%. We’re trending our first dollar workers comp book at 4.6%. For financial lines, the underwriting environment in a number of classes in a word is simply dumb. Rates continue to decline albeit at a slower pace. We are of course trading growth for underwriting margin and income where we need to. In the quarter, rates and pricing for North America financial lines in aggregate were down 3% and 2.7%, respectively.

We are trending financial lines loss costs at just over 5%. On the consumer side of North America, our high net worth personal lines business had another outstanding quarter. This is a powerhouse business. Over $5.5 billion in premium last year and it grew over 12% in the quarter with new business growth of nearly 35%. It speaks to a franchise and a class of its own in terms of service and capability. Premium growth for or our true high net-worth premier and signature segments, the group that demands the most underwriting and servicing grew 16.5%. In our homeowner’s business, we achieved pricing of 17% in the quarter while our selected loss cost trend remained steady at 10.5%. While a small quarter, our agriculture business had a very good underwriting result as the ‘23 crop year turned out a bit better than we projected.

Turning to our international general insurance operations. Net premiums were up 17.5% or 16.7% in constant dollars. Our international commercial business grew 11.4% while our consumer was up over 26%. Growth this quarter is geographically diverse with all major regions contributing, which again illustrates the true global nature of the company. Asia led the way with premiums up 40%. Excluding Huatai’s contribution, premiums were up 7.7%. Latin America had a strong quarter with premiums up about 13% while the continent of Europe grew 10.3%. We continue to achieve positive rate to exposure across our international commercial portfolio with retail property and casualty lines pricing up 5.5% and financial lines pricing down 2.3%. Loss cost inflation across our international retail commercial portfolio is trending at 5.8% with P&C lines trending 6.1% and financial lines trending 4.8%.

Within our international consumer P&C business, our personal lines division had an exceptional quarter with constant dollar growth of 47%, led by Asia and Latin America. By the way, the modest increase in overseas general’s ex-CAT current accident year combined ratio this quarter was primarily due to the consolidation of our China business. In our international life insurance business, which is overwhelmingly Asia, premium and deposits were up over 50% in constant dollar, with strong contributions from Taiwan, Hong Kong, China and Korea. Excluding Huatai Life, premiums and deposits were up over 10%. Depending on the country, growth was driven by tied agency, brokerage, and direct marketing distribution channels. Lastly, global Re had a strong quarter with premium growth of almost 30% and a combined ratio of 76.9%.

We allocate incrementally more CAT capacity to our reinsurance business and grew both our CAT access and risk property portfolios in particular this quarter. In summary, we had an excellent quarter and start to the year. We remain well positioned to continue producing outstanding results through the balance of the year and beyond. We remain confident in our ability to continue growing operating earnings at a rapid pace through P&C revenue growth and underwriting margins, investment income, and licensing. I’m going to turn it over to Peter and then we’re going to come back and we’re going to take your questions.

Peter Enns : Thank you, Evan. As you’ve all just heard, we continue to build on the momentum of our record 2023 year, with strong growth and top line and earnings per share this quarter. We continue to effectively manage our balance sheet and ended the quarter in a strong financial position, including book value that exceeded $60 billion and cash and invested assets of $143 billion, each topping last quarter’s all-time highs. Adjusted operating cash flow is $3.6 billion. There were two one-time earnings items this quarter that I would like to touch on. First, we recognized an incremental $55 million deferred tax benefit related to the new 2023 Bermuda Corporate Income Tax Law. This resulted from finalizing our review of two smaller subsidiaries since last quarter.

We don’t expect additional deferred tax gains related to this law going forward. Second, there was a contribution made to the Chubb Charitable Foundation of $30 million pre-tax or $24 million after-tax. These items provided a net benefit of $0.08 per share. Additionally, there were two other noteworthy items in the quarter. In March, we issued $1 billion of 10-year debt to retire existing debt due to the retire mature in May 2024. Lastly, we closed on an additional 9% of shares of Huatai that brought our ownership interest to 85.5%. This leaves the last tranche of less than 1% of outstanding Huatai shares remaining to close. During the quarter, book and tangible book value per share excluding AOCI increased, 2.2% and 2.9% respectively from December 31st.

Driven by strong operating results, partially offset by $350 million in dividends and $316 million in share repurchases in the quarter. Turning to investments, our A-rated portfolio produced adjusted net investment income of $1.48 billion, slightly beating our guidance of $1.45. We expect our adjusted net investment income to have a run rate of approximately $1.5 billion to $1.52 billion next quarter and to go up from there. Turning to underwriting results, the quarter included pre-tax catastrophe losses of $435 million, which is modestly lower relative to prior year and is principally from winter storms and other weather related events in the U.S. Prior period development in the quarter in our active companies was a positive $216 million pre-tax with favorable development of $311 million in short tail lines, primarily from property and credit-related lines, and $95 million of unfavorable development in long tail lines, which was primarily from excess casualty and was within our range of expectations.

Our corporate runoff portfolio had unfavorable development of $9 million pre-tax. Our paid-to-incurred ratio for the quarter was 84%. Our reported core effective tax rate was 15.2% or 17.3% for the quarter, excluding the update to our Bermuda tax benefit. As I’ve said before, our first quarter tax rate also tends to be the lowest of the year due to certain tax benefits associated with equity award vesting and stock option exercises. We continue to expect our annual core operating effective tax rate for the full year to be in the range of 18.75% to 19.25%. 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: [Operator Instructions]. Your first question comes from the line of David Motemaden with Evercore ISI. Please go ahead.

David Motemaden : Hey, good morning. First question Evan, I just wanted to maybe get a little bit more detail on the $95 million of unfavorable reserve development on the long tail lines that you guys took this quarter. Maybe just unpack that a little bit more, would be helpful.

Evan Greenberg: Yeah. Good morning, David. Look, we recognized over 200 million of reserve releases, so keeping in perspective and that included adverse development of 95 in North America, commercial lines long tail. It was not concentrated in any one period. It was spread out 16 forward. It was predominantly large count excess casualty, auto related in areas we’ve discussed, trucking, logistics companies, companies with large commercial fleets. It’s the business we’ve been addressing in terms of rate and underwriting actions, and in that case, think retentions, and our loss specs that reflect our action. In fact, when we talk about that, we gave you color around that we had this large LPT that was larger than usual, and then we offset to a degree by the underwriting actions that we’ve been taking.

You heard it all last quarter. It’ll run two or more, maybe two more quarters. That’s all related back to the same business as you know, so there’s the mental model. The development was not a surprise, because we continually track actual versus expected activity for all product lines, and we had continued to observe higher than expected loss activity for this business. So we study it more deeply this quarter, and we took, as we always will. We took the bad news, and we are slow to recognize good news. No different than I said last quarter, our reserves are really strong.

David Motemaden : Got it. That’s helpful. And then I did notice that the commercial casualty net premium rent and growth accelerated during the quarter, and you mentioned, you also mentioned the rate increases accelerated a little bit in the quarter as well and commercial casualty. Could you just talk about how you are thinking about balancing all the elevated uncertainty in the environment with leaning into growth, which it seems like you guys are doing a little bit?

Evan Greenberg: Well, the growth is coming. It wasn’t a little bit. It was a stuff change in the rate we got, exceeded loss cost, let alone pricing, which includes exposure change, and that is what contributed substantially to the growth. We grew exposure as well, particularly in our middle market long tail business, though there was some growth in particular lines in large accounts as well, where the pricing – you know, the vast majority of our book is adequately price and casualty, and we’re getting rate that recognizes loss cost trend, and so we maintain the adequacy. And then the stress classes, which need rate to hit our target combined ratios, that’s where rate has accelerated in the market, and we, because the market is also reacting, we’re able to achieve and grow the business to a degree. Otherwise we get the rate, the business, and there were one or two classes where that’s occurring.

David Motemaden : Okay, that’s helpful. Thanks for the detail.

Evan Greenberg: You got it.

Operator: Your next question comes from the line of Mike Zaremski with BMO Capital Markets. Please go ahead.

Mike Zaremski: Hey, thanks Scott. Good morning. Now, on the topic of social inflation, I think – I’m assuming when we think about social inflation that the main way to tackle it is risk selection and pricing, etc., but I recall in your shareholder letter Evan, you talked about working, or maybe you can elaborate. You and others have talked about kind of, it sounds like a more concerted effort to lobby efforts or to maybe state-by-state see if there could be some reforms, so just curious if you could elaborate. If there’s anything changing there in terms of what Chubb or the industry is doing to maybe tackle it from the back end or. Thanks.

Evan Greenberg: Yeah. First of all, our loss specs reflect the reality of the environment we are in, the inflation we observe, and that includes any actions, as we know them to be, that might ameliorate it around tort reform. Tort reform is going to be a long-term, never-ending process. As you say, it’s not going to be federal, state-by-state. It could be county-by-county, depending, and it depends on the class of business as to the kind of reform that’s required to bend that curve and loss cost. The insurance industry can support it and does. The insurance industry can’t particularly lead it. We don’t have the printing press. This is ultimately paid for by corporate America, and it’s paid for by consumers, by the products and the services from corporate America.

It’s a tax on everybody, if you look at it in a clear-eyed way. We reflect the inflation that we see, whether it comes from social inflation, so-called social inflation, or other causes in the prices and the rates we ultimately charge corporate America for the business. Tort reform comes in, there’s litigation finance, where disclosure laws have to change around that, and I mentioned that, and some states require it. Most don’t, and it’s very simple, because it puts in context how sympathetic is the plaintiff, and what are the motives. There’s laws around who bears liability, the responsibility, what they call joint and several laws around it. You could be 1% liable, but you are the only one with any money, so they make you 100% responsible financially.

There are reasons that that occurs. That is also being gamed by the trial bar in how they target cases, and how they target companies. It’s those sorts of things. The insurance industry is hardly sympathetic. Corporate America needs to do more in this case, and we are all active. A number of companies are active in advocating for reforms, but it’s not a magic, it’s no silver magic bullet. It’s going to take many years, and it’s going to require more effort than is currently being expended.