Chubb : CB.N - Q2 2022 Chubb Ltd Earnings Call

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CB.N - Q2 2022 Chubb Ltd Earnings Call

EVENT DATE/TIME: JULY 27, 2022 / 12:30PM GMT

OVERVIEW:

CB reported 2Q22 core operating income of $1.8b and core operating income per share of $4.20.

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JULY 27, 2022 / 12:30PM, CB.N - Q2 2022 Chubb Ltd Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Evan G. Greenberg Chubb Limited - Executive Chairman & CEO

Karen L. Beyer Chubb Limited - SVP of IR

Peter C. Enns Chubb Limited - Executive VP & CFO

Timothy Alan Boroughs Chubb Limited - Executive VP & CIO of Chubb Group

C O N F E R E N C E C A L L P A R T I C I P A N T S

Alexander Scott Goldman Sachs Group, Inc., Research Division - Equity Analyst

Brian Robert Meredith UBS Investment Bank, Research Division - MD, Financials Research Sector Head & Global Insurance Strategist Charles Gregory Peters Raymond James & Associates, Inc., Research Division - Equity Analyst

David Kenneth Motemaden Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst Elyse Beth Greenspan Wells Fargo Securities, LLC, Research Division - Director & Senior Analyst

Meyer Shields Keefe, Bruyette, & Woods, Inc., Research Division - MD

Michael Wayne Phillips Morgan Stanley, Research Division - Equity Analyst

Tracy Dolin-Benguigui Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

Yaron Joseph Kinar Jefferies LLC, Research Division - Equity Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, and welcome to the Chubb Limited Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

For opening remarks and introduction, I would like to turn the call over to Karen Beyer. Please go ahead, ma'am.

Karen L. Beyer - Chubb Limited - SVP of IR

Thank you and welcome to our June 30, 2022, second 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 supplement.

Now I would 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 are several members of our management team.

And now it's my pleasure to turn the call over to Evan.

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JULY 27, 2022 / 12:30PM, CB.N - Q2 2022 Chubb Ltd Earnings Call

Evan G. Greenberg - Chubb Limited - Executive Chairman & CEO

Good morning. We had a very strong quarter with record operating income driven by outstanding underwriting and investment results as well as double-digit, constant dollar P&C premium growth. Pricing was strong and exceeded loss costs in commercial lines, even as we increased the inflation factors we are using in our loss ratios in anticipation of future increases to loss costs.

Meanwhile, growth in our consumer businesses continued to accelerate. Core operating income in the quarter was a record $1.8 billion or $4.20 per share, up 16% over prior year. For the year, we have produced over $8 per share, up nearly 31%.

Our second quarter underwriting results were simply lights out: $1.4 billion of underwriting income, which was up 21% over priorwith a published combined ratio of 84%, both record results. Catastrophe losses in the quarter were reasonably light relative to our expected losses and virtually flat with last year's second quarter. The P&C current accident year combined ratio, excluding CATs, was 83.5%, a nearly two-point improvement over prior year.

On the other side of the balance sheet, adjusted net investment income was a record $950 million for the quarter. As you know, we are predominantly a buy-and-holdfixed-income investor, and given rising interest rates and widening spreads, investment income is and will continue to rise.

Our reinvestment rate is now averaging 4.7% against a portfolio yield of 3.2%. We have begun to thoughtfully and meaningfully accelerate the turnover of our portfolio in a targeted manner so that we can put cash to work more quickly at higher yields.

Spreads have moved to more historical averages among the various fixed-income classes and the wind-down of QE could create more volatility and put more pressure on spreads in the future, which would benefit us. Peter will have more to say about these and other financial items.

As you saw, we completed the acquisition of the Cigna business. As we had previously announced, the addition of Cigna's A&H and life business in Asia will be immediately accretive to core operating income per share and ROE. We have spent the past 6 to 8 months planning the integration to generate the revenue and earning power the combination of our businesses together in each country should achieve. We are off to a rapid start and are beginning to execute.

Having just come back from Asia and met with the teams in Korea and Thailand, morale among our new and existing colleagues is quite high and there is a great sense of optimism in what the future holds for our business in the region. Our Cigna colleagues who are joining us, starting with the leadership, are a great fit with Chubb and our culture.

Now, turning to growth and the rate environment, total P&C premiums globally increased 9% in the quarter on a published basis, or 11% in constant dollars, with commercial up 12% and consumer up 8%. Growth in the quarter remains broad based with contributions from virtually all commercial businesses globally, from large corporate to middle market to small, from traditional to specialty and most all regions of the world. Commercial P&C premiums for North America were up 12.5% or 8.7% excluding agriculture, while in Overseas General, commercial lines grew 13% in constant dollars. And we then scrub 6 points of FX to arrive at the published result.

Agriculture premiums were up 44% in the quarter, driven overwhelmingly by crop insurance growth. Commodity prices plus growth in market share produced this result. Looking forward, we will have a very strong crop insurance revenue growth in the third quarter as well.

In terms of the Commercial P&C rate environment, market conditions overall remain favorable while the level of rate increases is moderating. The vast majority of our portfolio is achieving favorable risk-adjusted returns, and additional rate is therefore required primarily to keep pace with loss costs, which are hardly benign.

The rate environment is naturally becoming a bit more competitive, particularly in certain casualty-related classes, as more carriers seek to now grow. The market is reasonably disciplined, and I expect it will remain so, given not only the specter of loss cost inflation, but the presence of other risk exposures, such as climate change, the war in Ukraine, the litigation environment, cyber and the overall costs of reinsurance. Plenty of reminders to managements to get paid for the exposures underwritten.

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JULY 27, 2022 / 12:30PM, CB.N - Q2 2022 Chubb Ltd Earnings Call

In the quarter in North America, total Commercial P&C premiums, excluding agriculture, grew 8.7%. Growth this quarter in commercial lines was led by our Major Accounts & Specialty Division, which grew about 10.5%, followed by our middle market and small commercial business, which grew about 6.5%. Renewal retention for our retail commercial businesses was a very strong 101% on a premium basis.

Overall rates increased in North America commercial lines 7%, while total pricing, which includes rate and exposure, increased over 10.5%. Remember, most but not all of the exposure change helps to ameliorate loss cost.

In major accounts, which serves the largest companies in America, rates increased over 8% with pricing up 11.6%. General casualty rates were up nearly 13% and varied by class of casualty. While risk management-related comp and GL were up about 4%. Property rates were up around 9% and financial lines rates were up nearly 7.5%.

In our E&S wholesale business, rates increased by just under 10% with pricing up over 14%. Property rates were up over 13%. Casualty was up 8.5% and financial lines rates were up 9.5%.

In our middle market business, rates increased nearly 7%, excluding comp, with pricing up about 9%. Rates for property were up 5%. Casualty rates were up over 7%. And comp rates were down 4.3%. However, comp pricing was up over 5% when taking into account exposure change. And finally, financial lines rates were up over 10%.

Turning to loss cost for a minute, we increased our loss cost trends in North America to 6.5% in anticipation of rising costs, meaning the actual trends we are observing at this time are lower. Again, the 6.5% is compared to pricing that was up over 10.5%.

In general, we are trending loss costs for short-tail classes close to 7%, up from 6.5% last quarter. In long-tail, excluding workers' comp, we are trending at 6.5%, up from 6%. And our first-dollar comp book is trending between 4% and 4.5%. These trend factors are contemplated in both our pricing and in our accident year loss picks in the quarter.

Turning to our international general insurance operations. Retail Commercial P&C premiums grew 12.5% in constant dollars, while our London wholesale business grew over 10%. Retail commercial growth varied by region, with premiums up 14% in Asia Pacific, followed by growth of over 13% in Latin America. Our U.K. and Europe division was up nearly 12%. Internationally, like in the U.S., we continued to achieve improved rate-to-exposure across our commercial portfolio.

In our international business, rates increased in the quarter about 9.5%, while we estimate pricing was up about 12%. Rates varied by class and by region as well as country within region. Outside North America, we are currently trending loss costs at about 6.5%, up from 4%, though that varies by class of business and country. Loss cost factors we are using for short-tail are now running over 7%, and in long-tail, we are trending at about 6%. Again, these factors are contemplated in both our pricing and in our accident year loss picks in the quarter, and like in North America, are higher than actual observed trends.

International consumer lines growth in the quarter continued to pick up momentum as premiums increased over 12%, though FX then scrubbed about 7.5 points off the growth. Premiums in our international A&H business grew over 12% in constant dollars, with Latin America up over 19% and Asia Pacific up 13%, while our international personal lines grew 12%.

Net premiums in our North America high net worth personal lines business were up 4.7% on the back of record new business activity. Our true high net worth client segments grew 12%, while overall retention was very strong at nearly 98%.

In our homeowners business, we achieved pricing of about 10%, while the homeowners loss cost trend is running about 10% as well.

To sum it all up, we had simply an excellent quarter as I look ahead, I am mindful of the world and conditions in which we operate, including inflation, the specter of recession, the war and energy and food security problems globally.

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JULY 27, 2022 / 12:30PM, CB.N - Q2 2022 Chubb Ltd Earnings Call

With all that, we have a lot of broad-based momentum and earning power in our organization that gives me confidence. Commercial P&C growth and pricing are favorable, our consumer lines business growth is accelerating, our life company revenue and earnings will accelerate with the addition of the Cigna business in Asia. Asia is now a $7.5 billion region for our company. Our underwriting margins are excellent, and our investment income will grow nicely due to rising rates and strong cash flow. We are well positioned for continued excellent EPS growth well into the future.

I'll turn the call over to Peter, and then we'll come back and take your questions.

Peter C. Enns - Chubb Limited - Executive VP & CFO

Good morning, everyone. As you just heard from Evan, we had another excellent quarter. In addition to the record results, we ended the second quarter in a position of exceptional financial strength. Our strong underlying performance produced operating cash flow of $2.7 billion for the quarter and $5.2 billion for the first 6 months.

Our balance sheet remains strong. We have $68 billion in total capital. We continue to remain extremely liquid with cash and short-term investments of $10.6 billion at quarter end or $5.2 billion after accounting for the cash that was paid on July 1 for the Cigna deal.

Among the capital-related actions in the quarter, we returned $1.5 billion to shareholders, including $1.1 billion in share repurchases and $348 million in dividends. Through the 6 months ended June 30, we have returned $2.8 billion to shareholders.

The current quarter included after-tax realized mark-to-market losses on our private and public equities of $489 million compared to gains of $794 million last year. Also included are after-tax losses on sales of fixed maturities of $279 million, in part to advance our portfolio turnover strategy.

Book and tangible book value per share decreased 7.7% and 11.6%, respectively, from last quarter driven by the continuing impact of rising interest rates on our investment portfolio and unfavorable foreign currency movements.

Net realized and unrealized losses for the quarter were $5.4 billion after tax.

In the quarter, adjusted net investment income of $950 million was above the top end of our estimated range and benefited from higher interest income from floating-rate securities and higher reinvestment yields resulting from portfolio turnover in this more attractive interest rate environment. We are remaining consistent and conservative in our investment strategy with 82% of our fixed-income portfolio rated investment grade, and we intend to maintain our historical allocation across investment assets.

As Evan noted, with rising rates, our portfolio's reinvestment rate has increased year-to-date from 2.3% in December to 4.7% at June 30th. Our current book yield is 3.2% versus 3% in the first quarter. As a reminder, every 100 basis point increase in our investment yield generates approximately $1.2 billion pre-tax of net investment income.

Updating our quarterly guidance, we now anticipate adjusted net investment income over the next quarter to be in the range of $980 million to $1 billion. And we expect the quality of this income to be high as the vast majority of it will be predictable yield-oriented income and very little from more volatile sources like PE distributions and call premiums.

Our reported ROE for the quarter was 9%, and our core operating return on tangible equity was 18.6%. Our core operating ROE was 12.4%.

Pre-tax catastrophe losses for the quarter were $291 million from weather-related events globally with approximately 79% in the U.S. and 21% internationally. We had favorable prior period development of $247 million pre-tax in the quarter, split approximately 1/3 in long-tail lines, principally from accident years 2017 and prior, and 2/3 in short-tail lines. The current period included a charge from molestation claims related to reviver statutes of $155 million. Our paid-to-incurred ratio for the quarter was 83%.

Our core operating effective tax rate for the quarter was 17.7%, which is slightly above the high end of our previously guided 2022 annual range of 15.5% to 17.5%. This was due primarily to growth in higher-tax jurisdictions and the negative impact of adverse market conditions on assets

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