01—Abstract
Summary
Summary of the 10-K filed February 28, 2017. Cited figures are marked; the original filing is the authoritative source.
Chubb Limited (NYSE: CB) closed its transformational 2016 acquisition of The Chubb Corporation on January 14, 2016, making it one of the largest P&C insurers globally.
Total assets reached $160 billiona and shareholders' equity $48 billion at year-end 2016, versus $102 billion and $29 billion a year earlier, reflecting the roughly $29.8 billion total purchase consideration. Net premiums earned rose 67% to $28.7 billion, and net income climbed 46% to $4.1 billion, with diluted EPS of $8.87 versus $8.62 in 2015. Growth was mostly acquisition-driven: on an 'As If' constant-dollar basis, net premiums written fell about 2.8%, reflecting merger-related underwriting actions and reinsurance purchases that cut premiums by roughly $650 million.
Underlying profitability remained solid but mixed. The combined ratio was 88.3% (P&C combined ratio 88.7% excluding a one-time $113 millionb pension curtailment benefit), compared with 87.3% in 2015. Catastrophe losses rose to $1.06 billion (4.0 points), while favorable prior-period reserve development of $1.135 billion (4.3 points) helped offset them.
Investors should note that the 2016 results included $492 millionc of Chubb integration expenses, and that management targets $800 million of annualized integration savings by the end of 2018. Book value per share grew over 15% to $103.60, and the company repurchased no shares in 2016 but authorized a new $1.0 billion program through 2017. Balance-sheet leverage increased materially: long-term debt rose to $12.6 billion from $9.4 billion, and financial debt to total capitalization was 21.3%.
Amortization of purchased intangibles is expected to rise to $251 milliond in 2017 from $19 million in 2016, and the fair-value adjustment on acquired invested assets will reduce net investment income by about $360 million in 2017. The company also flagged risks including reserve adequacy for long-tail casualty and asbestos/environmental exposures, UK withdrawal from the EU, Swiss withholding tax, and reliance on a limited number of brokers.
02—Key points
Key Highlights
- Transformational scale: Completed the $29.8 billion acquisition of The Chubb Corporation on January 14, 2016, lifting total assets to $159.8 billion and making Chubb a global P&C leader; net premiums earned rose 67% to $28.7 billion.
- Earnings growth: Net income increased 46% to $4.135 billion and diluted EPS rose to $8.87 from $8.62, though the figures are inflated by acquisition-driven scale and purchase accounting effects.
- Underwriting performance: Combined ratio of 88.3% (P&C 88.7% excluding a $113 million pension curtailment benefit) versus 87.3% in 2015, with catastrophe losses of $1.06 billion (4.0 points) offset by $1.135 billion of favorable prior-period development.
- Integration progress: $492 million of integration expenses in 2016; annualized savings target of $800 million by end-2018 is reported as on track, with $580 million realized in 2016.
- Capital and leverage: Book value per share of $103.60 (up over 15%), but long-term debt rose to $12.6 billion from $9.4 billion, and financial debt to capitalization reached 21.3%; $1.0 billion share repurchase authorized through 2017 with $945 million remaining at February 24, 2017.
- Underlying premium softness: On an 'As If' constant-dollar basis, net premiums written declined about 2.8%, with North America Personal lines down 10.6% and Global Reinsurance down 17.5%, as merger-related underwriting actions and competitive pricing weighed on growth.
- Reserve and risk watch items: $60.5 billion gross unpaid losses (about 82% casualty-related), reserve sensitivity to long-tail assumptions, A&E exposures, and 2017 headwinds including $251 million of intangible amortization and roughly $360 million of lower fair-value-adjusted investment income.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 28, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $31.47B$18.99B | +65.7% |
| Interest Expense | $605.00M$300.00M | +101.7% |
| Net Income | $4.13B$2.83B | +45.9% |
| EPS (Basic) | $8.94$8.71 | +2.6% |
| EPS (Diluted) | $8.87$8.62 | +2.9% |
| Shares Outstanding (Basic) | 462.52M325.59M | +42.1% |
| Shares Outstanding (Diluted) | 465.95M328.84M | +41.7% |
05—Questions
Frequently Asked Questions
Why did Chubb's reported revenue and net income jump so sharply in 2016?
The jump is primarily due to the Chubb Corporation acquisition, which closed January 14, 2016 and added about $11.8 billion of net premiums earned and roughly $1.2 billion of net investment income. On a constant-dollar 'As If' basis, underlying net premiums earned were roughly flat to down slightly, so investors should separate acquisition scale from organic performance.
How strong is Chubb's underwriting profitability and what drove 2016 results?
The 2016 combined ratio was 88.3%, slightly worse than 87.3% in 2015 on a reported basis. Catastrophe losses of $1.06 billion (4.0 points) were well above 2015's $322 million, but favorable prior-period reserve releases of $1.135 billion (4.3 points) and integration-driven expense savings partially offset this. Management cites soft global P&C pricing as a continuing pressure.
What are the main balance-sheet changes investors should monitor?
Long-term debt increased to $12.6 billion from $9.4 billion, mainly from $5.3 billion of senior notes issued in November 2015 and $3.3 billion of assumed Chubb Corp debt. Shareholders' equity rose to $48.3 billion, and the company's debt-to-capitalization ratio of 21.3% remains below its 35% covenant. Repurchase agreements totaled $1.4 billion and $500 million of 5.7% notes matured in February 2017.
What integration savings and near-term earnings headwinds should investors expect in 2017?
Management expects $800 million of annualized integration savings by end-2018, with $760 million realized in 2017. Headwinds include amortization of purchased intangibles rising to $251 million from $19 million, and a roughly $360 million reduction in net investment income from amortizing the acquired fair-value adjustment. A $100 million retiree healthcare and pension harmonization benefit partly offsets these items.
What are the key risks highlighted in the filing?
Key risks include reserve adequacy, since losses are about 82% casualty-related and A&E reserves are sensitive to legal changes; catastrophe exposure, with a 1-in-100 modeled U.S. hurricane net PML of $3.07 billion; reinsurance counterparty credit risk, with $13.8 billion of recoverables; UK withdrawal from the EU affecting EU passporting; and Swiss tax and corporate governance considerations for a Swiss-domiciled holding company.
06—Continue