Chubb Limited

Good day and welcome to the Chubb Limited First Quarter 2020 Earnings Conference Call. Today's call is being recorded, and if you would like to ask a question, please press star 1. For opening remarks and introductions, I would like to turn the call over to Karen Beyer, Senior Vice President, Investor Relations. Please go ahead.

Thank you, and welcome to our March 31, 2020 First Quarter Earnings Conference Call. Our report today will contain forward-looking statements. including statements relating to company performance and the impact of the COVID-19 pandemic and its economic and other effects, pricing and business mix, 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.shop.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 Phil Bancroft, 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. We're in an unprecedented moment of historic proportions. None of us living today has experienced an event of this nature or magnitude. It is at once surreal and catastrophic. As a country, we will manage through and heal both our society and economy, and it will take time. The decisive heroic actions taken by our health professionals in combination with the support and leadership of our federal and state governments and our vast private sector and civil society are a powerful force to combat the virus, stabilize our financial markets, support our economy, which remains in a virtual coma, and set the stage for recovery. The most important thing we can do now to achieve stability and health while reopening the economy is to improve our test, digital trace, and isolate capability. The insurance industry plays an important role in our economic foundation. During this health and economic crisis, we are shouldering our responsibilities and carrying our share of the financial load. This event impacts both the liability and asset side of our industry balance sheet. With that, I'm going to divide my remarks into two parts. First, our quarterly results, which were very good. Then I'll provide some perspective on the current environment and how we are operating. To begin, as you saw from the numbers, we reported core operating income in the first quarter of $2.68 per share. The quarter was marked by very strong premium revenue growth globally and excellent underwriting results on both a published and current accident year basis. The calendar year PNC combined ratio for the quarter was 89.1 versus 89.2 prior year, with PNC underwriting income up over 9.5% in constant dollar. On a current accident year basis, excluding gaps, The combined ratio was 87.5, a full point improvement over prior year, with current accident year underwriting income up over 18%. The major difference between calendar year and current accident year underwriting income growth was a reduced benefit from the runoff of the 19 crop insurance year. You recall 19 was a difficult year for agriculture, while 18 was an excellent one. Book intangible book value per share declined 5.5% and 7.5% respectively for the quarter, and Phil will have more to say about investment income, book value, cats, and prior period development. Turning to growth in the rate environment, PNC net premiums grew 8.9% on a published or 9.3% in constant dollars. The commercial PNC pricing environment continued to firm across the globe, We secured greater market share as we achieved improved rate to exposure in more lines of business, and this necessary firming continued into April. Overall rates increased in North America commercial, which includes both major accounts and specialty, as well as middle market and small commercial, by 10.5%. New business was up 27.5% per quarter. and renewal retention was 95% on a premium basis. Our North America commercial P&C business had a strong quarter with net premiums growth of over 10%. In major accounts and specialty commercial, excluding ag, premiums grew about 9.5%, with major account retail growth of 7% and ENS wholesale growth of over 19%. In terms of rate increases, rates for major accounts were up 13%, and in Westchester and Bermuda, they were up 16% and 42% respectively. Turning to our U.S. middle market and small commercial division, premiums grew 11% overall, with middle market up 9% and small commercial up over 40%. Renewal retention in our middle market business was 94.5%. Middle market pricing was up over 6.5%, and excluding workers' comp, it was up over 7%. In our North America personal lines business, net premiums written in the quarter were up 4.8%, and retention remained very strong at 98% on a premium basis. In our international general insurance operations, growth remained strong with net premiums written up 10% in constant dollar, And FX then had a negative impact of about 1.3 points. Net premiums for London wholesale business grew over 27%, while retail division was up over 8.5%. Growth in our international retail business was led by Latin America, which was up 13. Continental Europe and the UK had growth of 9.7 and 9.1, respectively. and overall rates in our international retail business were up 8% and 18% in our London wholesale. Our international life insurance business had a strong quarter, with net written premiums up nearly 30% in constant dollar. John Keogh, John Lupica, Paul Crump, and Juan Luis Ortega can provide further color on the quarter, including current market conditions and pricing trends. But past ancient history, and from another time. What's important is to recognize the underlying strength and momentum of our company as we entered this moment. Turning to the current environment, the COVID-19 pandemic and consequent economic crisis will, of course, impact Trump. Our growth momentum, particularly in our commercial PNC business globally, continued into April, and we continue to experience improved rate of exposure. As we go forward, offsetting that will be a meaningful impact to growth from the health and economic crisis, as exposures in important areas shrink for a time, with the impact varying by country. This includes consumer-related lines. For example, travel insurance, A&H discretionary purchases, automobile insurance, Commercial lines where exposures are reduced while businesses are closed or as they reopen and are diminished or simply go out of business. Small commercial businesses in aggregate will be more impacted than medium, which will be more impacted than large companies, but it will vary substantially by industry. For credit-related products such as trade credit, surety, and other lines such as workers' comp, premium revenue will be impacted by reduced exposures. As you know, we do not give forward guidance, and in this case, the degree of revenue impact is simply unknowable. On the other hand, as I said, we are and will continue to benefit in terms of growth from improved technical conditions as many insurance companies take actions to reduce exposures or improve their rate to exposure to correct for inadequate underwriting. This will be an earnings event for Chubb. It will not threaten our balance sheet. Operating earnings will be impacted predominantly on the liability side of the balance sheet from increased insurance claims, though the asset side will likely be impacted as well from increased asset impairments. In addition, as I just mentioned, Earnings will be impacted by a reduction in premium revenues for a period of time. In sum, from what we know now, this will be a manageable cat-like event. However, from an exposure we really don't discreetly price for, so its impact is additive to our normal projected loss exposure. In a sense, it's like what terrorism exposure was before 9-11. We have a very strong balance sheet. Our capital and liquidity position are robust, and CHEV will continue to operate at a high level and emerge strong or stronger. Again, insurance has an important role to play in society and in the economy, and we are shouldering our share of responsibility while doing our job to support our employees, our customers, and our business partners. We have been quite clear about our priorities, and it shows in our response. First, to the extent possible, we have taken care of our 33,000 people around the world and endeavored to keep them safe through aggressive work-from-home protocols. We have provided them a degree of peace of mind, knowing their jobs and benefits are secure during the health crisis with a no-layoff pledge. Second, we have remained consistent and how we take care of our customers and distribution partners, doing what we can to support their needs. In fact, we are operating around the globe as a normal company during abnormal times. I am so proud and absolutely grateful for how my colleagues are performing every day as a group, from the smallest to the largest unit, from the biggest to the smallest country, how each is focused on delivering on our mission from internal operations to underwriting, sales, claims, marketing, and finance. It's really quite remarkable. We're extending payment terms to commercial customers, recognizing their cash flow pressures. We're providing a premium credit for auto policyholders in the U.S., recognizing their reduced exposures. We're supporting our U.S. small business clients with premium reductions for their reduced exposures. And we're supporting our small commercial clients by providing healthcare workers and first responders with gift cards redeemable at our customers' businesses. Lastly, as a corporate citizen, we're contributing to the immediate emergency response today while supporting the future tomorrow. Our commitment of 10 million to pandemic relief efforts globally is being directed to a range of organizations. that provide essential resources immediately in areas facing the most acute need. This includes providing emergency medical equipment and supplies to healthcare facilities and helping community food banks support those who are hungry and vulnerable, including so many who've become unemployed as a result of the pandemic. This is only the first chapter. As we move into the recovery phase, the Chubb Foundation will commit substantial additional funds. In sum, our company is very strong. Our balance sheet is in good shape, and we are operating well. While I see pressure on revenue and earnings in the short term, I see much opportunity for us in the future. Given all of our capabilities, I am confident Chubb will weather these difficult times and emerge stronger from this challenge. With that, I'll turn the call over to Phil, and then we'll be back to take your questions. Thank you, Evan. I want to begin with a few words on our financial position, which remains exceptionally strong. Our balance sheet includes a AA-rated investment portfolio with a relatively short duration and a conservative approach to our lost reserves. We have over $67 billion in total capital which, as we enter this period, is very strong, stemming from superior operating performance. Our access to liquidity on a global basis is excellent and unimpaired. Our operating cash flow remains quite strong and was $1.7 billion for the quarter. Net realized and unrealized losses for the quarter of $3.7 billion after tax included $2.2 billion from the investment portfolio, which resulted primarily from widening credit spreads in the investment rate and high-yield bond portfolio through March 31st. Even after considering the valuation adjustments noted, our portfolio remained in an overall unrealized gain position through the quarter end. Since that time, credit markets have recovered and liquidity has improved as a result of the extraordinary actions taken by the Fed in response to the COVID-19 pandemic. The portfolio mark has improved by approximately 1.7 billion pre-tax through this Monday. We also had a mark to market loss on our variable annuity reinsurance portfolio of 560 million. This was primarily due to negative equity returns and an increase in implied volatility. Again, this is purely a mark to market adjustment required because the transactions are deemed to be derivatives for accounting purposes, and it does not indicate a reduction in cash flows from our reinsurance treaties for the quarter. The results are in line with our expectations given these market conditions. Finally, realized and unrealized losses included $896 million after-tax losses from FX related to our net asset exposure to foreign currencies. These represent a point-in-time mark-to-market valuation adjustment and do not affect the capital position of our international operating units. As we noted in the press release, the marks are market price-driven based on the last day of the quarter and a moment in time. We believe they are largely transient and will retreat back to book value over time. Adjusted net investment income for the quarter was $893 million pre-tax and was within our guidance range. During March, we engaged on the margin in several tactical adjustments to the portfolio. We purchased a modest amount of high-quality equities and modestly increased our exposure to investment-grade corporate bonds. While there are a number of factors that impact the variability in investment income for we expect our quarterly run rate to remain in the range of 885 to 895 million. Net catastrophe losses for the quarter were 237 million pre-tax, or 199 million after-tax, including 224 million from global weather-related events and 13 million so far from COVID-19, which has been classified as an ongoing catastrophe. While there was no significant impact on core operating income in the first quarter related to COVID-19, the company anticipates that this global catastrophe event will have an impact on revenue as well as net and core operating income in the second quarter and potentially future quarters as a result of an increase in insurance claims due to both the pandemic and recessionary economic conditions. On a constant dollar basis, net loss reserves increased $363 million in the quarter and include the impact of catastrophe loss payments, favorable prior period development, and crop insurance payments in the quarter. On a reported basis, the paid-to-incurred ratio was 95%. After adjusting to the items noted above, the paid-to-incurred ratio was 88%. We had favorable prior period development in the quarter of 118 million pre-tax or 94 million after-tax. The favorable development is split approximately 28% in long-tail lines, principally from accident years 2016 and prior, and 72% in short-tail lines. Last year's favorable development of 204 million included 61 million of positive development from our agriculture segment resulting from strongly unexpected results from the 2018 crop year. As we said at year end, based on a difficult 2019 crop year, this level of development would not occur in the first quarter of 2020. Among the capital related actions in the quarter, we returned 666 million to shareholders, including $340 million in dividends and $326 million in share repurchases at an average price of $143.67 per share. Given the current economic environment and to preserve capital for both risk and opportunity, the company has suspended further share repurchases indefinitely. Our annualized core operating ROE in the quarter was 9.4%, and our core operating return on tangible equity was 15.1%. Our core operating effective tax rate for the quarter was 16.3%. We continue to expect our annual core operating effective tax rate to be in the range of 14 to 16%. I'll turn the call back to Helen. I mean, to Karen. Sorry, excuse me. To Karen.