Chubb Ltd Q2 FY2021 Earnings Call

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.

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 the 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. 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. 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.

Good morning. As you saw from the numbers, 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%. On the other side of the balance sheet, adjusted net investment income of $945 million, also a 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 and 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 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. In North America, Commercial P&C net premiums grew over 16%. New business was up 24% and renewal retention remained strong at 96.5% on a premium basis. In our North America major accounts and specialty commercial business, net premiums grew over 13%, with each division — major accounts, Westchester and Bermuda — having its largest quarter in history in terms of written business, and the standout was our middle market and small commercial division, which had the biggest quarter in about 20 years, driven by record new business growth and strong retentions. Overall rates increased in North America commercial by a strong 13.5%, which is on top of a 14.7% rate increase last year for the same business, making the two-year cumulative increase over 30%. And remember, in North America, rates have been rising for almost four years. However, they have exceeded loss costs for only about two years now. Loss costs are currently trending about 5.5% and vary up or down depending upon line of business. General commercial lines loss costs for short-tail classes are trending around 4%, while long-tail loss costs, excluding comp, are trending about 6%. Let me give you a better sense of the rate increase movement by division and line in North America. In major accounts, rates increased in the quarter by about 16% on top of almost 18% prior year for the same business, making the two-year cumulative increase over 36%. Risk management-related primary casualty rates were up almost 9%. General casualty rates were up 27% and varied by category of casualty. Property rates were up nearly 12% and financial lines rates were up almost 20%. In our E&S wholesale business, the cumulative two-year rate increase was 39% comprised of an increase of circa 18% this quarter on top of 18% prior year second quarter. Property rates were up about 16.5%, casualty was up about 21%, and financial lines rates were up over 21%. In our middle market business, rates increased in the quarter over 9.5% on top of over 9% last year, making the two-year cumulative increase 20%. Rates for property were up over 10.5%. Casualty rates were up 11%, excluding workers' comp, and comp rates were down about 0.5%. Financial lines rates were up over 17.5% in our middle market business. Turning to our international general insurance operations: Commercial P&C premiums grew an astonishing 33% on a published basis or 24% in constant dollars. International retail commercial grew 27% and our London wholesale business grew 60%. Retail commercial P&C growth varied by region, with premiums up 36.5% in our European division, with equally strong growth in both the U.K. and on the continent. Asia-Pacific was up over 29%, while our Latin America commercial lines business grew over 14.5%. Internationally, like in the U.S., in those markets where we grew, we continued to achieve improved rate to exposure across our commercial portfolio. In our international retail commercial P&C business, the two-year cumulative rate increase was 35%, comprised of increases this quarter and prior year of 16% each. Two territories in particular, the U.K. and Australia, stand out in terms of rate achievement. In our U.K. business, rates increased in the quarter by 18% on top of a 26% rate increase prior year for the same business, making the two-year cumulative increase 48%. In Australia, the two-year cumulative rate was 42%, comprised of an increase of 23% this quarter, on top of 16% prior year. In our London wholesale business, rates increased in the quarter by 13% on top of a 20% rate increase prior year, making the two-year cumulative 36%. International markets began firming later than the U.S. and again, like with the U.S., rates have exceeded loss costs for about 2 years now. Outside the U.S., loss costs are currently trending 3%, and so that varies by class of business and country. Consumer lines growth globally in the quarter continued to recover from the pandemic effects on consumer-related activities. Our international consumer business grew 13% in the quarter on a published basis and grew 5% in constant dollars. Breaking that down, international personal lines grew 20% on a published basis, while our international A&H grew 6.5%, but was essentially flat in constant dollars. Within our A&H book, a nascent recovery in our leisure travel business outside of Asia is beginning to result in growth, although passenger travel activity is still well below pre-pandemic levels in both our group A&H business, with its employer-based benefits, and our consumer-focused direct marketing business. Premiums were up mid-single digits, still impacted by the pandemic, but beginning to improve. Net premiums in our North America high net worth personal lines business were up over 2.5%. Non-renewals in California and COVID auto-related renewal credits had almost 1 point of negative impact on growth in the quarter. Our TruNet client segment, the heart of our business, grew almost 8% in the quarter. Overall retention remains strong at over 94%. And we achieved positive pricing, which includes rate and exposure of 13% in our homeowners portfolio. Loss cost inflation in homeowners is currently running about 11%. Lastly, in our Asia-focused international life insurance business, net premiums plus deposits were up 55% in the quarter, while net premiums in our Global Re business grew over 32%. In sum, we continue to capitalize on a hard or firming market for commercial P&C in most areas of the world. Both growth and margin expansion are two trends that I am confident will continue. Our organization is firing on all cylinders. We're growing our business and our exposures, and we continue to expand our margins. Our leadership employees are energized and driven to win. I couldn't be more proud or humbled by the results they are producing, and I want to thank them all publicly for their efforts. I am confident in our ability to outperform and deliver strong, sustainable shareholder value. I'll now turn the call over to Peter.

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 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. There are a number of factors that impact the variability in investment income, including the amount of operating cash flow available to invest, the reinvestment rate environment and the assumed prepayment speeds on our corporate bond calls and variability around private equity distributions. Based on the current interest rate environment and normalized private equity distributions, we continue to expect our quarterly run rate to be approximately $900 million. Our annualized core operating ROE and core operating return on tangible equity were 11.5% and 17.7%, respectively, for the quarter. And as a reminder, we continue to present the fair value mark on our private equity funds outside of core operating income as realized gains and losses instead of net investment income as other companies do. The gain from the fair value mark this quarter of $712 million after-tax increased core operating ROE by five percentage points to 16.5% and core operating income by $1.59 per share to $5.21. Book and tangible book value per share increased by 4.2% and 5%, respectively from the first quarter due to record core operating income and realized and unrealized gains of $1.4 billion after-tax in our investment portfolio, which primarily came from declining rates and mark-to-market gains on private equities. The increase in book value per share also reflects the impact of returning over $2 billion to shareholders in the quarter. Our pretax P&C net catastrophe losses for the quarter were $280 million, principally from severe U.S. weather-related events. There was no overall change to our aggregate COVID-19 loss estimate. We had favorable prior period development in the quarter of $268 million. This included a charge from molestation claims of $68 million pretax compared with $259 million in the prior year. Excluding this charge, we had favorable prior period development in the quarter of $336 million pretax, split approximately 30% in long-tail lines, principally from accident years 2017 and prior, and 70% short-tail lines. For the quarter, our net loss reserves increased $1.1 billion in constant dollars and our paid-to-incurred ratio was 80%. Our core operating effective tax rate was 15.8% for the quarter, which is within our expected 17% for the year. Now I'll turn the call back over to Karen.

Thank you. At this point, we're happy to take your questions.

We will begin with Michael Phillips with Morgan Stanley.

Thanks. Good morning Evan and thanks for taking the question. First question is on growth, 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?

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 part gaining market share. So all in, very, very strong growth — fundamental growth in the business. And by the way, actual exposure growth was negative in the quarter. But new business and renewal retention and rate well overcame that. You saw a 21% growth in commercial P&C.

Okay. And sticking with North America commercial lines. The core loss ratio relative to 1Q was up a little bit, and was there some impact from portfolio transfers in the second quarter, or is that just a normal second-quarter event that happened, or what impact was that in the quarter?

No, it's just normal. It's a normal quarter-on-quarter seasonalization. There wasn't an impact from loss portfolio transfers. The mix of business changes quarter-to-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.

Yes, perfect. Okay. Thank you, Evan. Appreciate it and congrats on the quarter.

Thanks a lot.

We will now take a question from David Motemaden with Evercore.

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?

Sure. You're really asking the question about loss portfolio transfers (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 one-time 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.

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 another question on the expense ratio: 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 that coming back? Are we still realizing some sort of benefit from that?

No, you're fundamentally looking overall at a pretty good run rate. And look, if things open up more and as they open up more, there'll be more travel-related expense and a little more entertainment-related expense. We don't anticipate it to have a big impact. It's still a pretty good run rate. That's on the OpEx ratio. Remember, the acquisition ratio bounces around with mix of business.

Right. Yes. Perfect. Thank you.

You got it, David.

Our next question will come from Greg Peters with Raymond James.

Good morning. So, the first question will focus on the pricing commentary. You laid out very robust results in terms of price achievement, not only in the recent quarter, but really for the last almost two years. In your press release, I think you said you're confident these market conditions will continue. There's growing rhetoric in the market that the rate environment is going to start to soften. From where you sit today, you're producing an 85% combined ratio. Is it possible that two years from now we're back to negative rate increases across many lines of commercial, or talk about your views on how you see the market developing?

Don't actually, Greg. There's a lot, but I don't know where you're going. Go ahead. Look, I can't tell you what we're going to see two years from now. I can give you a sense — in my 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 rates will continue to exceed loss costs. We're exceeding loss costs right now by a reasonable margin. The industry overall has been achieving rates in excess of loss costs for just two years now. Secondly, the industry starts at a loss ratio that is quite high. 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. Then you have an external environment that is risky — from cyber to climate to the litigation environment. All that is baked into the mood and the thinking among those in the industry underwriting today. From everything I see, it is natural — I gave you year-on-year movement in pricing and rate so you would have perspective. 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.

The comments about loss costs are interesting because there's two factors. You mentioned litigation. There's a perspective that the legal environment, because of COVID, was shut down last year, and that's going to come back. And then the second piece on loss cost is the rhetoric about inflationary pressures, especially on things like auto. Do you see that manifesting itself in terms of higher loss costs for the industry over the next 12 months?

Yes. 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 recognizing what I think is a relatively hostile legal and litigation environment. The current actual is running better than the trended 6% we're using, but we think that's a timing head fake. On the short-tail side of the business, I gave you two numbers: homeowners running double-digit observed inflation today, and short-tail commercial trending at about 4%. On the commercial property side, from all we see and our data, at the moment it's running below that in both frequency and severity. But we see enough external inflation — and we see enough in the homeowners book — that we continue to trend it in both pricing and reserving at that 4% range.

Got it. Thank you for the thorough answers.

You got it.

We will now move to Elyse Greenspan with Wells Fargo.

Hi, thanks. Good morning. My first question, Evan, going back to some of the pricing commentary you gave: it seems like most lines are still at healthy levels above loss trend. We've heard from some in the industry that momentum is slowing in certain lines. From your perspective, are most lines still in need of healthy rate increases, or are any lines rate adequate?

I'm not sure I got the question, Elyse. Could you clarify? But broadly, it really varies across the board. When I look at the industry overall, if you roll it all together, it needs rate. When I look at it for the Chubb portfolio, most of our business is at or approaching risk-adjusted rate adequacy. It varies by line, by territory, by class.

Okay, that's helpful. And then my second question: you outlined a $5 billion incremental share repurchase program. As you think about opportunities, your excess capital position, should we think about capital return being prorated over the next year depending upon where your share price is, or could you come sooner? How are you thinking about share repurchase, given the $5 billion and that you bought back a good amount in the second quarter as well?

Nice try, Elyse. Stayed tuned.

Okay. Thanks, Evan.

You're welcome.

Now we will hear from Ryan Tunis with Autonomous Research.

Good morning. Evan, one observation: the Overseas General segment loss ratio improvement has been keeping up with the North America commercial loss ratio improvement, which is surprising given the mix. I was curious if that surprises you as well?

No, not at all. Over half the overseas general business is commercial business. Take Europe or the London market — both wholesale and retail — those were soft markets for an extended period. We were scratching for growth, but we were disciplined in underwriting and making good money and margins. Relative to the market, we were well outperforming. Europe and the U.K. are slower to react, but you see that reaction taking place, and that was an opportunity for us to drive both growth and rate.

When you think about overseas general and North America, do they have pretty similar margin profiles at this point given pricing conditions?

Well, they're running different combined ratios. It varies by segment of overseas general, by country, by mix. It varies wholesale versus retail. But overseas general continues to improve at a pace that's very similar to North America.

Got it. And then a follow-up on Elyse's question: your response suggested many lines are approaching risk-adjusted rate adequacy. From a growth perspective, when a line becomes rate adequate, does that materially drive top-line growth — i.e., do you see meaningful incremental submissions and quotes, or is it more incremental?

Underwriting will never destroy book value. If a cohort runs over 100, you have to fix it or kill it immediately. In this environment, if you can achieve an adequate risk-adjusted return on a cohort and the market will allow it, you'll see more submissions, more quotes, better broker and agent engagement, and a drive to write that business. We know our minds clearly. That's why we've been growing commercial at double digits for 10 quarters. That's a result of discipline and a favorable market environment.

We will now move to Tracy Benguigui.

Good morning. 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 mandated, not guaranteed and not part of an intercompany pool. I'm not trying to box you in on the BSA side, but structurally, could you conceivably let that entity's assets run dry, or could there be circumstances where you may theoretically be under any obligation to contribute capital? I recognize Century is regulated by Pennsylvania, which is also your group supervisor.

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. That 10-K disclosure around our obligation to Century speaks for itself. It's quite clear. It is a limited obligation, and I will leave it at that.

Okay. I also recognized that Bermuda is opposing the G7 tax proposal in theory. Regarding a minimum 15% global tax rate floor, how would you think about Chubb's seating arrangement versus affiliates?

I assume you mean our seating arrangements for pooling and capital efficiency purposes. We do it for pooling and capital efficiency, not for tax purposes. A simple example: imagine Chubb's balance sheet can take $10 million net per risk on a class of business, but in all the countries we operate in, we can't take that same retention independently because of limited local capital. If I took that retention in each jurisdiction and had a loss in one country, I'd have to dividend in one place and contribute capital in another — the most inefficient way to run a business. Pooling of risk and internal reinsurance allows us to leverage a global balance sheet for the benefit of local operations, providing stability, spread of risk and an amount of capital in one place. That's the fundamental reason Chubb uses internal reinsurance. Thanks for the question, Tracy.

Our next question will come from Brian Meredith with UBS.

Thanks. Evan, regarding the $5 billion share repurchase authorization you announced, does that indicate anything about your appetite for inorganic growth opportunities here? In other words, has your appetite for acquisitions changed?

No. Nothing has changed. We're disciplined. Everything I've ever said about M&A still holds: it has to advance what we're doing strategically and be good for shareholders in terms of value creation. Our earnings generation power and current capital position and surplus capital together led us to the decision that the right and prudent thing to do was to provide capital flexibility for risk and growth, organic and inorganic, and return excess to shareholders. That's all we're doing.

Great. Thanks. And, Evan, another question: you're a meaningful player in the cyber insurance marketplace. Can you give us your thoughts on that marketplace now? I know there were issues with losses last year, but I understand pricing is pretty good right now. Your view?

The pricing environment for cyber is pretty good, but that's not the whole story. Cyber has a catastrophe profile and the potential for systemic loss that has no time or geographic boundary. As the world becomes more digitally interconnected, concentrations of exposure are growing. We see both nation-state and non-state malicious actors — some to disrupt society, others to make money. You get frequency on one hand and systemic on the other. Chubb underwrites to address this and is beginning to respond, but the industry needs to think about public policy as well. For example, with ransomware, while I don't think the government should outright outlaw ransom payments, current laws — such as anti-money laundering — mean payments should require permission. We should remove incentives for ransomware, which is mostly about money. Additionally, private and public sectors should work together on information sharing and understanding systemic aggregations of risk. Cyber is more than about achieving rate today.

We'll now hear from Meyer Shields with KBW.

Good morning. Two quick questions. Evan, you talked about the general expense ratio, but could you give a little color on what drove the actual decrease in administrative expenses in North American commercial year-over-year?

Meyer, why don't we take that one offline with you and go through the accounting of it. There was nothing substantial.

Okay. In the same tone, other income or expenses in North America Commercial was negative 14%. Is there anything unusual building up to that number?

No, nothing unusual. It's just quarter-to-quarter noise.

Okay, perfect. Thank you.

You're welcome.

And with no additional questions in the queue, I will turn the call back over to your host for any additional or closing remarks.

Thanks, everyone, for your time and attention this morning. We look forward to speaking with you again next quarter. Have a great day.

Ladies and gentlemen, this will conclude your conference for today. Thank you for your participation, and you may now disconnect.