12 July 2018 Insurance / Nonlife Chubb Limited

Deutsche Bank Research

Rating Company Date Hold Chubb Limited 12 July 2018 Company Update North America United States Reuters Bloomberg Exchange Ticker Price at 11 Jul 2018 (USD) 131.85 Financial CB.N CB UN NYS CB Price target 135.00 Insurance / Nonlife 52-week range 156.15 - 124.57 Even the Best M&A Has Had Its Challenges Valuation & Risks Joshua Shanker The company's acquisition of "legacy" Chubb has been well-executed Entering its tenth quarter, the ambitious merger of ACE and Chubb has delivered Research Analyst better results than most major acquisitions in the P&C space over the past two +1-212-250-7127 decades. However, we believe that the price paid has made it difficult for the Grace Carter company to deliver on its three-year promises: EPS accretion, tangible book value Research Associate growth, revenue synergies, etc. Recent acquisitions by Chubb competitors have +1-212-250-2628 been done at similar multiples to ACE/Chubb, but the acquirers in these cases seem poised to receive much less at a nonetheless equivalently high price. Chubb Sam Desai, CFA said that it could be currently "ready" to do another major transaction, but even Research Associate the best M&A often seems to fail to deliver on the bottom line. We believe it would +1-212-250-9761 be a mistake for Chubb to do another large M&A transaction at the market's current valuation requirements and instead should buy back shares in lieu of Key changes building an M&A war chest. Lack of material upside to our target price informs TP 141.00 to ↓ -4.3% our Hold recommendation. 135.00 EPS (USD) 10.50 to 10.45 ↓ -0.4% Prior-period favorable reserve development has been in sharp decline Source: Deutsche Bank Adjusting for the one-time 1Q17 Ogden charge, Chubb's Global P&C net favorable Price/price relative reserve development declined by 31% to $133mn in 1Q18 (vs. 1Q17) and by 29% 200 to $751mn in 2017 (vs. 2016). The 2017 vs. 2016 decline represented a $0.59 EPS headwind for 2017. The benign claims environment that fueled a multi-year trend 150 of extreme net favorable reserve development may be reverting to norms amidst a 100 rising volume and cost of securities class action suits among other challenges. We 2016 2017 2018 are modeling a decline in annual favorable development that acts as a $0.15-0.30 Chubb Limited S&P 500 INDEX (Rebased) headwind on EPS for each of the next three years. Performance (%) 1m 3m 12m Normalized catastrophe experience has not been declining and may even be Absolute -0.9 -1.6 -8.7 rising S&P 500 INDEX -0.3 5.0 14.4 Chubb has spent the past couple years integrating the two companies, Source: Deutsche Bank which included "merger-related actions" that limited premium growth including purchasing more reinsurance to limit catastrophe exposure. Legacy ACE stopped Stock & option liquidity data Market Cap (USDm) 61,758.6 giving guidance around budgeted catastrophe expectations in 2014 and did not Shares outstanding (m) 468.4 resume following its merger into Chubb. However, catastrophe events over the Free float (%) 100 past two years seem to have nudged the company to give intermittent advice Volume (11 Jul 2018) 506,911 around this line item. We estimate that pro forma ACE/Chubb had a combined Option volume (und. shrs., 1M avg.) 60,437 catastrophe exposure likely just above $900mn in 2015. Chubb's guidance Source: Deutsche Bank around 2017's catastrophe budget was somewhere in the $890-980mn range but there is quarterly evidence that may point an even higher number. We are modeling average annual catastrophe expectations at $1.00-1.05 billion, which puts us likely above the street in this regard. Higher catastrophe expectations and

Deutsche Bank Securities Inc. Distributed on: 12/07/2018 20:00:12 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. 7T2se3r0Ot6kwoPa 12 July 2018 Insurance / Nonlife Chubb Limited lower net favorable prior-year development likely explains our below-the-Street estimates. We are trimming our 2018 EPS estimates by a nickel and 2019 by $0.30 to $10.70 vs. consensus of $11.31.

We are lowering our target price to $135; risks We value P&C insurers on a forward-looking price-to-book multiple with price-to- earnings as on overlay. We are valuing Chubb at 12.5x year-ahead earnings, in- line with where it trades on 2018 cat-normalized consensus numbers, which is equivalent to 1.16x book value. The 3-4% decline in the target price principally relates to a broader peer sell-off among U.S. insurance stocks. 1.1x will likely provide a floor for the stock, and a franchise like Chubb's should trade at a meaningful to book. However, a significant amount of that premium is already accounted for in the goodwill on the balance sheet. Excluding intangibles, our target price implies a valuation of 1.8x book. A major risk to our valuation is catastrophic events, which can cause our valuations to be proven high. Alternatively, the lack of loss events may cause our estimates to be too low. Equally, dramatic changes in reserve estimates and/or interest rates can cause our long-term estimates to differ from actual results.

Forecasts and ratios Year End Dec 31 2017A 2018E 2019E 1Q EPS 2.48 2.34A 2.54 2Q EPS 2.50 2.70 2.61 3Q EPS -0.13 2.69 2.71 4Q EPS 3.17 2.73 2.83 FY EPS (USD) 8.03 10.45 10.70 OLD FY EPS (USD) 8.03 10.50 11.00 % Change 0.0% -0.4% -2.7% P/E (x) 17.7 12.6 12.3 DPS (USD) 2.82 2.90 2.98 Dividend yield (%) 2.0 2.2 2.3 Source: Deutsche Bank estimates, company data

Page 2 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited

Lately investors have been questioning the reasons behind Chubb's recent Recent concern over Chubb's apparent underperformance, wondering why the stock has not been rising. We underperformance seems nothing more than having generally followed its peers think concerns over Chubb's performance are probably overstating the degree during a sell-off in U.S. insurance names. of underperformance. Yes, Chubb shares are down 8.8% year-to-date in a broad market (S&P 500) tape up 4.6%, but Chubb is only very modestly underperforming the large cap U.S. commercial insurance peers (AIG down 7.4%, Hartford down 5.4% and Travelers down 6.7%). In fact, one can dig through the trading tape over the past three years and note very little alpha generation among the P&C peers.Since announcing the ACE/Chubb combination on June 30, 2015, shares of Chubb are up 37.9% compared with shares of The Hartford up 33.4% and shares of Travelers up 37.8%, while the S&P 500 is up 41.3%. (AIG down 5.7% and XL up 58.1% have, however, generated differentiated performance for differentiated reasons.)

Figure 1: Performance of Chubb and Peers Indexed to Figure 2: Performance of Chubb and Peers Indexed to YE Announcement of ACE/Chubb Merger 2017

1.30 1.70 1.25 1.60 1.20 1.50 1.15 1.40 1.10 1.30 1.05 1.20 1.00 1.10 0.95 1.00 0.90 0.90 0.85 0.80 0.80 0.70

Chubb AIG Hartford Travelers XL S&P 500 Chubb AIG Hartford Travelers XL S&P 500 95%

Source: Company reports and FactSet Source: Company reports and FactSet

In fact, we somewhat doubt the recent contention that Chubb has been underperforming. Over the past three months (4/11-7/11), CB stock (down 1%) has materially outperformed its closest peer TRV stock (down 8%). This has created a unique situation where, over a short period of time, Chubb stock has gone from the bottom of its relative P/E valuation range to Travelers (just below parity) to the top of its trading range (just below a 10% premium). By historical standards, relative to Travelers, Chubb stock seems fairly fully valued. Relative to the S&P 500, at just above 75% of the market's P/E multiple, Chubb don't appear out of line with where they have traded historically.

Deutsche Bank Securities Inc. Page 3 12 July 2018 Insurance / Nonlife Chubb Limited

Figure 3: Time Series P/E Multiple of CB (ACE) shares Figure 4: CB P/E Multiple Relative to the S&P 500 relative to TRV Chubb AIG Hartford Travelers XL S&P 500 115% 95%

110% 90%

105% 85%

100% 80%

95% 75%

90% 70%

85% 65% 2012 2013 2014 2015 2016 2017 2018 60% CB/(ACE) P/E premium to TRV parity 2012 2013 2014 2015 2016 2017 2018

Source: Company reports and FactSet Source: Company reports and FactSet

Our view is that Chubb is currently in a strategically difficult position. On the In 2015, the ACE/Chubb deal may have one hand, we're underconfident that the merger between ACE and Chubb has seemed expensive, but insurance M&A in 2018 has been done at similar multiples. delivered operating results that justify this type of expensive M&A. It was, by no means a failure, and we would not be implying that.Without a doubt, Chubb and legacy Chubb are/were both excellent companies operationally, but the goals of the acquisition have arguably not been met, and they certainly haven't been exceeded. That said, we believe later transactions in the space, in fact, argue that legacy Chubb was bought for a bargain price by comparison. ACE's acquisition of legacy Chubb was purchased at essentially the same valuation multiples as recent deals for Validus and XL in 1Q18.

Figure 5: Common Valuation Multiples Used for Legacy Chubb and Targets of Recent P&C Insurance Deals legacy Chubb Validus XL P/2Q15 BVPS 1.77xP/4Q17 BVPS 1.59xP/4Q17 BVPS 1.51x P/2Q15 BVPS excl. AOCI 1.85x P/4Q17 BVPS excl. AOCI 1.58x P/4Q17 BVPS excl. AOCI 1.66x P/2Q15 Tangible BVPS 1.82xP/4Q17 Tangible BVPS 1.80xP/4Q17 Tangible BVPS 1.96x P/2Q15 Tangible BVPS excl. AOCI 1.91x P/4Q17 Tangible BVPS excl. AOCI 1.79x P/4Q17 Tangible BVPS excl. AOCI 2.21x P/2016 Consensus EPS on 6/30/15 15.9x P/2018 Consensus EPS on 1/21/18 16.6x P/2018 Consensus EPS on 3/4/18 15.4x P/2017 Consensus EPS on 6/30/15 15.1x P/2019 Consensus EPS on 1/21/18 15.7x P/2019 Consensus EPS on 3/4/18 14.5x P/2016 Consensus EPS Relative to S&P 500 on P/2018 Consensus EPS Relative to S&P 500 on P/2018 Consensus EPS Relative to S&P 500 on 6/30/15 104% 1/21/18 96% 3/4/18 90% P/2017 Consensus EPS Relative to S&P 500 on P/2019 Consensus EPS Relative to S&P 500 on P/2019 Consensus EPS Relative to S&P 500 on 6/30/15 109% 1/21/18 101% 3/4/18 94%

For Validus, estimates for the S&P 500 have been manually adjusted upward by 8% to account for an inefficiency of consensus EPS to reflect in a timely manner broadly increased earnings from the U.S. Tax Cuts and Jobs Act of 2017, which we believe had already been largely accounted for in share price appreciation across the market. Source: Company reports, FactSet and Deutsche Bank

However, while we might argue that the Chubb deal looked expensive at the time, legacy Chubb's track record in terms of both capital generated for its investors and appreciation for investors who owned the stock has far exceeded the targets of these peer deals. Assuming the engine that generated these returns can continue to do so, ACE paid no premium to the more recent deals to acquire what we view as a much better business.

Page 4 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited

Figure 6: Multi-Year Annualized Capital Generation by Legacy Chubb and Targets of Recent P&C Insurance Deals legacy Chubb Validus XL Tangible BVPS + Tangible BVPS + Tangible BVPS + Time BVPS + Divs Divs Time BVPS + Divs Divs Time BVPS + Divs Divs 15-year 2Q00-2Q15 +11.0% +11.4% 4Q02-4Q17 +1.2% +2.2% 10-year 2Q05-2Q15 +11.5% +11.7% 4Q07-4Q17 +8.9% +8.8% 4Q07-4Q17 -1.2% -1.1% 5-year 2Q10-2Q15 +9.8% +9.9% 4Q12-4Q17 +6.8% +5.5% 4Q12-4Q17 3.7% -0.2% prior 5-year 2Q05-2Q10 +14.0% +14.3% 4Q07-4Q12 -5.7% -2.0% 4Q07-4Q12 +11.2% +12.1% first 5-year 2Q00-2Q05 +11.9% +12.8% 4Q02-4Q07 +5.8% +8.5%

Source: Company reports, FactSet and Deutsche Bank

Figure 7: Multi-Year Annualized Stock Performance by Legacy Chubb and Targets of Recent P&C Insurance Deals legacy Chubb Validus XL Time CB S&P 500 gap Time VR S&P 500 gap Time XL S&P 500 gap 15-year 6/30/00-6/30/15 +9.1% +3.5% +563bps 2/6/03-2/6/18 -2.0% +9.1% -1,117bps 10-year 6/30/05-6/30/15 +9.9% +7.0% +291bps 1/21/08-1/21/18 +9.0% +9.0% -4bps 2/6/08-2/6/18 0.0% +8.6% -862bps 5-year 6/30/10-6/30/15 +15.8% +16.5% -78bps 1/21/13-1/21/18 +9.4% +15.2% -578bps 2/6/13-2/6/18 +8.1% +13.9% -580bps prior 5-year 6/30/05-6/30/10 +5.5% -0.6% +617bps 2/6/08-2/6/13 -7.0% +4.3% -1,130bps 1/21/08-1/21/13 +9.5% +4.1% +542bps first 5-year 6/30/00-6/30/05 +8.6% -2.6% +1,115bps 2/6/03-2/6/08 -5.9% +11.3% -1,717bps

We measure the anniversary of a year in XL's history on February 6 (and not March 4, the day before AXA announced its intention to purchase XL) because specific media speculation around an acquisition of XL began on February 7. Source: Company reports, FactSet and Deutsche Bank

Arguably, the Validus deal is a "bolt-on" for AIG and does not really match the While recent insurance M&A has been scope of the ACE/Chubb merger, so we won't dwell on comparing legacy Chubb valued as richly as ACE's acquisition of Chubb, these other deals do not match to Validus (though legacy Chubb's historical performance is nonetheless better). legacy Chubb's brand, quality and track However, the XL's acquisition by AXA is rightfully described as transformational record. like the ACE/Chubb merger.In acquiring legacy Chubb, ACE bought a business that generated a compounded annual growth in tangible book plus dividends of over 11% for 15 years. Over that same time frame, legacy Chubb's business model drove stock performance in excess of the markets (S&P 500) by over 500bps per annum even before the significant "bump" created by ACE's "take out" price. At an equivalent valuation, AXA is acquiring a business that has generated essentially no return for shareholders in 5, 10 or 15 years, and whose stock has underperformed the market by over 600-1,000bps annually depending on what time frame one uses.

No, legacy Chubb's brand, historical performance and potential is significantly better by comparison. If these are the prices that deals must go for, acquiring legacy Chubb at this price makes sense relative to others. But, that perhaps only makes sense if a company MUST do M&A. We will assert, as we have done in several notes prior, that ACE would have been better off buying its own stock in size in 2015. The Chubb deal has not been a failure in any way, but we believe it has not delivered upon the goals set by management three years ago.

We are confident this assertion will ruffle some feathers, and we will aim step While it may be dispiriting to repurchase by step to explain where we think the combined business has fallen short large quantities of one's own shares at 2x book, we believe it is a better use of Chubb's and what lessons it might have for future capital deployment, which presents capital than large-scale M&A with current a difficult dichotomy.On one hand, another transformational acquisition in the market premiums. future may not be met with as much fanfare if the Chubb/ACE merger is not viewed as having generated excess returns for shareholders. On the other hand, Chubb shares appear very expensive on a price-to-tangible book basis, making repurchase dilutive to the capital base and conflicts with Chubb management's commitments to grow its tangible book value per share. At 2x tangible book, we believe management is discouraged from buying back its own shares in size

Deutsche Bank Securities Inc. Page 5 12 July 2018 Insurance / Nonlife Chubb Limited

(beyond perfunctory repurchases to offset the issuance of shares for the purpose of employee compensation). Regardless, we tend to be increasingly less focused on where stocks trade on a price-to-book basis, and think P/E largely determines valuation in stable markets. All in, given our view of the outcome of the legacy Chubb deal and what we see as a unmerited premium for P&C deals today, despite the dilution, we'd prefer to see Chubb buy its own stock.

Progress on ACE/Chubb Merger Goals

We acknowledge that we are partly relitigating the past, which doesn't really help investors picture what a stock will do next. However, on the 1Q18 conference call, Chubb's CEO Evan Greenberg was asked, "is Chubb ready for another large deal?" The answer was direct, but non-commital. Essentially, yes, the company is ready, but Chubb isn't going to do a transaction that distracts it from its momentum. The full answer is available in the transcript. We believe that the question of "ready" likely points, in part, to the question of whether the company is in a capital position to do another large deal. If so, we believe a large deal would be a mistake. Instead, the company should repurchase its own shares. We do not believe the ACE/Chubb acquisition was a failure, but we do believe it hasn't succeeded on its own terms.

When ACE announced its intention to buy legacy Chubb, it laid out five key goals that would be achieved.

■ The transaction will be accretive to the company’s per share earnings and book value per share immediately

■ By year three, the transaction will be accretive to EPS on a double-digit basis and will be accretive to ROE

■ ROI will exceed ACE’s cost of capital within two years and be a double- digit return by year three

■ Tangible book value per share will return to its current level in three years

■ Expected goodwill payback in approximately 5.5 years

We would also add a sixth goal that was not on the list but was referenced repeatedly.

■ Earnings accretion will be balanced between revenue and expense- related synergies.

We will take each of these points individually.

Accretive to the company’s per share earnings immediately. Without a doubt, Had ACE bought its own shares throughout the deal was accretive to earnings per share if ACE chose to do nothing else 2016 instead of buying Chubb, the first year EPS accretion would have been greater than with its capital other than to sit on cash. Chubb recorded 2016 operating EPS of that of the Chubb acquisition. $10.13. We have a stand alone ACE model as well, which is available to investors upon request. Assuming that ACE did not buy Chubb (and did not redeploy capital elsewhere, nor issue incremental debt), we estimate that stand alone ACE, under the same loss ratio and catastrophe trends, would have achieved around $9.77 in 2016 EPS – basically flat with 2015. Instead, the deal provided ACE/Chubb with immediate 4% EPS accretion. However, the Chubb deal was financed with $9 billion in cash (some coming from legacy Chubb itself) and $5.3 billion of incremental debt issuance.If ACE, instead of buying Chubb, were to instead have spent $6 billion repurchasing its own shares, cancelling 14-15% of the company's

Page 6 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited share, we expect that, conservatively, ACE would have finished 2016 with about $10.50 in operating EPS, which implies the transaction was immediately dilutive by 3-4%. Yes, it is accretive to sitting on cash, but M&A is not the only option.

Accretive to EPS on a double-digit basis by year three. It is difficult to know The goal was to deliver double-digit EPS a counter-factual, what stand alone ACE's 2018 EPS will ultimately have been. accretion over stand alone ACE in 2018 results. Consensus numbers suggest 12% However, we do know what consensus thinks the 2018 earnings looks like for EPS growth over 2015, though these the current configuration. Chubb might surprise to the upside. (For reference, our numbers have steadily been downward 2018 forecast is only a penny below consensus.)But, based on where consensus revised since early 2016. stands today, it seems like 2018 earnings represent 12% compounded EPS growth over 2015 results. One must make some assumptions around normalized catastrophe exposure, and Chubb does not explicitly give guidance on this matter (but there is a lengthy section below that traces how Chubb has given this disclosure aslant).

Figure 8: Calculating Chubb's 3-Year EPS Compounded Growth Rate ACE Chubb 2015A 2016A 2017A 2018E Operating EPS $9.77$10.13 $8.03$10.46 Catastrophe losses ($mn) 321 1,067 2,753 1,125 Normalized Catastrophes ($mn) 415 950 970 985 Tax rate on catastrophe losses 15.5% 20.4% 20.9% 20.3% Weighted average shares outstanding 328.8 465.9 471.2 468.4 EPS drag from excess catastrophes $0.24 -$0.20 -$2.99 -$0.24 EPS drag from one-time items $0.81 Operating EPS assuming normal catastrophes $9.53 $10.33 $10.21 $10.70 YOY EPS growth 8.4% -1.2% 4.8% 3-year Cumulative EPS growth 12.3%

Source: Company reports and Deutsche Bank

We would argue that there is nothing particularly wrong with an 12% EPS growth from 2015-2018 in a vacuum. On consensus numbers, Travelers is flattish over that same 3-year period. Peers AIG, Hartford and XL (all of which have very different EPS trajectories) simply have too many unusual items on their P&L to be used effectively as comparables. Digging deeper, CNA's EPS is poised to grow 35-40% over the three-year period ended 2018. Everest Re's EPS looks to be flattish over that time frame. If ACE's EPS growth 2015-2018 was poised to be flat, then the company seems poised to deliver on its promise of over 10% accretion over stand alone ACE 2018.

Deutsche Bank Securities Inc. Page 7 12 July 2018 Insurance / Nonlife Chubb Limited

Figure 9: Consensus 2018 EPS Forecast for Chubb

$11.60

$11.40

$11.20

$11.00

$10.80

$10.60

$10.40

$10.20

$10.00

Jul-15

Jul-16

Jul-17

Jul-18

Jan-16

Jan-17

Jan-18

Sep-15

Sep-16

Sep-17

Nov-15

Nov-16

Nov-17

Mar-16

Mar-17

Mar-18

May-16

May-17 May-18

Source: FactSet and company reports

During the first half of 2016, consensus projections envisioned the combined Chubb to deliver $11.00-11.50 of EPS. Since that time, consensus projections have consistently been downward revised. If Chubb management too had believed it could grow its earnings to these levels across these three years, its projection looks poised to fall short.

ROI will exceed ACE’s cost of capital within two years and be a double-digit Had ACE repurchased 14-15% of its shares return by year three. This may very well be true, though the weak EPS accretion outstanding for $6 billion over the course of 2016, we would expect the normalized 2018 does not advertise this as success. However, we don't know what ACE's internal EPS would be somewhere in the range of cost of capital is within its models. At the time before ACE announced its intention $12.25. to buy Chubb, tangible shareholders' equity was $23.6 billion, and debt was $6.6 billion (then 22% debt-to-tangible equity is now 33% undercurrent capitalization) at an average 4.3% annual cost. If the equity cost of capital for Chubb were 10%, the overall cost of capital would be around 8.7%. We estimate the additional capital that was issued to finance the transaction, due to its higher proportional debt content, cost around 8.2%. We're not going to argue whether Chubb has satisfied its ROI promises without its cost of capital equation. However, it does appear to us that acquiring Chubb was not the best use of incremental capital.Similar to the year one accretive impact, had ACE instead repurchased 14-15% of its shares outstanding for $6 billion over the course of 2016, we would expect the normalized 2018 EPS would be somewhere around $12.25 compared to current consensus EPS of around $10.46.

Tangible BVPS dilution restored after three years. The company has already acknowledged that this will take an extra quarter or so to achieve than initially planned. Regardless, we view it as a success, even if the timing is modestly delayed. Prior to the closing of the transaction, our modeling suggested that it would only be achieved closer to year-end 2019. While we watch this figure closely, it is worth recognizing that a lower equity denominator means a higher ROE. We believe repeatable earnings are far more important that focusing on where book stands at a given moment.

Page 8 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited

Expected goodwill payback in approximately 5.5 years. We will unlikely find it necessary to revisit this in the middle of 2021, but, if tangible BVPS growth was slightly delayed, we assume the same is true for goodwill payback.

Earnings accretion from revenue-related synergies. While not listed as one Despite management's confidence in of the five goals, it seemed that this was implicit as the reason behind the "revenue synergies," post-merger premium growth at Chubb appears to have lagged ACE/Chubb combination.There were very modest overlaps between the two peers. companies, and ACE would find a new distribution arm for its products through Chubb's distribution channels, while Chubb would augment the product suite offered by ACE. On multiple conference calls, new Chubb management gave examples of the synergy opportunities. However, it is difficult to argue that nine quarters in, the premium growth at Chubb has been much more than flattish. That is not to say that the business hasn't encountered legitimate headwinds including significant reinsurance market pricing declines leading Chubb to walk away from business in its reinsurance arm. That would have happened at stand alone ACE as well. The merger of ACE and Chubb also signaled a number of competitor start up operations in the high net worth homeowners' space with an aim to capitalize on potential customer flight responding to changes in how the new Chubb management would run this business. With the exception of AIG (and perhaps Hartford), which had its unique issues, Chubb's premium growth has lagged the large cap peer group from 1Q16-1Q18.

Figure 10: Chubb Premium Growth Indexed to 4Q15, Figure 11: Chubb Premium Growth Indexed to 4Q15 presented three ways Compared with Peers

1.25 1.25

1.20 1.20

1.15 1.15

1.10 1.10

1.05 1.05

1.00 1.00

0.95 0.95

0.90 0.90 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 4Q-17 1Q-18 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 4Q-17 1Q-18 Chubb (incl. adjustments) CNA (unadjusted) Everest (unadjusted)

unadjusted constant $ constant $, excl. merger-related actions Hartford (unadjusted) Travelers (unadjusted) XL (unadjusted)

Source: Deutsche Bank and company reports Source: Deutsche Bank and company reports

That said, it does not require a smart company to take share in the P&C insurance marketplace. All a company with distribution in place needs to do is to underprice business, and the premium will come. Chubb may ultimately be absolutely correct in essentially not growing its premiums over the past nine quarters. It may be that new business (net of non-renewed business) isn't all that attractive.

Chubb distinguishes itself from some of its peers by having actually improved its accident-year underwriting margin by 100bps since merging, while a number of its peers have seen their accident-year underwriting margins decline (left image). These improvements are largely expense-related, driven by reduced fixed costs from the integration of ACE and Chubb.

Deutsche Bank Securities Inc. Page 9 12 July 2018 Insurance / Nonlife Chubb Limited

Figure 12: Change in TTM Accident-Year Ex-Catastrophe Figure 13: Change in TTM Calendar-Year Ex-Catastrophe Combined Ratio Indexed to 4Q15 Combined Ratio Indexed to 4Q15

400bps 400bps 300bps 300bps 200bps 200bps 100bps 100bps 0bps 0bps -100bps 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 4Q-17 1Q-18 -100bps 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 4Q-17 1Q-18 -200bps -200bps -300bps -300bps -400bps -400bps -500bps -500bps

Chubb CNA Everest Hartford Travelers XL Chubb CNA Everest Hartford Travelers XL

2015 margins as if ACE/Chubb and XL/Catlin had already merged. 2015 margins as if ACE/Chubb and XL/Catlin had already merged. Source: Company reports and Deutsche Bank Source: Company reports and Deutsche Bank

However, it is also worth noting that Chubb's calendar-year underwriting margin Chubb's accident-year underwriting has deteriorated by about 100bps since merging (right image). This calculation margins have modestly improved since the merger. However, its calendar- favors companies like Everest Re and Hartford, which have historically not year underwriting margins have modestly generated material amounts of net favorable prior-year loss reserve development deteriorated over the same time frame. but have recently begun to do so. By contrast, it penalizes companies like Chubb and Travelers, which have historically generated significant earning from reserve releases, which have now slowed in recent quarters. (Please see a detailed section on reserve release decline later in this note.)

The premium growth/margin trend analysis above is hardly conclusive. The It is too early to say whether competitors generally strong ex-catastrophe results in XL's margin trends fail to capture who have chosen to grow these past two years have made the right strategic the outsized catastrophe exposure that was required to generate these results. decisions. We will only know as the recent The generally poor margin trends in Travelers's numbers doesn't highlight the years results mature. specific issues the company has encountered in its auto lines, both personal and commercial. This is only one measure. But it does lead us to believe that the ACE/Chubb merger hasn't resulted in much premium growth or margin improvement.However, five years in the future, if all the companies that grew their premium volumes in 2016-2017 are incurring severe losses on that business, Chubb management will have demonstrated itself to have followed precisely the right strategy in a difficult time.

Our conclusion is this. The ACE/Chubb combination is likely the most ambitious P&C insurance merger in history. Unlike the reserving issues that clouded the many mergers of the 1997-2004 period (which included acquisitions by ACE, Travelers and XL) or other large transactions that caused problems for its buyers (Safeco, Catlin, etc.), the Chubb merger has been at this point, by comparison, without a seam. However, the fact that it has not resulted in materially outsized performance tells us that, even among the best mergers, the payoff may not justify the price paid.

Forecasting a Continued Drop in Net Favorable Loss Reserve Development

If one were to look at our models over the past decade for Chubb, ACE or many other companies we've had under coverage, one might discover that we have consistently underestimated earnings for a half decade or more. A significant variance between our forecast and actual results has been the persistent and sizable earnings generated by net favorable loss reserve development. Since

Page 10 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited the 2008-2009 global financial crisis, 1) as central bank planning has failed to sufficiently generate comfortable inflation, 2) as the frequency losses has been lower than expected amidst a slowly improving economy and 3) as the conservative shift of the judicial branch presided over under former President George W. Bush has reached maturity, claims experience for insurers has been remarkably favorable for most all competitors with few exceptions.

A Multi-Year Headwind We did not predict this trend that was capable of boosting many companies' Net prior period favorable loss reserve ROEs by 200-300bps in a given quarter.Instead, we forecasted diminishing net development has significantly augmented both ACE's and Chubb's earnings for prior-period favorable reserve development and were consistently proven wrong. over a decade. However, more recently, We haven't really learned our lesson, and we continue to forecast declines in net the amount of reserve releases and their favorable reserve development. Compared with 2017, we expect Chubb's Global contribution to earnings has declined P&C net favorable reserve development to be $634 million, $445 million and $310 materially. Our forecasted decline in reserve releases implies a $0.15-0.30 annual EPS million in 2018, 2019 and 2020 compared with $751 million in 2017 (excluding headwind through 2020. a one-time charge of $41 million related to the Ogden rate change in the U.K. in 1Q17). However, 2017 was the first year in perhaps a decade where we initially overestimated its impact on ACE/Chubb's results. Net favorable prior year reserve development at Chubb Global P&C was $1.063 billion in 2016. The drop to $751 million in 2017 represented a $0.59 headwind in year-over-year EPS generation. Our forecast implies a $0.15-0.30 EPS headwind related to diminishing net prior period reserve development (in Global P&C) that Chubb needs to confront in each of the next three years.

Figure 14: Chubb Net Prior-Period Reserve Development (Trailing 12-Month Basis)

1400

1200

1000

800

600

400

200

0

-200

Global P&C Agriculture

2014 and 2015 displayed as if ACE and Chubb had already merged. Excludes the impact of the Ogden U.K. rate charge from 1Q17. Source: Company reports and Deutsche Bank

We believe this trend is less favorable than what ACE envisioned when it acquired Chubb. Pro forma ACE/Chubb reliably generated $1.1-1.2 billion of net favorable reserve development in 2013-2015. That redundancy began to diminish in 2016, and the decline accelerated in 2017 (and continued to do so in 1Q18). For the trailing 12 months ended 1Q18, that number has declined to around $750 million. Chubb is not alone facing this trend in decline. Its results compare with, for example, pro forma XL/Catlin, which generated nearly $500 million of annual net favorable reserve releases during the trailing 12 months ended 1Q14. Prior to the 1Q18 announcement of its intended acquisition by AXA, the combined company was generating just over $200 million of net favorable development. As another example, the Travelers, which reliably generated about $900 million of annual

Deutsche Bank Securities Inc. Page 11 12 July 2018 Insurance / Nonlife Chubb Limited favorable reserve development in the 2013-2015 years, but is now generating less than $700 million.

Figure 15: Comparative Net Prior-Period Reserve Development (Trailing 12-Month Basis, $mn on left, indexed back the 1Q14 on right)

1,400 1.6

1,200 1.4

1,000 1.2 1.0 800 0.8 600 0.6 400 0.4 200 0.2 0 0.0

new Chubb Travelers XL Catlin new Chubb Travelers XL Catlin

2014 and 2015 displayed as if ACE/Chubb and XL/Catlin had already merged. Excludes the impact of the Odgen U.K. rate charge from 1Q17. Source: Company reports and Deutsche Bank

Travelers, among other domestic personal lines/commercial hybrid underwriters had particular difficulties over the past 24 months with its personal auto business, which created material amounts of net unfavorable reserve development. If one strips out the impact of the unfavorable trends in this segment, net prior period development at Travelers in its Business and Specialty segments has been essentially flat over the past five years as ACE/Chubb's and XL/Catlin's have declined. (Other large-cap U.S. P&C companies do not provide useful comparisons, given that prior-year development has not been a significant feature in The Hartford's earnings history over the past five years, and AIG's reserves have proven decidedly deficient for many years.)

Figure 16: Comparative Net Prior-Period Reserve Development Excluding Personal Lines (Trailing 12-Month Basis, $mn on left, indexed back the 1Q14 on right)

1,400 1.6 1.4 1,200 1.2 1,000 1.0 800 0.8 600 0.6 400 0.4 200 0.2

0 0.0

new Chubb Travelers XL Catlin new Chubb Travelers XL Catlin

2014 and 2015 displayed as if ACE/Chubb and XL/Catlin had already merged. Excludes the impact of the Ogden U.K. rate charge from 1Q17. Source: Company reports and Deutsche Bank

The pace of decline of favorable reserve development at XL has been greater than the pace at Chubb, though we believe the reason for this decline may have similar roots in both. Both ACE (in Chubb) and XL (in Catlin) acquired businesses run by a top management looking to exit the business via a sale. We question the degree to which significant reserve releases at both legacy Chubb and legacy Catlin were particularly conservative. Whereas a company like legacy ACE or legacy XL should

Page 12 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited aim to set very conservative loss picks if it is to view itself as a "going concern" business, the acquired business has incentives to release reserves and pick its losses less conservatively in the spirit of boosting EPS/ROE in order to attract a buyer.

Uncommonly Good Crop Results In the section above, we refer to Chubb's Global P&C business. The way Chubb reports earnings, it sums up the value of its various subsegments excluding a) life reinsurance and b) agriculture/crop business into a larger reporting segment called Global P&C. ACE entered into an agreement to purchase the remaining 80% of Rain and Hail Insurance Services that it did not own in 2010. This business sells insurance to farmers to protect their crops against weather, crop failure and pricing gluts. Chubb management has described this business as a long-term 88-90% combined ratio business (a general framework repeated as recently as the 4Q16 earnings conference call) with a high degree of volatility. Following the 2012 U.S. Corn Belt droughts (estimated by SwissRe at an insured loss of $11.7 billion in 2017 dollars, making it historically the 16th most costly global insurance event as measured from 1970-2017), the combined ratio for this ACE's crop business spiked to 105%, 1,500-1,700bps above the long-term expectation of 88-90%. We would expect that this 105% level represents a likely peak-type loss for this business.

Over the 2016-1Q18 period, the combined ratio of Chubb's crop insurance Recent crop results, delivering a 71-74% business has ranged between 71-74% on a trailing 12-month basis.Whereas combined ratio for the past couple years are as far from the long-term margin a spike to 105% in 2015 represented a upward (earnings negative) skew expectations (in a positive direction) as 1,500-1,700bps in excess of the long-term expected norm, 71-74% represents a 2012, the worst year in crop insurance downward (earnings positive) skew of 1,400-1,900bps. The point we make here is history skewed to the negative. We that the current earnings stream today is skewing as positive as the worst insured assume results like these, which added an incremental $0.30 to both 2016 and 2017 drought in U.S. history skewed negative. Further, it is worth noting that, in the EPS, are unsustainable. pre-Chubb years, ACE's crop business's combined ratios generally were fairly similar whether measured on a accident-year or calendar-year basis. For the past couple of years, this short-tailed line of business has been throwing off significant amounts of net prior-year favorable reserve development.

Figure 17: Tracking Underwriting Margin Trends for Chubb's Crop Insurance Business

110% 140 105% 120 100% 100 95% 80 90% 60 85% 40 80% 20

75% 0 Net PYD ($mn) Combined Combined Ratio 70% -20 65% -40

60% -60

1Q-18

4Q-17

3Q-17

2Q-17

1Q-17

4Q-16

3Q-16

2Q-16

1Q-16

4Q-15

3Q-15

2Q-15

1Q-15

4Q-14

2Q-13 3Q-14

1Q-13 2Q-14

1Q-12 4Q-12 1Q-14

2Q-12 3Q-13 4Q-11 3Q-12 4Q-13

Net PYD ($mn) Combined Ratio AY Combined Ratio

Source: Company reports and Deutsche Bank

We assume these uncommonly good results should likely revert to the long-term average of 88-90%. We forecast an 86% combined ratio in the crop business

Deutsche Bank Securities Inc. Page 13 12 July 2018 Insurance / Nonlife Chubb Limited as we assume that the mode is somewhat lower than the average, given that severe years like 2012 should likely be uncommon. However, the persistency of this sub-normal 71-74% period seems extraordinary, particular for a business that is subsidized by the Federal government. Above we detailed a $0.15-0.30 multi- year EPS headwind stemming from out forecast of a decline net favorable prior period development. By comparison that 71-74% combined ratios in the crop business are also boosting Chubb's annual EPS by $0.30 or more (especially if they persist at the now lower Federal tax rate).

We have not lowered our combined ratio forecast for crop insurance results and generally assume that most of the Street has been modeling crop results in the mid-to-high-80% range instead of the low-70% range. It could be argued that these outsized crop profits have been a key factor in Chubb's EPS beats since merging.

Figure 18: Trailing 12-Month EPS Impact of Crop Figure 19: Chubb's Post-Merger EPS Beats and Insurance Underwriting Results Below/(In Excess of) a Contribution from Crop Business 89% Combined Ratio 1Q-16 2Q-16 3Q-16 4Q-16 1Q-17 2Q-17 3Q-17 4Q-17 1Q-18 $0.40 Actual EPS $2.27 $2.25 $2.88 $2.72 $2.48 $2.50 -$0.13 $3.17 $2.34 Consensus EPS Forecast $2.16 $2.22 $2.58 $2.42 $2.41 $2.47 -$0.24 $2.29 $2.26 $0.30 Implied EPS "Beat" $0.11 $0.03 $0.30 $0.30 $0.06 $0.03 $0.11 $0.88 $0.07 Earnings from crop insurance delivering better $0.07 -$0.03 $0.00 $0.23 $0.13 -$0.02 -$0.02 $0.22 $0.13 $0.20 than an 89% combined ratio

$0.10

$0.00

-$0.10

1Q-18

4Q-17

3Q-17

2Q-17

1Q-17

4Q-16

3Q-16

2Q-16

1Q-16

4Q-15

3Q-15

2Q-15

1Q-15

4Q-14

3Q-14

2Q-14

1Q-14

4Q-13

3Q-13

2Q-13

1Q-13

4Q-12

3Q-12

2Q-12

1Q-12 4Q-11

-$0.20

-$0.30

-$0.40

Per share calculation recalculates sharecount as if ACE and Chubb had already merged prior to 2016. Source: Company reports and Deutsche Bank Source: Company reports and Deutsche Bank

In 1Q16, 4Q16, 1Q17, 4Q17 and 1Q18, crop insurance results significantly contributed to Chubb's EPS beat versus consensus. There may be something to this seasonality, and management has indicated as such without expressing it explicitly. Still, we suspected combined ratios in the low-70% range are likely more exceptions than long-term likelihoods. However, this is one area where Chubb has had and may continue to have some incremental earnings over consensus forecasts.

Merger-Related Actions Haven't Materially Reduced Catastrophe Exposure

In the past, legacy ACE and legacy Chubb used to provide investors with useful guidance related to its annual budgeted catastrophe exposure. Now, it is difficult to pin down where "new" Chubb currently stands in terms of its 2018 annual average catastrophe load expectation. That said, the company has given investors some clues. Despite having some tools to track cat load, however, we are left unsatisfied and conclude that the catastrophe exposure at Chubb is higher than what the "clues" imply and may even be higher than what we are currently modeling ($1.00-1.05 billion annually). Regardless we are fairly confident that our catatastrophe expecation is above the Street on this line item, which explains some of the variance between our numbers and consensus EPS. To understand

Page 14 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited why, it might be useful to go through a brief history of guidance regarding Chubb's catastrophe tolerance.

The Pre-Merger Era The Chubb predecessor company ACE (same management at new Chubb today) used to reliably give guidance around its catastrophe expectations as a part of ranged EPS disclosure. Essentially, the company would give an EPS range (between $X.XX and $Y.YY) including the impact of budgeted catastrophes (with $ZZZ million in pre-tax catastrophes equivalent to $AAA million after-tax) and excluding any projection of prior-year loss development. However, the policy also adopted the standard of updating EPS guidance each quarter to include a) actual catastrophe losses and b) development that had already occurred. The effect was that EPS guidance would shift as actual experience strayed from budget. The full-year guidance offered with fourth quarter earnings contained the full- year catastrophe budget but no placeholder for reserve development, but the updated guidance with first quarter would contain the i) first quarter’s favorable development, ii) the first quarter’s actual catastrophe experience plus iii) the catastrophe budget for the final nine months of the year. The second quarter guidance update included i) the first half development, ii) actual catastrophes and iii) the second half budget for catastrophes, and so on. Analysts were sometimes confused by this policy, and sometimes it would seem that there were core earnings revisions buried in the shifts that management did not intend. Generally, management found fielding questions about all matters of guidance tedious and abandoned the practice for the 2014 fiscal year (having given a year’s advance notice). In addition to ceasing to give EPS guidance, the company also stopped giving guidance around annual catastrophe expectations.

The last guidance legacy ACE gave around annual average catastrophe risk came with 4Q12 earnings for the 2013 fiscal year. From legacy ACE 4Q12 press release: "The company also issued 2013 guidance. [...] Catastrophe losses included in the estimate are $475 million pre-tax ($395 million after-tax), which are in line with last year’s catastrophe loss guidance." While the company did not update guidance again, subsequently, as reinsurance became cheaper, ACE management indicated that it had reduced its catastrophe exposure. $415 million is perhaps more reasonable for a 2014-2015 budgeted cat load, which is equivalent to about 3.0% of net premium earned in those years.

By contrast, legacy Chubb always gave both EPS and catastrophe loss guidance We estimate that the 2015 pro forma until the day that the company was acquired by ACE. The legacy Chubb 4Q14 catastrophe budget for ACE and Chubb combined was $915mn, equivalent to press release contained this forward-looking bullet of guidance: "Catastrophe around 3.3-3.4% of pro forma net premiums losses that have an impact of 4 percentage points on the 2015 combined earned. Contrary to general comments from ratio." At $12.5 billion of annual premium 2015, 4% equates to essentially $500 management, we believe the catastrophe million of budgeted pre-tax catastrophe losses. Assuming legacy ACE’s 2015 budget for 2017 and 2018 is higher than it was in pro forma 2015. expected catastrophe loss experience was around $415 million, the combined company would have around a $915 million budget for catastrophe losses, and the combined Chubb/ACE average annual catastrophe load would be around 3.3-3.4% of pro forma net premiums earned.Subsequently, new Chubb management repeatedly mentioned throughout 2016 and 2017 that it was taking merger-related actions including increasing prices, non-renewing business and, very essential to the point we are making here, increased reinsurance purchasing in order to reduce firmwide catastrophe exposure. We would assume from these qualitative comments that new Chubb management expected that its annual average catastrophe expectation would decline, if not in 2016, then certainly in

Deutsche Bank Securities Inc. Page 15 12 July 2018 Insurance / Nonlife Chubb Limited

2017. By our calculations, this doesn't seem to be the case. Catastrophe exposure may be increasing. Full-Year guidance makes a comeback . . . in retrospect 2017 turned out to be a very active catastrophe year. While new Chubb Chubb gave investors 2017 catastrophe management gave no guidance around its 2017 annual expectation for budget guidance in retrospect, which we estimate implied a budget of $890-980mn catastrophe losses (nor have they for 2018). They did give retrospective detail in pre-tax catastrophe losses compared with when 4Q17 full-year results were reported. On the 4Q17 conference call, CEO actual 2017 catastrophe losses of $2.75B Evan Greenberg said: "For the year, we produced $3.8 billion in core operating pre-tax. income, which was down 20% from what we would have earned with a normalized level of cat losses and without the benefit from tax reform, or about $4.8 billion." Buried within this statement, we believe, is guidance around the 2017 annual catastrophe expectation (which can somewhat be extrapolated into future years). When trying to tease out this math, it seems Chubb would have earned about $5.5 billion with no cat losses ($2,171 million after-tax) and without the benefit from the one-time tax reform gain ($450 million). (Formula: $3.8 billion of actual core earnings + $2.2 billion of cats - $450 million tax benefit = $5.5 billion). Between that $5.5 billion of earnings excluding catastrophes and $4.8 billion of earnings from normalized catastrophes, there is the implication of about $700-775 million (the range depends on the number of decimal places used and using "20%" vs. "$4.8 billion") of after-tax normalized annual catastrophe experience for 2017 in this commentary. At a 20% tax rate (similar to 2017's catastrophe tax rate), it implies about a $890-980 million pre-tax catastrophe budget, which doesn't seems particularly lower than either actual guidance (2013) or hypotheses (2014-2015) around pre-merger pro forma catastrophe budgets.However, there are a number of other quarterly “correctives” from 2Q16 through 1Q18 that lead us to believe that the high end of the range, at $980 million, may be modestly understating Chubb’s exposure to a year of normal catastrophe losses. In fact, Chubb’s 2018 catastrophe exposure actually seems to be higher than it was in pro forma 2015. Below are the conflicting (and modestly tedious) data points around Chubb’s catastrophe exposure. 2Q16 represents a break with protocol In 2Q16, Chubb ended its post-2013 suspension around disclosing average catastrophe expectations. The company pre-announced its 2Q16 cat losses, which seemed, at the time, an unusual moment to break with the non-guidance stand it took in 2013. From the press release preceding 2Q16 earnings results, Chubb pre-announced that 2Q16 catastrophe losses would cost the company a preliminary $390 million pre-tax, but also that "This estimate exceeds our original internal projection of $280 million pre-tax." It is not unusual for Chubb or another P&C company to publish a preliminary estimate of catastrophe losses whenever they are high or the market seems to note particular uncertainty. The unique part is Chubb's disclosure of its long-missing budgeted number.

1Q17: Catastrophes elevated or not? With 1Q17 results, management noted on the conference call that "Our While 1Q17 catastrophe experience was underwriting income growth was driven by combined ratios that were simply described as "elevated" just after these losses occurred, the 1Q17 loss now seem in- excellent in the quarter on both a calendar and accident-year basis in spite of line with Chubb's budget in retrospect. We elevated natural catastrophe losses." Chubb reported 1Q17 pre-tax catastrophe question whether the experience of 2H17 losses of $206 million. At the time, it was not clear to what degree catastrophe catastrophes has caused the cat load for the losses were elevated, as described. In general, the volatility around catastrophes same exposures to be higher in retrospect due to modeling adjustments. for many P&C companies (including Chubb) is quite high. It is not unusual for a company to experience double its quarterly budgeting of catastrophe losses. (For example, 1Q18 would experience $380 million in catastrophe losses on a budget of $205 million, but more on this below.) If a management team describes a quarterly experience with catastrophes as "elevated," we would assume this

Page 16 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited implies catastrophes at least 20% higher than expected (but probably more) and certainly no less that 10%. We believe this statement implies a potentially maximum catastrophe budget of $175 million or less for the first quarter. Over a year later, the 10-Q for 1Q18 reads, “For the three months ended March 31, 2018 and 2017, based on these and other factors, the normal level of CATs that we expected was $205 million and $201 million, respectively.”While technically true that $206 million of catastrophe experience in 1Q17 is higher than a budget of $201 million, it seems implausible to us that a management team would describe $206 million vs. $201 million as particularly “elevated.” Far more likely, it would have been best described as “nearly and coincidentally in-line” with the budget.

If this last point seems pedantic, we absolutely concur, and the point we are trying to make here is not whether $206 million is higher or essentially the same as $201 million. What we are probing is whether management wasn’t precisely correct when it described the 1Q17 results as having “elevated natural catastrophe losses.” Our initial assumption was that this meant a catastrophe budget of $175 million or less for the first quarter. However, over one year later the company put numbers to that budget, which would make it seem essentially in-line. A lot was learned about catastrophe exposure in 2017. Hurricanes Harvey, Irma and Maria combined for $70-100 billion in insured losses industrywide. The California wildfires also represented significant multi-billion insured losses. Perhaps 1Q17 losses were elevated relative to the budget based on the 2017 catastrophe models, but are essentially in-line when fitted to the 2018 models. This would explain how the losses could be described as “elevated” in 2017 when they were “essentially in-line” when investors were given the catastrophe budget a year later.

1Q18: Catastrophe exposure rising or falling? With the publication of the 1Q18 earnings press release, Chubb again revealed Formula for the 1Q18 catastrophe budget: its quarterly catastrophe budget: “Core operating income was $1.1 billion. Core ($2.98 core EPS excluding cats - $2.62 core EPS normalized for cats) * 469.5mn diluted operating income excluding catastrophe losses was $1.4 billion, or $2.98 per shares outstanding / ($303mn of after-tax share, up 5.3% per share on the same basis from last year. Core operating income cats / $380mn of pre-tax cats) = $212mn of with an expected level of catastrophe losses was $1.2 billion, or $2.62 per share, "normalized" 1Q18 cats up 4.8% per share on the same basis from last year." With this disclosure, the company gives investors the tools its needs to calculate the budget for the 1Q18 catastrophe expectation at $212-213 million.In the 10-Q filed two weeks later and mentioned above this initial $212-213 million disclosure was downward tweaked to $205 million: “For the three months ended March 31, 2018 and 2017, based on these and other factors, the normal level of CATs that we expected was $205 million and $201 million, respectively.” The point we make here is that whether we believe our theory of $175 million or less as the original 1Q17 catastrophe budget or the $201 million disclosed over a year later or whether we believe the $212-213 million 1Q18 cat budget disclosed in the press release or the $205 million disclosure in the 10-Q, it may very well be the case that the 1Q18 catastrophe budget is higher than the 1Q17 budget. We acknowledge that we may be overstating the case, however. $205 million and $201 million might be described as essentially the same (when comparing the 1Q18 budget to 1Q17 budget) just as $206 million and $201 million might also be described as essentially the same (when comparing 1Q17’s actual result to its budgeted expectation). But, if the 1Q17 budget were $175 million or less and the 1Q18 budget were $212-213 million, this seems more directional. 3Q17: Giving quarterly average catastrophe loss guidance sometimes becomes the norm The hurricanes of 3Q17 caused Chubb $2.2 billion of after-tax catastrophe losses. This is an unusual outcome, but one that seems to occur every five years or so.

Deutsche Bank Securities Inc. Page 17 12 July 2018 Insurance / Nonlife Chubb Limited

To clear up some of the confusion, the company gave incremental detail in the 3Q17 conference call: "Our pretax catastrophe losses in the quarter, principally from Hurricanes Harvey, Irma and Maria, were $3 billion gross and $1.9 billion net of reinsurance and reinstatement premiums. This compares to an expected net catastrophe loss for the third quarter of $330 million pretax." With this 3Q17 disclosure, investors have been given budgeted catastrophe disclosure from two first quarters ($205 million in 1Q18 and $201 million in 1Q17), a second quarter ($280 million in 2Q16) and a third quarter ($330 million in 3Q17). The company has not disclosed a fourth quarter base number since the merger, and the already disclosed numbers can be changing some year-to-year. However, $815 million ($205 million + $280 million +$330 million) isn’t likely to be radically wrong for a first nine months of the year estimate, and its seems to be tracking higher than $890-980 million for a full-year cat budget forecast.

Further, the fourth quarter has plenty of perils that can cause material losses: Irregular quarterly guidance around the end of the U.S. Atlantic hurricane season (remember Superstorm Sandy?), catastrophe budgets seems to imply around $815mn of expected catastrophe exposure the beginning of the Australian cyclone season, the Santa Ana wildfire season in through the first nine months of the year. California, the year-round risk of an earthquake, etc.A $200-300 million budget for Given the seasonal perils during October- a fourth quarter does not seem unreasonable and implies $1.0-1.1 billion of annual December, we expect that the fourth quarter expected catastrophe exposure. This is higher than the combination of legacy represents an additional $200-300 of annual expected catastrophe exposure, suggesting Chubb’s 2015 guidance of $500 million plus legacy ACE’s 2013 guidance of $475 a full-year catastrophe budget of $1.0-1.1B million (which we suspected was probably closer to $400 million by 2015). Given all the declines in catastrophe reinsurance over the past five years combined with ACE/Chubb’s management commentary about reducing catastrophe exposure, one would expect the budgeted cat load to be lower, not higher. The key hole view into budgeted numbers appears to suggest the opposite, however. It may be the case that Chubb has some annual aggregate coverage that limits its exposure above $1 billion, but, ultimately, we just don't know without some guidance.

Ultimately, the point we make is that Chubb management has obliquely returned to the policy of giving guidance. However, it does itself no favors when it selectively gives a piece of essential information for one quarter and then keeps that same statistic hush in another quarter. From what they company has given investors, we have some of the tools, but they are imperfect ones. This may be why we are forecasting a normalized catastrophe budget of $1.00-1.05 billion, when we think the implied internal forecast is $890-980 million (a variance that would like imply a drag on our forecast relative to consensus of $0.03-0.27 per share), which likely better matches consensus. Instead of arming investors with a selective and dogged set of tools to forecast numbers, the company can end this type of second guessing with disclosure on its annual budgeted catastrophe exposure, a piece of data that a number of its competitors willingly offer.

Page 18 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited Appendix 1

Important Disclosures *Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure Chubb Limited CB.N 131.85 (USD) 11 Jul 2018 8 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/ Research/Disclosures/CompanySearch. Aside from within this report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities? topicId=RB0002. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 8. Deutsche Bank and/or its affiliate(s) expects to receive, or intends to seek, compensation for investment banking services from this company in the next three months. Important Disclosures Required by Non-U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at https://research.db.com/Research/Disclosures/CompanySearch Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Joshua Shanker

Deutsche Bank Securities Inc. Page 19 12 July 2018 Insurance / Nonlife Chubb Limited

Historical recommendations and target price. Chubb Limited (CB.N)

(as of 07/11/2018) 200.00 Current Recommendations Buy Hold 9 10 Sell 7 150.00 8 Not Rated 6 11 12 Suspended Rating 4 5 1 3 2 ** Analyst is no longer at Deutsche Bank 100.00 Security price

50.00

0.00 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Jul '18 Date

1. 07/24/2015 Hold, Target Price Change USD 132.00 Phil Stefano 7. 07/26/2017 Hold, Target Price Change USD 135.00 Joshua Shanker 2. 01/21/2016 Hold, Target Price Change USD 110.00 Joshua Shanker 8. 09/27/2017 Hold, Target Price Change USD 134.00 Joshua Shanker 3. 05/11/2016 Hold, Target Price Change USD 116.00 Joshua Shanker 9. 10/27/2017 Hold, Target Price Change USD 146.00 Joshua Shanker 4. 07/27/2016 Hold, Target Price Change USD 126.00 Joshua Shanker 10. 01/31/2018 Hold, Target Price Change USD 149.00 Joshua Shanker 5. 02/07/2017 Hold, Target Price Change USD 125.00 Joshua Shanker 11. 03/28/2018 Hold, Target Price Change USD 140.00 Joshua Shanker 6. 04/26/2017 Hold, Target Price Change USD 132.00 Joshua Shanker 12. 04/25/2018 Hold, Target Price Change USD 141.00 Joshua Shanker

§§§§$$$$$§§§§§

Equity Rating Key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock. Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Newly issued research recommendations and target prices supersede previously published research.

Page 20 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited

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Deutsche Bank Securities Inc. Page 21 12 July 2018 Insurance / Nonlife Chubb Limited

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed-rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or liquidation of positions), and settlement issues related to local clearing houses are also important risk factors. The sensitivity of fixed- income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. The index fixings may – by construction – lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. Funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Options on swaps (swaptions) the risks typical to options in addition to the risks related to rates movements. ? ? Derivative transactions involve numerous risks including market, counterparty default and illiquidity risk. The appropriateness of these products for use by investors depends on the investors' own circumstances, including their tax position, their regulatory environment and the nature of their other assets and liabilities; as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited – up to theoretically unlimited losses. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option, investors must review the "Characteristics and Risks of Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp . If you are unable to access the website, please contact your Deutsche Bank representative for a copy of this important document. ? ? Participants in foreign exchange transactions may incur risks arising from several factors, including the following: (i) exchange rates can be volatile and are subject to large fluctuations; (ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government-imposed exchange controls, which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk. ? Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important conflict disclosures can also be found at https://research.db.com/Research/ on each company ’ s research page. Investors are strongly encouraged to review this information before investing.

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Page 22 Deutsche Bank Securities Inc. 12 July 2018 Insurance / Nonlife Chubb Limited and services. If this is not the case, or if You are an IRA or other retail investor receiving this directly from us, we ask that you inform us immediately.

In July 2018, Deutsche Bank revised its rating system for short term ideas whereby the branding has been changed to Catalyst Calls (“CC”) from SOLAR ideas; the rating categories for Catalyst Calls originated in the Americas region have been made consistent with the categories used by Analysts globally; and the effective time period for CCs has been reduced from a maximum of 180 days to 90 days.

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Deutsche Bank Securities Inc. Page 25 David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Officer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Spyros Mesomeris Head of Research - Germany Global Head of Quantitative and QIS Research

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