Chubb’s Greenberg on War, Ex-CAT Reporting and Insurance Profits

Chubb’s 2021 annual report, published online in April 2022, contains more than the details of the best year in the company’s history. As in past years, the chief executive commented on world events in his letter to shareholders.

Starting his letter by recalling a prediction included in his 2020 annual report letter — that Chubb was entering a period of greater wealth creation — Chubb Chair and CEO Evan Greenberg quickly referenced the Russia-Ukraine conflict in his opening paragraph.

“I am confident this pattern will continue,” he wrote, referring to the wealth created by double-digit premium growth and record underwriting profit in 2021. He added, however, “I am naturally more cautious when considering the external environment with a war now raging in Europe involving a major nuclear power.”

Strong organic growth was one of Chubb’s 2021 shareholder wealth drivers. Another was a combined ratio below 90.

Organic growth was the best since 2003, according to Greenberg, reporting P/C net premiums written globally jumping 13%, driven by commercial lines growth of almost 18%. The published P/C combined ratio was 89.1 for the full year 2021.

Although Greenberg’s letter repeatedly talks about the company’s reasons to “look to that future with clarity, conviction and optimism,” writing the letter at the time a war is unfolding in Ukraine prompted the insurance leader to comment on its impacts on Chubb, the insurance industry and the overall economy.

“As we manage risk at home and abroad, geopolitical and political strife, social divisions, economic uncertainty, climate change, and technological advances pose tough questions for the insurance industry and for liberal democracy and the free enterprise system that have sustained our way of life,” Greenberg wrote. “An emerging multipolar world and, until the last two months, a lack of strong political leadership and unity among democracies, as well as an intensifying U.S.-China/Russia rivalry, are sources of concern.”

Still, even though “we are living through times that are, on the one hand, uncertain, risky and complicated, particularly now given war in Europe, there is also great opportunity” for insurers, he said, later referring to global property/casualty market conditions conducive to growth “now and over time, [which is] constrained only by our underwriting discipline to earn a proper risk-adjusted return and management of risk.”

Other growth drivers include:

• The potential reversion of consumer spending and travel to pre-COVID levels, coupled with a longer-term trend of an expanding middle class, which will boost Chubb’s large and diverse consumer businesses.
• Rising interest rates, which will boost investment returns.
• Revenue and earnings power from Chubb’s acquisition of Cigna’s accident and health and life insurance business in the Asia-Pacific region (expected to close in 2022) and from Chubb’s increasing ownership in Huatai Insurance Group in China.
• Digitalization of Chubb’s business, providing a competitive advantage long into the future.

“All of this gives me confidence that we will not only benefit in the short term but are also well placed to take our company into the future,” Greenberg wrote.

The confidence, however, is tempered by words of caution, with the CEO describing the Russia-Ukraine conflict as “a human tragedy of epic proportions and an event with profound geopolitical implications.” Wrote Greenberg: “The crisis is testing the leadership of liberal democracies, and it will change the world in ways we cannot yet predict.”

The letter continued with an admonition: “We abhor and reject on every level Russia’s extraordinarily barbaric military actions in Ukraine, but we simply don’t know the endgame. Before the Ukraine invasion, pressures were intensifying on the international trading system and on the liberal world order, which the U.S. has led since the middle of the last century.”

“Will Ukraine be an enduring wake-up call while at the same time accelerate the move toward a multipolar world and a new Cold War between democracy and autocracy?”

“As a global company, Chubb is in the thick of these trends but, frankly, we all are, as they deeply impact our country — including our peace and prosperity as citizens.”

Not directly referenced in the letter is Chubb’s local presence in Russia. On the page immediately following the letter, the report includes an image of an array of dots on a global map, and below it, a list of the 54 countries in which Chubb has a local presence, including Russia.

The global breadth of Chubb’s operations is among the growth drivers Greenberg highlights in the opening letter. “The depth of our local presence and the well-integrated design of our organization enable us to take advantage of opportunities arising from both cyclical and longer-term secular growth trends in the U.S., Europe, Asia, Latin America and other parts of the world.”

Ex-CAT Reporting: A ‘Head-Fake’

More than five pages of the 20-page letter deal with natural catastrophe exposure and Chubb’s commitments to protect society against the impacts of climate change. “In our way of thinking, virtually all geographies and properties are exposed to some combination of threats arising from increased weather-related events,” the letter says, after describing the contributions of natural phenomena and carbon emissions to climate change, and the impact of aging infrastructure on property losses.

That means the insurance price of every property risk needs to include catastrophe premium. And when carriers report their results, they need to stop highlighting the “current accident year combined ratio excluding catastrophes.” The “ex-CAT” measure of underlying financial health is a secondary one, which made sense when natural catastrophes were infrequent events.

“The industry and investment community should focus primarily on the published results, including CAT losses … By focusing more on ex-CAT, managements and investors are led to give a pass to inadequate pricing and underwriting, and it’s a head fake,” Greenberg wrote, noting the mismatch between the denominator of the calculation, which includes CAT premium, and the numerator with CAT losses excluded. “What a great gig.”

Greenberg also addresses Chubb’s commitments on climate action, including placing certain limits on fossil fuel underwriting, including coal and tar sands. “But underwriting limitations must be balanced against the essential and core purpose of insurance, which is to provide risk protection for lawful activity. Any such limits on entire classes of activity interfere with this purpose and must be an exception based on an analytical, fact-based examination of realistic alternatives,” he wrote.

The Rest of the 20 Pages

The 20-page letter touches on almost every issue on the minds of insurance carriers’ leadership teams, including inflation (“I doubt [it] is simply a temporary phenomenon, given such broad-based supply- and demand-side pressures across the economy”), digitization of insurance (“it’s here”), the talent war (“If you are ambitious, disciplined, take responsibility, are a decent human being and have a need to belong, [then] give us a call,”), cyber threats (“Like a pandemic, a cyber-CAT event knows no geographic or temporal boundaries”), and more.

Greenberg also comments on U.S.-China relations and America’s domestic problems, including the divisive ideological extremes that stand in the way of progress.

Other highlights of the letter more directly related to Chubb’s performance included Greenberg’ comments on Chubb’s patience during the soft market and its ability to capitalize on hard market conditions in commercial insurance in 2021. “As a good underwriter does, we chose to forsake growth — painfully, I might add — for an underwriting profit” during the six prior years. “Quite a number of our competitors, on the other hand, in their pursuit of market share during the soft part of the commercial P/C cycle, inflicted damage on themselves (and, frankly, their customers, too) by underpricing risk and providing excessively broad coverage.”

Discussing the litigation environment, Greenberg observed that “lawyers drive up insurance costs by cleverly twisting insurance contract language and testing new theories of legal liability” and described a portion of the “money-making investment class” of litigation funding as being comparable to “betting on a horse race.”

Regarding Chubb’s M&A philosophy, Greenberg commented: “We pull the trigger on an acquisition only if we are already engaged in and understand the business, are confident that there is an industrial logic, and there is a financial return that is attractive to the company and our shareholders.”

Looking back on the ACE-Chubb merger of 2016, which occurred at a time when market conditions were soft, he noted Chubb’s accelerated growth in the more recent harder market. “[I]t is clear our success has been much greater than it would have been if Chubb and ACE had stayed on their separate paths.”

Not mentioned in the letter was Chubb’s failed takeover bid of The Hartford early last year.