Chubb Limited — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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. [Operator Instructions] I would now like to turn the call over to Karen Beyer, Senior Vice President, Investor Relations. Please go ahead.
Good morning, everyone, and 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 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.
Good morning. We had an excellent start to the year. Core operating income was up double digit, driven by all 3 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 2 onetime items that partially offset each other. Adjusting for these, they were up 18.6% and nearly 21%, $5.33.
Thank you, Evan. As you all just heard, we continue to build on the momentum of our record 2023 year with strong growth in 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 in cash and invested assets of $143 billion, each topping last quarter's all-time highs. Adjusted operating cash flow was $3.6 billion. There were 2 onetime 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 2 smaller subsidiaries since last quarter. We don't expect additional deferred tax gains related to this law going forward.
Thank you. At this point, we're happy to take the questions.
[Operator Instructions]
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? And maybe just unpack that a little bit more would be helpful.
Yes. Look, we recognized over $200 million of reserve releases, so to give perspective. And that included adverse development of $95 million in North America commercial lines long tail. It was not concentrated in any one period, it was spread out from '16 forward. It was predominantly large account excess casualty, auto related in areas we've discussed. Trucking, logistics companies, companies with large commercial fleets and it's the business we've been addressing in terms of rate and underwriting actions and in that case, think retentions.
Got it. That's helpful. And then I did notice that the commercial casualty net premium written growth accelerated during the quarter and you mentioned -- you also mentioned the rate increases accelerated a little bit in the quarter as well in commercial casualty. Could you just talk about how you're 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?
Well, the growth is coming. It wasn't a little bit. It was a step change in the rate we got exceeded loss costs, 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.
Your next question comes from the line of Mike Zaremski with BMO Capital Markets.
On the topic of social inflation, I think, I'm assuming when we think about the social inflation that the main way to tackle it is risk selection and pricing, et cetera. 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. And 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...
Yes. First of all, our loss picks reflect the reality of the environment, 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 tort reform 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.
Great. Switching gears, maybe a quicker question on Personal Lines. If I look at kind of what Chubb has said about kind of loss cost inflation in personal lines and appreciating you have a different book than I guess the average of your peers. But you got -- you all have been talking about kind of close to double digit or double-digit loss cost inflation for many years now. It feels like that's been -- some of your peers have caught up to you in terms of, I think, they were underestimating it. But just curious if you can provide any context. Is the loss cost inflation more so coming from weather inflation? Or is it just as much coming from wage inflation? Or just any context unpacking that kind of 10%, 10.5% loss inflation?
Yes, it comes from 3 sources -- or a couple of sources. It comes from frequency of loss and from various perils. It comes from -- and so there you could think weather-related. You can also think water-related. And so the infrastructure impact to housing stock itself. It comes from wage inflation, and it comes from materials, which -- remember, we ensure not the average homeowner, we're ensuring those who are more affluent. And our product is a richer product in terms of how it responds to loss and the position it places you back in following loss. We try to duplicate exactly what you had before the loss, not sort of like it, but we duplicate it.
The next question comes from the line of Gregory Peters with Raymond James.
When I was looking through your results, I was particularly struck by the growth in the reinsurance lines, seems to have accelerated. And I'm just curious if there is a change in your perspective regarding leading into those market conditions.
Yes. Greg, keep in mind, percentages are a funny thing. It's not a big business. It's not a big book of business. We're not a large reinsurer. So the percentage growth, which is very good to see, is off of a relatively small base. So in dollar terms, it's nice. Thank you very much to all our Global Re colleagues, but it's not a large amount. We allocated given the pricing environment and given structure and given underlying pricing and structure of cedent's portfolios. We allocated more -- incrementally, as I said in the opening, more CAT capacity with 2 Global Re, which means they're writing a bit more CAT excess and a bit more property proportional and excess per risk. And it's across the globe where they see favorable conditions. That's predominantly with the CAT results.
Okay. Fair enough. I know -- I got to preview this question knowing that I'm probably not going to get a great answer, but I feel like it's appropriate to ask...
You can ask anyway, and you'll get a lousy answer, go ahead.
Well, the topic is M&A. I mean, you featured it. You talked about the 1 to 2 points of drag you get on holding excess capital. You mentioned that in your shareholder letter. You're generating great results. I feel like this is a time where we could see you get more active in the market. But maybe you can just talk to us broadly about what you're seeing in the market? Is there a pipeline out there? Or is it -- is there a lot of opportunities? Or give us some perspective if possible.
Greg, I'm at rest. And the results are terrific. We have excess capital for both risk and opportunity. It's earning -- putting money to work at over 6% right now. If you put the capital against our invested asset, it requires certainly a damn good ROE. The cash that we hold is accretive to shareholder returns. And look, we're a global company with a lot of global opportunity and our eyes are always open. But as I said, I'm at rest. Don't hold your breath.
Your next question comes from the line of Ryan Tunis with Autonomous.
I guess first question, just on financial lines. I think you said that it's quite frankly, dumb. Now that's obviously like a pretty broad set of various lines within financials. I think I heard you say that you're shrinking in mid-market, too. And my perception is that, it was a little bit more disciplined than some of the major accounts. So just curious if you could just take us within financial lines, whether it's account size or D&O excess whatever, like where are folks acting more or less irrationally?
Yes, look, the way to think about this -- don't just think, it behaves differently to a degree in major account than it does in middle market in the cohorts that show up where market competition is irrational. I'm not going to unpack each one of those. But what I'll break down for you is this. You have publicly traded D&O. And whether it's in middle market or it's in large account, there is dumb behavior depending on the cohort. I'm not going to unpack which one of them it is that much transparency, but you see it in large accounts and you see it in publicly traded deal. There is not-for-profit D&O. We write it in both major accounts and we write it in middle market.
Got you. And a follow-up, just shifting gears. Just curious about priorities in U.S. personal lines. It kind of felt like you had the stuff in California a few years ago that in the past few years, it's sort of been more of a business where you've been focused more on risk selection and growth for good reason. But I mean it looks like it's more than $1 billion of underwriting earnings today. It looks a little underwritten. Just maybe if you could update us on -- yes, like what are the key sets of priorities in terms of managing that business right now?
Well, key sense of priorities, good question. On one hand, we can continue pushing the envelope and we're impatient about it. On the -- how we define the services and coverage is that a customer in our space are to expect from a great carrier. The kind of resiliency services and engineering services, the kinds of technology that we can use to interface with our customers, give them a better experience. How we can use technology and claims and manage a better and more seamless outcome for them. All of that is wrapped up in how we think about that part of the business.
Your next question comes from the line of Brian Meredith with UBS.
Evan, just curious, and I'm sure there's some moving parts here, but can you help me kind of square in North America commercial. I'm looking at gross written premiums up a little below 2% and then nets up 9.5%. And have seen your ceded premiums kind of continue to drop the last couple of quarters, is there something going on there? Is it technical? Are you buying less reinsurance? What's going on?
Yes. I'm going to let John Lupica give this -- it's really coming -- it came this quarter from 2 things. And that LPT, I forget had on an impact on and it distorted the gross in that.
Yes, Brian, as Evan had noted, we had in that large structured transaction this quarter that produced net written premium with no gross written premium. In addition, we had exited 2 large MGAs or fronted programs that historically pursed a lot of gross with very little net. When you adjust for those 3 items, the gross and net are virtually identical.
That's really...
That's the same answer on the net to gross ratio.
It's really transactional, not fundamental.
Got you. No change in reinsurance by now, that makes sense.
I just see...
Okay. Excellent. And then, Evan, I may have missed this, but you provided a lot of great kind of pricing rate and trend exposure commentary. But did you give us what the kind of total North America commercial pricing, call it, rate and trend was? And if not, could we get that, you typically provided it?
I did give it to you. Are you asking me to go back and do it again? Do you actually want me to look -- I'll give it to you if you want me to take my notes and do it [indiscernible]. Listen, North America, I said pricing increased 12.8% including in P&C, including rate of 9.4% and exposure change of 3.1%.
Got you. And trend?
Loss cost. So we're trending short tail at 6.8% and long tail -- short -- sorry, overall loss cost 6.8%; short-tail, 5.3%; long tail, 7.6%. Yes, this is full service call.
The next question comes from the line of Bob Huang with Morgan Stanley.
Hopefully, I'm not asking anyone to repeat anything. But just a quick question on the -- on your annual shareholder letter, right? You talked about the willingness to pull back on unprofitable lines a demonstration of underwriting discipline, which is kind of really curious as to how to square away that line of thinking with your first quarter results because it seems like the first quarter results continue to demonstrate a lot of strength, a lot of growth. Is the financial line somewhere you're looking at as a...
Hey, you're not listening. Not listening. Did you see that -- so I'm going to interrupt you. Are you really -- financial line, [ frank, ] number one. Number two, I said right upfront in major accounts in certain areas of casualty, where we're taking action. And we saw it last quarter, saw it this quarter and it impacts growth. And then there are other areas growing. Those are 2 that are visible.
No, that's...
By the way, look at our 20-year track record over any period of time, where we have shrunk our business, cut businesses in half over periods of time when we couldn't earn an underwriting profit and then triple the math to that. Do you have another question for me?
No, I think that's very helpful. Yes, it helps me contextualize things.
Your next question comes from the line of Robert Cox with Goldman Sachs.
A high-level question. So Chubb produced an 86% combined ratio, which has continued to improve and net investment income contributions to ROEs have gone up. I know there's more bifurcation than ever with respect to pricing adequacy by line of business. But I'm curious when do you think the market will sort of dictate the matching of rate and loss trend versus the excess margin you're generating now?
I'm not sure I understand your question. Sorry.
So I'm curious -- yes, I'm just curious when you think basically rate and loss trend will be at similar levels versus rate exceeding loss trend.
I have no idea. It depends on when the market -- and it will never really happen. But I'm seeing you're asking in a very theoretical way. There's something neat in what is a market, so it's always inherently messy. But when typically, when rate and price are adequate or in excess of what's required to earn a reasonable return then the market in time notices and responds and becomes more competitive. And at that time, rate and price stay steady with loss cost. And then the market begins to go soft. And when that part of the cycle happens, it means the rate on price are less than loss cost. And that is not terrible until rate and price versus loss cost is not enough to achieve a reasonable return on capital.
And maybe just a follow up on that. Curious if you think that with data and analytics, these cycles are becoming less volatile over time.
In some areas, yes. Some areas, absolutely not. Because the loss cost environment, which data and analytics cannot [Technical Difficulty] is not less volatile. When the loss cost environment is more specific i.e., loss cost inflation, then with data and analytics in steady periods like that, then the amplitude of cycles is different.
Your next question comes from the line of Jimmy Bhullar with JPMorgan.
I had a question on just your comments on dumb behavior and financial lines. I was wondering if you could talk about who it is that you're seeing being undisciplined. Is it companies that are established, that are large peers in the market? Or smaller competitors, new money that's come in, just some color on who's driving because it's been going on for a while, so.
Next question, Jimmy.
Not going to comment? All right.
No.
So -- and then on cash, there's been a lot of talk about post -- or pre-COVID, you're starting to emerge negatively and a few companies have seen post-COVID adverse development as well. So any comments you can make on your view of casualty reserves overall for the industry and for your own book?
We did expect a change of loss cost pattern frequency in particular. And we have talked about it during COVID that we didn't take the head fakes that loss costs during shutdown, obviously, courts are closed, frequency plummets and as does severity. And at that time, we maintained our view. We saw right through it and said, trends aren't changing, so we continue to trend. It's just a question of reporting on what period does it get reported in? So we expected that the trend doesn't change, but the reporting pattern changes. So therefore, if you really want to look at it in a correct way, you'd say, it went down during COVID to reaccelerate after COVID and then the expected cohorts of claims in aggregate still appear, and that's what we've seen. The pattern post COVID is not out of line with our expectations in our pricing and loss picks.
Okay. And just for Peter, what do you expect your tax -- do you expect a change in your tax rate next year given what's the changes in Bermuda? And to the extent you can quantify the expected tax rate.
For next year and after, it's just too early to say. There's too many moving parts in terms of how the different countries are going to adopt and we're looking at it closely, but it's just too early to say.
Your next question comes from the line of Cave Montazeri with Deutsche Bank.
There was nothing called out this quarter with regards to the Baltimore bridge losses? I appreciate it's early days, but is there any color worth sharing with us on this topic?
Our policy is, we do not report on individual claims, but I've noticed a lot of commentary on this. Look, it's a tragedy that an accident like this occurs, and it's done a lot of damage. However, when it comes to Chubb, it's another large loss. There is nothing -- yes, of course, we have exposure, but the exposure is within what we would contemplate and there's nothing outsize to us. And so another large unfortunate claim, that's all there is to it.
Your next question comes from the line of Elyse Greenspan with Wells Fargo.
My first question, Evan, I was hoping you could just provide some more color on what drove the sequential acceleration in exposure growth that you pointed to within Property Casualty as well as within workers' comp?
Well, what I said, Elyse, thank you, is the premium growth because we don't really disclose exposure, but the premium growth came from, a substantial portion of it came from rate and price, which were very healthy across the portfolio. Property grew nicely. Property was our biggest growth area. Casualty grew, particularly in our middle market area and E&S. And rate and price had a substantial contribution to the growth, though we also grew new business where pricing versus loss cost is healthy to us.
And then my follow-up, you highlighted some planned reunderwriting within North America commercial. I believe you had also told us about that last quarter, and it sounds like we'll have that work through for the next couple of quarters. So is it right way to think about, I guess, the growth in North America commercial ex the LPT and just the reunderwriting as kind of the baseline of growth for the year. I know you don't like to guide, but you seem pretty positive about just casualty pricing and things like that, just trying to pull it all together.
I'm not going to help you with your worksheet, I'm sorry, Elyse. I don't guide. We don't guide growth for the year. What we did tell you is excluding the LPT, excluding the unusual size of the LPT because we have LPTs virtually every quarter. But excluding the unusual size of it, and what we view as the unusual, the onetime underwriting action in large account that I described, the net of that, we gave you a growth rate, and we said that's the underlying growth rate for that quarter. That is not -- we didn't say that's a run rate for the year. This is a diversified commercial and personal property casualty book of business. And you're hardly -- we don't give guidance on growth for the year.
I will now turn the call back over to Karen Beyer for closing remarks. Please go ahead.
Thanks, everyone, for joining us today. If you have any follow-up questions, we'll be around to take your call. Enjoy the day. Thank you.
Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect your lines.