So far, we’ve seen several companies announce strong or even surprisingly good results, while companies that are usually strong have had to announce worse-than-expected catastrophes or significant adverse development.
In the commercial cohort, The Hartford kicked the season off with a pre-announcement of bad cat losses, driven by personal lines. Then Travelers announced a strong EPS beat despite having a similar business mix, with the stock up 6% on the day. Fortunately for Chubb, it fell on the positive side of this trend despite a variety of headwinds, although stock reaction was muted.
One thing that has been positive in the prevailing economic murk is the surprise extended pricing cycle in core commercial lines. This continued tailwind, combined with Chubb’s strong underlying business and proactive take on loss costs, has helped the carrier to consistently deliver strong results.
The chart below shows Chubb’s return on tangible equity (ROTE) over the past three years.
This performance shows the strong value Chubb continues to deliver for investors, with double digits for every quarter except Q2 2020.
The call itself was interesting, and something of a departure from the standard script, with topics ranging from loss costs to ChatGPT. Of particular interest was the increased focus on growth of the business in Asia, as well as detailed commentary on pricing, exposure and loss cost trends. We address these topics further in the note below.
Overall, Chubb had a very strong quarter. Operating EPS was up 15.4%, driven by significant growth in net investment income and GWP and NWP P&C growth of 7.0% and 9.3% respectively. However, underwriting income was down, due to 1.1 pts of cat activity and 0.7 pts of prior-period development. On an underlying basis, the loss ratio was relatively stable, worsening by 0.5 pts to 55.9%.
First, Chubb’s expansion in Asia might help counterbalance the eventual slowing of the P&C cycle
One thing we noticed on this quarter’s earnings call was the increased discussion regarding Asia. The region (which for Chubb is quite broad and includes Australia), had been coming up on calls the past few quarters with the Cigna integration and the addition of the majority stake in Huatai.
This expansion, and subsequent growth, is part of a wider discussion on Chubb’s different segments, and Life/A&H in particular, that we don’t usually get into when focusing on P&C. However, in examining Chubb’s performance in the context of P&C cycles, the other segments can still play a central role.
The P&C world has benefited recently from significant pricing and exposure tailwinds, and Chubb has benefited from the growth in core lines. But when inflation is brought under control and this pricing cycle winds down, Chubb could benefit from not having all its eggs in one basket, as the cycles will differ for these other lines – and even for P&C in other countries.
The chart below shows the relative premium changes for Life vs. P&C. Keeping in mind that Life is just a fraction of the size of the P&C bucket, we can see its growth picking up due to acquisitions.
Year over year for the quarter, Life growth in net written premium was 124%. This is even more pronounced in the international portion of the life business, where the growth was 238%, largely due to the Cigna acquisition.
As these numbers continue to grow, they will reach a critical mass where strong performance could offset downturns in the P&C pricing cycle. This does not yet take into account Huatai’s increased ownership impact or any further acquisitions, and with Greenberg planning a seven-week trip to Asia towards the end of the year, we can only postulate that other names in the consolidation pipeline could emerge.
Either way, he has made it clear that this is part of a longer-term strategy, already spanning more than two decades, to expand in a region that has great growth potential.
Taking a step back, it makes sense for companies to think about building a global book. Yes, this will not, and has not, worked for many other underwriters. And yes, the experiment of having P&C and Life too has not worked. That said, companies such as Chubb and AIG have shown that leaning into their areas of strength beyond North America is a smart strategy.
Second, Chubb shows pricing accelerating, outpacing exposure growth, which might be a positive read-through for the group
Chubb’s commentary on pricing adds it to the list of carriers and brokers whose recent announcements have shown the pricing cycle has not slowed, and may even be accelerating.
The chart below shows Chubb’s latest pricing data. We were excited to see the carrier added additional data points this quarter, to show exposure, which gives great color.
One takeaway here is that the growth primarily reflects rate gains above exposure uplift, which has not always been the case.
While Chubb does not give forward guidance, Greenberg did give a brief indication that he expects this and other trends to continue on their current trajectories.
We recently saw Travelers report similar trends for its business insurance segment. Taking a step back, it will be interesting to see if carriers start to have differing trends emerge on this front once the earnings season is done and dusted.
Third, Chubb’s loss cost view begs the question of whether the industry is on the same page
For the past several years, Chubb has given a by-line listing of its underlying loss cost assumptions. This year we did still get the overall number of 6.7%, which represents a small uptick from Q4, but no additional granularity was given. We’ve included historical trends with the current data point in the chart below. Note the layout is due to different breakdowns given on different calls
This uptick is small, but it is still a point of interest because it represents Chubb’s view of where loss cost trends are heading. As we have pointed out in previous earnings notes, Chubb takes a measured and cautious stance, so it can be the first indicator that carriers need to take a good look at their underlying assumptions.
Greenberg elaborated on this, highlighting that a primary motivation for the shift is the switch from low inflation to high inflation, and emphasizing that the ability to react to these shifts is what allows companies to survive.
Similar questions have emerged on other earnings calls. Our reserve reviews published on April 5 and April 14 show that not all companies and segments are operating in lockstep, which is a given. One of the areas of caution evident in these notes is that some carriers have been willing to take down reserves in recent AYs, but this could prove premature depending on how trends develop.
As we continue to figure out the direction of loss costs from here, companies who have taken a cautious stance such as Chubb will likely outperform when looking at value creation with a longer time frame.
In summary, Chubb had a strong quarter during a time of uncertainty. The carrier’s plan to expand in Asia is already taking hold, and it may positively affect results down the road as the P&C cycle wanes. For now though, pricing is re-accelerating in commercial, and moving well beyond the increase in exposure in most lines, and Chubb continues to take an active stance in the matter of loss costs while the future of social inflation remains unclear.