01—Abstract
Summary
Summary of the 10-K filed February 27, 2020. Cited figures are marked; the original filing is the authoritative source.
Chubb Limited (NYSE: CB) closed 2019 with a strong year: net income rose 12.4% to $4.45 billiona, diluted EPS reached $9.71 (up from $8.49), and shareholders' equity grew to $55.3 billion, with total assets of $176.9 billion.
Net premiums written grew 5.5% to $32.3 billionb (7.0% on a constant-dollar basis), led by North America Commercial P&C, Overseas General and Life. The P&C combined ratio held flat at 90.6%, aided by $792 million of favorable prior period reserve development and catastrophe losses that fell to $1.19 billion from $1.63 billion in 2018. Operating cash flow increased to $6.3 billion, and the company returned capital through $1.36 billion of dividends and $1.53 billion of share repurchases.
The main offsets were a sharp deterioration in North America Agricultural Insurance, whose combined ratio rose to 95.1% from 75.5% because of preventive planting claims and poor crop yields, and a $116 millionc adverse development charge tied to legacy asbestos and environmental (A&E) exposures in run-off. Investors should also note the company's ongoing expansion in China through its Huatai Group stake, which it plans to raise toward majority ownership with consolidation expected by the end of 2021.
Brexit, the OECD tax proposals, and the long-tail nature of its reserves (about $48.5 billiond net) remain key risks, and the company flagged that $15.4 billion of reinsurance recoverables carry counterparty exposure. Overall, the filing portrays a large, diversified global insurer with solid underwriting discipline in its core commercial and personal lines, a strong balance sheet (debt-to-capitalization of 21.1%), and a capital return program that remains active into 2020.
02—Key points
Key Highlights
- Net income of $4,454 million, up 12.4% from $3,962 million in 2018; diluted EPS of $9.71 versus $8.49.
- Net premiums written of $32.3 billion, up 5.5% (7.0% constant-dollar), with growth across most segments and lines.
- P&C combined ratio of 90.6%, unchanged year over year, with catastrophe losses down to $1.19 billion from $1.63 billion.
- Favorable prior period development of $792 million pre-tax, partly offset by $116 million of adverse A&E development in run-off.
- North America Agricultural Insurance combined ratio deteriorated to 95.1% from 75.5%, cutting underwriting income by $296 million.
- Operating cash flow of $6.3 billion, and $2.9 billion returned to shareholders through dividends ($2.98 per share) and buybacks ($1.53 billion in 2019).
- Book value per share rose to $122.42 from $109.56, with shareholders' equity of $55.3 billion; pending Huatai Group stake increase toward majority ownership.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 27, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $34.19B$32.72B | +4.5% |
| Interest Expense | $552.00M$641.00M | −13.9% |
| Net Income | $4.45B$3.96B | +12.4% |
| EPS (Basic) | $9.77$8.55 | +14.3% |
| EPS (Diluted) | $9.71$8.49 | +14.4% |
| Shares Outstanding (Basic) | 455.91M463.63M | −1.7% |
| Shares Outstanding (Diluted) | 458.91M466.80M | −1.7% |
05—Questions
Frequently Asked Questions
How profitable was Chubb's underwriting in 2019, and did catastrophes affect results?
The P&C combined ratio was 90.6% in both 2019 and 2018, meaning underwriting profit was earned. Catastrophe losses were lower at $1,187 million pre-tax (4.1 points of the combined ratio), compared with $1,626 million (5.9 points) in 2018. Excluding catastrophes and prior period development, the current accident year combined ratio worsened to 89.2% from 88.0%, largely due to the agricultural segment.
What drove the deterioration in the North America Agricultural Insurance segment?
The segment's combined ratio jumped to 95.1% from 75.5% after management revised its 2019 crop-year margin estimate downward. The revision reflected preventive planting claims caused by wet weather and crop yield shortfalls from poor growing conditions. Underwriting income in the segment fell 77% to $89 million.
How exposed is Chubb to legacy asbestos and environmental (A&E) liabilities?
A&E liabilities are principally run-off exposures from acquired businesses (Westchester Specialty, CIGNA P&C, and Chubb Corp), and they are managed through the Corporate segment. In 2019 these produced $116 million of adverse development. Gross A&E liabilities were about 3.2% of gross loss reserves, and the company also noted that Century Indemnity, an inactive run-off subsidiary, carries about $1.5 billion of reinsurance balances owed to active Chubb companies, creating some credit risk if Century's reserves deteriorate.
What is the status of Chubb's Huatai Group investment and what does it mean for future earnings?
Chubb raised its interest in Huatai Group from 20% to 30.9% during 2019 and has agreed to buy an additional 22.4% (15.3% and 7.1% tranches) for about $1.6 billion, subject to Chinese regulatory approval. Upon completing the 7.1% purchase, expected by the end of 2021, Chubb would hold 53.3% and begin consolidating Huatai, replacing equity-method income with consolidated results. Chubb already had $1.55 billion of collateralized deposits outstanding to the sellers as of January 2020.
How is Chubb positioned from a capital and liquidity standpoint?
Shareholders' equity was $55.3 billion and the ratio of financial debt to total capitalization was 21.1%, well below the 35% covenant limit in its credit facility. The company had $1.3 billion of remaining share repurchase authorization as of February 26, 2020, and it had $567 million of letter of credit usage under its $1.0 billion facility. Management said it did not expect Brexit or the OECD tax proposals to materially affect its capital management strategy, though both were flagged as risks.
06—Continue