Q2 2019 Earnings Call
Please standby.
Good day and welcome to the sub limited second quarter 2019 earnings Conference call.
Today's call is being recorded.
If you would like to ask a question on todays call. Please signal by pressing star one on your telephone keypad.
For opening remarks, and introductions I would like to turn the call over to Karen buyer Senior Vice President Investor Relations. Please go ahead.
Thank you and good morning, everyone. Welcome to jobs June Thirtyth 2019 second quarter earnings Conference call. Our report today will contain forward looking statements, including statements relating to company performance and growth opportunities pricing and business mix and economic and market conditions, which are subject to risks and uncertainties and actual results may differ materially.
See our recent SEC filings earnings release, and financial supplement which are available on our website at investors dotcom dotcom for more [laughter] 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, it's my pleasure to introduce our speakers. This morning first we have Evan Greenberg, Chairman and Chief Executive Officer, followed by still Bancroft, Our Chief Financial Officer will then take your questions.
Also with us to assist with your questions are several members of our management team.
And now I'll turn the call over to Evan.
Good morning.
As you saw from the numbers, we had a very good second quarter highlighted by excellent underwriting and strong premium revenue growth globally in constant dollars.
That is benefiting from favorable underwriting conditions in our various growth initiatives.
In fact, the positive pricing in underwriting environment continue to improve through the quarter.
And spread to more classes and segments of business.
Core operating income was $1.2 billion were to 60 per share down 3%.
Due to modestly higher year on year cat losses.
Book and tangible book value per share were up three point to 4.7% respectively in the quarter.
And are now up 7.7 or nearly 12% for the year.
The combination of income and the Mart derived from falling interest rates.
Our combined ratio of 90.1 included 3.8 points of Cat losses.
2.6 points of favorable prior period reserve development.
So on a current accident year basis, excluding cat combined ratio was 88.9%.
Phil will have more to say about investment income book value cats and prior period development.
Turning to growth.
PNC premium revenue in the quarter in constant dollars was quite strong.
Net premiums written grew 6%.
With foreign exchange, having a negative impact of 1.8 percentage points.
The pricing environment continued to win to firm through the quarter. We took advantage of some of the best pricing we've seen in years.
The rate of increase of prices accelerated while at the same time, it's spread to more classes of business and more classes of risk.
Rates continue to firm in the U.S. for major accounts and CNS specialty to the middle market.
We continue to observe favorable conditions in London wholesale market and in Australia.
With early signs firming conditions are spreading to the UK company market.
Certain classes of risk on the continent in Europe and in Southeast Asia.
Overall were rates are moving they are firming broadly to varying degrees in most all short and long tail classes.
Accompanying price increases certain terms and conditions are tightening in certain classes.
In my judgment, given some of the market dislocation, we have observed including a reset of risk appetite on the part of some.
This firming trend is sustainable.
And will likely continue to accelerate and spread.
His income and loss reserve driven not capital driven.
Overall prices increased in North America commercial on a written basis by about 7% in the quarter.
Versus a loss cost trend in aggregate of just under 4.5%.
Renewal price change includes both rate and exposure rate was up 6.3 that exposure a half a point.
Pricing improved throughout the quarter in many property and casualty related areas, including general casualty, both primary and excess Dino and professional lines.
As more business comes into our underwriting appetite and price range and other carriers take corrective actions, we are benefiting from a flight to quality all things being equal many buyers prefer job.
New business in our North America commercial lines was up over 11% in the quarter.
With major accounts and specialty up nearly 15%.
Retention of our customers remains strong across all of our North America commercial and personal PNC businesses with renewal retention as measured by premium of 93.5%.
In major accounts in specialty commercial excluding agriculture premiums were up 7% with major up five and a half and Westchester Ns up over 9%.
Renewal price change for major accounts was 8.5%.
With risk management pricing up 6.3, excess casualty up almost 10 and property up 18 and a half.
Public do you know rates increased 11%.
In our west Chester business renewal pricing was up over 9.5%.
Turning to our middle market and small commercial business premiums overall were up over 4.5%.
Renewal retention in our middle market business was 92%.
Middle market pricing was up over four and a half and if you exclude workers comp it was up nearly five.
Again this is the best we've seen in a number of years.
Middle market pricing for primary casualty was up four and a half.
Property, six and a half.
Excess umbrella up over sex and public do you know rates were up 18%.
In our North America personal lines business net premiums in the quarter were down 2%.
But adjusting for the expanded reinsurance that we have discussed in the past.
On an accounting change that impacted growth prior year.
Net premiums written were up about two and a half.
Retention remains strong at 96% and for homeowners pricing was up nearly 10% in the quarter.
Turning to our international business growth accelerated in our overseas General insurance operation.
With net written premiums in constant dollars are up 9%.
FX, then had a negative impact of almost six points.
Net premiums for our London market wholesale business were up over 24%.
While our retail division was up seven and a half with growth led by Latin America up almost 11 and Asia up about 9%.
In our London wholesale business, we continued to see a reduction in capacity and rates firming across multiple lines of business.
We're also seeing a significant increase in submissions to chubb as brokers worry about the continuity of markets as they look to us as a preferred carrier of choice.
Overall rates in our London open market business were up over 9%.
Property was up 23 and a half.
Marine cargo almost seven and a half aviation was up 12 and onshore energy was up 15%.
Do you know rates in the London wholesale market were up 20%.
Our life insurance business had a strong quarter and half year with a contribution to earnings of $76 million year to date.
John Keogh, John Lupica, Paul Krump, Juan and Drawdy can provide further color on the quarter.
Including current market conditions and pricing trends.
In closing this was a good quarter for Chubb.
We have momentum from a firming market flight to quality and our various glut.
Global growth initiatives.
We are achieving rate, which is supporting margins and helping ameliorated exposures, we observe on the loss side.
In some we have some wind in our sales and we're taking advantage of it.
Our organization is focused energized and hungry with that I'll turn the call over to Phil.
Thank you, Evan our balance sheet and overall financial position.
Quite strong.
We have 107 billion.
Portfolio cash and high quality investments that as well rated and liquid and we are generating substantial capital significant positive cash flow.
Cash flow in the quarter was 1.4 billion.
Among the capital related actions in the quarter, we returned $720 million to shareholders.
Including 344 million in dividends and 376 million in share repurchases year to date through yesterday, we have repurchased over 800 million in shares at an average price of $140 per share.
In June we paid off $500 million that insured.
And issued $1.3 billion of eight and 12 year debt in the European market.
The net proceeds will be used to repay our 1.3 billion senior debt at maturity in November 2020.
That was issued at an average rate of 1.14%.
[noise], we grew tangible book value per share share by 4.7% in the quarter and 11.9% year to date.
Since the close of the Chubb acquisition in 2016 tangible book value per share has fully recovered from the initial 29% dilution.
Even excluding the favorable impact of unrealized gains.
Our annualized core operating or are we in the quarter was 9.3%.
And our annualized core operating return on tangible equity was 15.2%.
As a reminder, Shep records a change in the fair value Mark on the private equity funds as realized gain.
So therefore it is not included in core operating income.
Other companies record the impact of the Mark as part of their investment income.
This quarter, we had after tax realized gains of $237 million.
Which would increase our core operating EPS by 51 cents and our annualized core operating or are we to 11.1%.
Adjusted net investment income for the quarter was 902 million pretax, which was higher than our estimated range and benefited from a one off accrual adjustment of $9 million and increased corporate bond call activity.
During the quarter.
Interest rates continue to decline as financial markets anticipating a shift in fed policy towards monetary easing.
This favorably impacted our portfolio mark to market, resulting in an after tax unrealized gain of 1 billion.
Although market yields have declined significantly in recent months, we will remain conservative in our investment strategy and do not contemplate any significant shift in asset allocation.
Our investment income going forward, we'll continue to benefit from growth in our invested assets.
And we will be impacted by the level of market interest rates. Despite the negative impact of lower rates. We expect net investment income to grow moderately due to our growth in invested assets and strong cash flow.
We now expect our quarterly adjusted net investment income run rate.
To be in the range of 890 to 900 million going forward.
Adjusted interest expense was 145 million pre tax in the quarter.
Factoring in the debt that matured and the new Euro debt issued in June we expect our quarterly adjusted interest expense to remain the same for the balance of the year.
Pre tax catastrophe losses for the quarter were 275 million principally from us weather related events.
We had favorable prior period development in the quarter of 188 million pretax or a 152 million. After tax. This included 48 million pretax adverse development on prior year catastrophe losses, principally from poor hurricane Hermine and typhoon JV, primarily in our assumed reinsurance operation.
And 25 million pretax adverse development related to our run off non a casualty exposures.
The remaining favorable development of 261 million is split approximately 90% from long tail lines, principally from accident years, 2015, and prior and 10% from short tail lines.
Foreign currency movements adversely impacted core operating income by $23 million in the quarter.
On a constant dollar basis net loss reserves increased 831 million, reflecting catastrophe losses in the quarter and the seasonal increase in our crop reserve offset by favorable prior period development.
The paid to incurred ratio was 87%.
Our core operating effective tax rate for the quarter was 15.3%.
Which is in line with our annual expected range of 14% to 16%.
Through six months, our core operating effective tax rate was 15%.
I will turn the call back to parent.
Thank you at this point, we'll be happy to take your questions.
Thank you and ladies and gentlemen to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speakerphone. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Once again.
Star one.
And we'll take our first question from Mike Phillips of Morgan Stanley . Please go ahead.
Thank you good morning, everybody.
First question on Evan on your comments.
Of what's driving the rate activity and I believe you said.
Yeah, something like its incoming reserve driven not capital driven so I guess.
One if you can expand upon that kind of implies there's going to be some timing of reserve issues and maybe what you've seen and what while you mentioned or reserve driven.
Well.
Just simply.
You know the rate has not kept pace with loss cost trend.
And that puts pressure on income.
And it puts pressure ultimately on reserves, you're either I think that.
That it just imply it says what it implies that balance sheets overtime.
Have less redundancy in them.
And you know for some are adequate.
For others and and become negative for others.
And and you have a loss cost environment that.
In many ways.
In the headlines is stable, but you have areas of of casualty and catastrophes and and.
And and and other areas within the business, where there is volatility and and there is there is there is trend pressure and so you know my comments meant to imply all of that what I was saying to you is income and balance sheet not capital driven that there was a dearth of capital there is plenty of capital around and but it is more disciplined at this moment and and it comes to its deployed when the rate and terms are more adequate.
Okay no. Thank you that's helpful.
I guess, if I could turn specifically to North America commercial lines.
Where I guess, depending on what you use for Twoq you 18 with your comments from last year. The structured settlement some had some impact there.
So the the core loss ratio deteriorated either by 70, Bips or 170, bips, depending on how you adjust for that.
I will say it looks like kind of one of the highest court loss ratios for that segment in a while so we heard travelers are they talking about non cat weather I'm not sure. If any that came into play here for that segment for you or what else drove the uptick and maybe has your view of loss trends in that segment changed since since last quarter yeah.
You know let's.
Let's.
Look at North America commercial PNC, let's look at it on a current accident year ex cat.
Last year. It ran an 87 four combined ratio. This year ran at 87 nine combined ratio I mean simply outstanding World class.
And.
And in the eighties, so let's have that perspective, we wrote the same volume of L.P. tease. This year that we did last year.
And so no impact from that it was simply rate and trend naturally not in non cat weather or any of that just simply rate and trend something I've been saying for many quarters.
Thanks for the question.
All right. Thank you.
You're welcome.
Our next question from at least Greenspan with Wells Fargo. Please go ahead.
Hi, Good morning on my first question.
First question I have and is also you know just going back I guess to some of your comments to the previous question on just what you're seeing with.
Loss trend.
See any trend changes and that tort environment and you know I know, there's a lot of different classes that blends together, but that 4.5% of trend that you said in the Buck from North America commercial can you give us some perspective on how that would compare audits and it maybe it's not numbers, that's what qualitatively to what you've seen and you know some lease inquiry.
Sure Lisa in the in the aggregate in the round the loss cost trend is is is stable we haven't seen.
A change in it.
As you as you rightfully note, though within that you know it varies by class of business in the area of business we've talked.
For a number of quarters for quite some time now about professional lines do you know.
In particular and I.
Repeat.
Oh go into what we've talked about but.
Simply about the increase in frequency and in some areas severity in that.
You know when the tort environment.
Generally there has been.
Less of an increase of frequency, but and there have been headlines of of increasing.
In in severity in jury awards.
Cases, and you see it from commercial auto.
Products liability that is chemical related.
And and then you know the trend from of toward from hashtag me too and.
And model a station.
And and you know the specter in the future of.
Of the revive or statutes, which you know is unknowable at the time. So you know there is there is and then you know the Australian market behaves a certain way and toward and.
The London market UK, where do you know had deteriorated. So you know you have it varies by area and by class of business comp on the other hand behaved very well general liability behaves you know.
And in a steady way reasonably study so I hope that helps you.
Yeah. That's helpful. And then on you know you said you know kind of in talking to that core margin within North America commercial that odd you know the delta between this keeps you in last Q2, it's really just due to rate versus trend and are you seeing in your comments. This quarter and also last quarter are pretty bullish on pricing and you know the fact that you would think it would continue so do you think where you know reaching a point, where obviously it takes a while to earn in the rate, but if you keep getting a suede and accelerate side do you think as we get into 2020, you can think about that being an environment, where odd now there would be some core margin improvement.
You know we're in the risk business, so I can.
You know I can project, the numerator reasonably well to you.
I can't.
Project and prognosticate the denominator the on the denominator I can project again quite project the numerator.
The same way to you because we are in the <unk> at all.
Ana.
Risk business.
And so you know look rate exceeding trend.
Is a simple statement, it's an ameliorating factor.
And and that's a good thing.
We'll see.
What we will see what its impact is on margin in the future.
Okay. Thank you and then one last quick numbers question you guys mentioned on it you added a little bit to your JV last quarter, what do you guys on pegging that as as for insured loss for the overall industry right now.
I don't have a number in my head my colleagues around the table don't but will you know, we'll take it offline with you and will will.
To give you a number.
Okay. Thank you very much.
You're welcome.
Well take our next question from your own Keener with Goldman Sachs. Please go ahead.
Thank you good morning.
Going back to North America commercial so Evan you're talking about world class margins, there and loss trends that are stable.
I I guess do you need more rate in that segment today or is this maybe an opportunity to try and take market share all others are still pushing for rate.
It varies by class of business.
There is no general statement.
Some.
Some classes are adequately priced some classes need rate and terms and conditions changes.
And.
In some classes needs substantial rate and so you know it varies it's it's it's there is not a simple.
There is not a simple box to that but.
As I think you can see our new business is up.
Our renewal retention is high.
Or in a more favorable underwriting environment.
And and where it makes sense to us and we've got a lot of data in a lot of experience, we're leaning right into it.
Okay.
Thank you.
And then I guess I shift to the investment portfolio. So it sounds like from the.
From the comments that you're not really looking for any change in direction here, even with the change in monetary policy. One thing I didn't know this was an increase in duration sequentially is that a strategic move or was that just kind of normal quarterly noise removed.
It was simply to go at the end of last year, we had a decrease to duration because we weren't getting paid to take duration risk and over the course of this year, it's drifted up slightly but to the extent within you know.
Half a point or half a year of four years, we don't think there's any material impact on our investment income.
Okay, So you're not necessarily will contact center operation here.
We are not okay. Thank you.
Welcome.
We will take our next question from Ryan Tunis with autonomous.
[noise] Thanks, good morning.
So clearly terms or conditions rate accelerate and improve throughout the year.
Everyone has had the other side of that the loss trend today is.
It's more challenging environment than or six months ago.
No.
I'd say it's.
If I compare six months ago today, it's been stable.
Fair enough.
And then I guess, maybe a noise I wanted to ask about the crop but.
Just curious what the thought process laws.
[laughter] and how you're thinking about.
The planting season. It Didnt look like you put up a loss taken agriculture I'm not sure. If you did but just just interested in your thoughts there.
Sure.
Let me, let me make just a couple of comments about that and it's not an annoying night.
I would be surprised if when you didnt ask about it.
I'm first of all we did put up.
The.
Loss ratio.
About two and a half point this quarter.
So, but but you, but you have to recognize it sauna.
It's on a low earned premium base at this time of year.
And.
It is not signaling at this point.
What you should imagine for third quarter or for fourth quarter at all.
You know given the wet weather conditions, this spring and the potential impact.
On prevented planting or delayed planting.
Along with the volatility that.
In commodity prices impact by trade and other factors.
It's natural the questions raised about what kind of year, we're anticipating for crop.
So when a word it's unknowable.
Our models under various scenarios point to a roughly average year.
However, the actual tally of prevented planting claims.
The summer growing season conditions.
And therefore the the.
The result in quality of the crop.
Commodity prices and then the fall harvest weather conditions, our role to play out all of that's in front of us.
So we simply raised our loss ratio modestly in the second quarter as a naturally conservative action.
Two very little bit that we could see.
Thank you.
But its on Nols and wonder if you know.
But I'll tell you what but come on over you are going to make a lot of money on hedging.
In commodities.
Thanks.
As a reminder, everyone. It is star one if youd like to ask a question.
We'll take our next question from Paul Newsome with Sandler O'neill. Please go ahead.
Good morning, congrats on the quarter.
I wanted to ask.
If I may if I make my own assumption about where we are from a.
Pricing versus loss cost spread is there anything in either the North America commercial or the overseas.
More.
Business mix in business mix change that would affect so that sort of easy comps that simple calculation for me.
The ongoing shifts, we're seeing and tightening in the commercial property casualty insurance market and I'm wondering if in this environment.
It it might shift your thinking on mergers and acquisitions at all.
No.
Steady.
And.
And it doesn't shift was.
With the times.
That way so we know.
You know I.
I've been very consistent and and when asked this.
For for many years now.
We are builders and we're a company of builders.
And we have a strategy to grow our our company organically.
Acquisitions.
Complement.
That strategy they help to advance it.
Or improve upon it.
In any and the strategy is.
Product.
Segment of customer.
Distribution.
And territory.
Oriented.
And.
When.
We.
Identify the right target or partner.
And.
Financials, we judge it to advance our strategy.
And in in a positive way.
And we will.
Be accretive to our shareholders.
And their capital.
Then.
Then we are.
We know our minds and we will pull the trigger.
That's helpful. Thank you just to follow up on on that with with the potential for acquisitions to complement organic growth does that does that imply you're more focused on bolt on.
Acquisitions, as well as opposed to something larger or transformational.
We're agnostic.
Understood. Thank you.
I know you up.
But I.
I'm I'm, sorry, there's not really more to say there.
We will take our final.