Chubb Limited
Q2 2010 Earnings Call Transcript

Published: 23 Jul 2010

[Operator:]

Good day, everyone, and welcome to the Chubb Corporation's Second Quarter 2010 Earnings Conference Call. [Operator Instructions]. Before we begin, Chubb has asked me to make the following statements. In order to help you understand Chubb, its industry and its results, members of Chubb's management team will include in today's presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It is possible that actual results might differ from estimates and forecasts that Chubb's management team might make today. Additional information regarding factors that could cause such differences appear in Chubb's filings with the Securities and Exchange Commission. In the prepared remarks and responses to questions during today's presentation of Chubb's Second Quarter 2010 Financial Results, Chubb's management may refer to financial measures that are not derived from the Generally Accepted Accounting Principles or GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP and related information is provided in the press release and the financial supplement for the second quarter 2010, which are available on the Investors section of Chubb's website at www.chubb.com. Please also note that no portion of this conference call may be reproduced or rebroadcast in any form without the prior written consent of Chubb. Replays of this webcast will be available through August 20, 2010. Those listening after July 22, 2010, should please note that the information and forecast provided in this recording will not necessarily be updated, and it is possible that the information will no longer be current. Now I'll turn the call over to Mr. Finnegan.

[John Finnegan:]

Thank you. And thanks for joining us. We are very pleased to report excellent results for the second quarter and the first half, notwithstanding substantially higher-than-expected catastrophe losses in both quarters. Operating income per share for the second quarter was $1.41, despite $0.38 of cats [catastrophes]. That compares to $1.49 in last year's second quarter when the impact of cats was only $0.08. The second quarter combined ratio in 2010 was a very strong 90.4%, even including 6.9 points of cats, our highest second quarter cat impact ever. The x cat combined ratio for the quarter was 83.5%, nearly a point better than last year's second quarter. For the first six months, operating income per share was $2.54 and the combined ratio of 92%, which is exceptionally good considering it included 9.6 points of cats. The six-month x cat combined ratio of 82.4% was nearly 3.5 points better than the first half of last year. In addition, our investment portfolio continued to perform extremely well. During the second quarter, it produced a net realized capital gain before tax of $90 million. At June 30, our net unrealized appreciation before tax stood at $1.9 billion, which is an increase of $88 million over March 31. The effect of these investment on operating results was a reported book value per share of $49.39 at June 30, 2010, a 19% increase compared to a year ago. Our excellent capital position enabled us to substantially increase our share repurchase program in order to take advantage of the attractive opportunity in the market to acquire our own shares. Ricky will talk more about the buyback program in his remarks. As you will recall, last January, we provided 2010 operating income guidance of $5.15 to $5.55 per share, based in part at an assumption of three points of cats for the year. Substantially higher-than-expected cats in the first half have led us to change that assumption to seven points of cats for the full year. Nonetheless, we are affirming our January earnings guidance based on our excellent x cat results year-to-date and our outlook for the second half of the year. I will elaborate on our updated guidance in my closing remarks. Let me turn it over now to John Degnan, who will talk about our operating results.

[John Degnan:]

Thanks, John. I'm going to begin with a review of the individual business units for the second quarter. Chubb Personal Insurance net written premiums increased 5%, led by strong growth outside the U.S. About half that growth was attributable to currency fluctuation, and CPI produced the combined ratio of 92.9% compared to 84.2% last year. Cat losses for CPI were 13.8 points in the second quarter of 2010 compared to only 3.2 points a year earlier. So excluding the cat impact, CPI's combined ratio improved nearly two points to 79.1% from 81%. Homeowners premiums were up 2%, and the combined ratio was 94.5%, including 20.3 points of cats. Our Personal Auto premiums were up 14% with a combined ratio of 90.2%. In Other Personal lines, which includes the Accident business, premiums increased 9%, and the combined ratio was 90.5%. Premiums for both Personal Auto and Accident reflect strong growth outside the U.S. and the positive effect of currency. At Chubb Commercial Insurance, premiums were flat. It was the first time since the first quarter of 2008 that CCI's reported premiums did not decline. The combined ratio was 92.9% compared to last year's 89.2%, but CCI's second quarter included a 5.6 point impact of cats compared with only 1.2 points in 2009. So excluding the cat impact, CCI's combined ratio for the quarter improved to 87.3% from 88% last year. CCI retained 86% of the U.S. premiums that came up for renewal, and the ratio of new-to-lost business was 1.3

[Richard Spiro:]

Thanks, John. As usual, I will review our financial results for the quarter. I will also provide commentary on our international investment portfolio and our capital management efforts. Overall, as you've heard, we are very pleased with our performance in the second quarter, and we continue to have excellent capital and liquidity positions. Looking first at our second quarter operating results, we had solid underwriting income of $263 million despite another relatively heavy cat quarter for the industry and for Chubb. Property and casualty investment income after tax was essentially flat at $311 million. Net income was higher than operating income in the quarter, due to net realized investment gains before tax of $90 million or $0.18 per share after tax, including $86 million in net gains before tax on our alternative investments portfolio. As a reminder, we account for our alternative investments on a one quarter lag, and we include the changes in the net equity of our alternative investments and net realized gains and losses. Accordingly, the net realized gains that we reported in the second quarter reflected the strong performance of equity markets in the first quarter. Conversely, the impact on our alternative investment of the subsequent decline in the equity markets during the second quarter will be reflected in our results in the third quarter. Unrealized depreciation before tax at June 30, 2010, increased to $1.9 billion from $1.8 billion at the end of the first quarter and $1.6 billion at year end 2009. Turning to our investment portfolio. The total carrying value of our consolidated investment portfolio was $42 billion as of June 30, 2010, compared to $42.3 billion at the end of the first quarter. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is four years, and the average credit rating is Aa2. In light of the continued volatility in global financial markets, we thought that you would appreciate some details about our international investment portfolio, which represented 22% of our total invested assets as of June 30. Our international investment portfolio totaled $9.2 billion, of which $9.1 billion was invested in high-quality fixed maturity securities and short-term investments. The international fixed maturity portfolio has an average credit rating of Aa1 and is heavily concentrated in AAA-rated sovereigns and supranationals. Our five largest sovereign exposures, which account for 45% of our total international investment portfolio, are Canada, the United Kingdom, Australia, Germany and France. We have no direct exposure to Greece, minimal exposure to Portugal and our total exposure to the so-called PIGS [Portugal, Italy, Greece, Spain] is approximately 5% of our international investment portfolio and 1% of our total invested assets. We also continue to have excellent liquidity at the holding company. At June 30, 2010, our holding company portfolio had $2.3 billion of investments, including $760 million of short-term investments. Book value per share under GAAP at June 30 was $49.39 compared to $47.09 at year-end 2009 and $41.45 a year ago. Adjusted book value per share, which we calculate with available-for-sale fixed maturities at amortized costs was $45.61, compared to $44.37 at 2009 year end and $40.41 a year ago. As for reserves, we estimate that we had favorable development in the second quarter of 2010 on prior-year reserves by SBU [strategic business units] as follows

[John Finnegan:]

As you've heard, Chubb has performed extremely well in the second quarter and for six months. Some of the highlights were

[Operator:]

[Operator Instructions] We'll take our first question from Joshua Shanker with Deutsche Bank.

[Joshua Shanker:]

I guess the question directs towards John Degnan, but anyone can really answer. I was watching the congressional hearings last week, and there was this argument about the extent to which the Neal Bill might or might not increase some premium costs. And then, I talked to myself, well, maybe this would spur improved price in the market. I'm wondering if you can talk about what you guys think the impact of a change in the taxation persuasion would have on the industry in general in terms of whether you could get premium increases out of that.

[John Degnan:]

Actually, Josh, I don't think that the $17 billion over 10 years or roughly $2 billion a year in increased access to the reinsurance companies would influence the market at all. First of all, the reinsurers are probably not going to be able to pass that along to their primary insurers. There are alternatives in the marketplace today to reinsurance. The reinsurance market is highly competitive, and frankly, it's a bogeyman that they've created that they could pass this along in premiums. I'd like to see them try it, do it to us. So I think they created an argument for their political purposes that is just flat out wrong and placed the fears. So it'd be pretty inconsistent for me to say that that's going to be a market-changing event. There's no way that's going to influence or change the market.

[Joshua Shanker:]

It would increase your competitive position. A lot of things that you write would be more competitively priced I guess though.

[John Degnan:]

It certainly puts us on a level playing field in terms of competition because the carriers that reinsure to their affiliated companies avoid taxation and have an effective tax rate that's several points lower than ours. So I don't think it will change the market, but it will take the competitive disadvantage away from domestic companies that we now face based on a loophole in the tax law.

[Joshua Shanker:]

In terms of the extent to which there would be any impact on your P&L or balance sheet from such a change?

[John Degnan:]

I just think it puts us in a better position in the marketplace to compete fairly. So it may improve our results. I don't think it's going to affect the hardening or softening of the market trend.

[Joshua Shanker:]

Do you think you'd win more business or do you think the market would become less competitive?

[John Degnan:]

Let me put it this way, they try to pass along the tax increase in prices where we get launched [ph].

[Operator:]

Next up, we'll hear from Vinay Misquith with Credit Suisse.

[Vinay Misquith:]

The first question is on the Accident area, combined ratio, the decline versus the year ago in standard commercial. If you could give us a sense as to why that is happening?

[John Finnegan:]

So we're looking at about, I guess, at Accident area, cat declined a little bit less than two points, which is consistent, I guess, with the first quarter. I think the story is the same as in the first quarter. The fact is that in lumpy classes like Property, we have just had some very good experience in the first two quarters of this year. Can't attribute it to anything, it comes and goes in Homeowners too. Property is aligned in which you're basically booking what your losses and what your claims are, and we've had very favorable experience these two quarters. That doesn't mean it's going to continue to be just as good for the next two quarters. It comes and it goes. I mean, it's certainly a profitable line of business for us over the longer run. We think we can write it well. We underwrite it well. It's disciplined. We get reasonable rates for it. But the difference from quarter-to-quarter just depends on the losses that we experienced during that quarter. And I think we said last time, like in the first quarter, second quarter, we had just a very favorable loss experience.

[Vinay Misquith:]

And since pricing is flat versus lost cost, and they're increasing, should we expect some amount of deterioration in the combined ratio going forward?

[John Finnegan:]

Well, let's say it, a couple of things -- are you talking about commercial specifically?

[Vinay Misquith:]

Yes, and also the other lines.

[John Finnegan:]

Well, I would say this, that if rates stay flat in Commercial business over time, lost costs tend to rise so that you will see margin compression, and you've probably seen a little bit of margin compression in the Liability lines now, although picking and opening it to Liability is pretty tough in the early years. As far as Property, I suspect that, that will -- listen, I think all the lines have tempered a little bit by frequency. Frequency is down. Claims are down. But over time, you won't get around margin compression if you don't raise rates. Property, though, is a little bit different case because it's a lumpy line, it's more like to the experience we have on -- our performance we have in the third and fourth quarter on Property will relate a little bit more to the losses we experienced during that period, the fire losses we get and any sort of ongoing trend line. In the Specialty lines, obviously, the issue is in more systematic losses. What we're seeing is significant decline in claims, especially in the credit crisis in [indiscernible] area. The credit crisis appears to have tapered off, so that's obviously a positive on the accident year. And the accident year is much better on Specialty this year than it was last year.

[Vinay Misquith:]

So would it be fair to assume that some part of your lower loss pick this year is because of lower frequency and severity of losses?

[John Finnegan:]

When you talk about lower loss pick this year, a loss pick is probably more relevant to our Specialty and Long Tail lines, where we have to make an assessment without much data. And I would say that in Professional Liability, we're running 99 this year versus 102 last year. Last year was a third year of major credit crisis claims, so we had a big load in our accident year for potential credit crisis claims. We're not seeing anything like that this year. We're seeing really an abatement of credit crisis claim, so we don't have as big a cap load in Specialty. In the Property classes and the Short Tail lines, those lines tend to be more influenced by claims activity and losses, actual experience not so much as a pick, and we've just had a much better experience in the first two quarters of this year than last. But to put this in some perspective, let me close this out, in our guidance, we are assuming about a three-point to four-point deterioration in our accident year x cat performance during the second half of the year, because we think we've been unduly lucky perhaps in the first half, and the numbers have just been great. So we expect a little bit more reversion to the 2009 x cat level. So we're not expecting extrapolating a continued performance at this very, very high level, still expecting a very good performance but somewhat worse in the second half than we've got in the first half.

[Vinay Misquith:]

On the Professional Liability side, you mentioned that combination is increasing. Could you help me understand your new-to-lost ratio of 1

[John Finnegan:]

Well, I think what you're seeing in the Professional Liability line is higher retentions all around, and you're certainly seeing that in CSI. I think we've been able to retain our good business. And when you look at retention, retention is one side of the coin and new-to-lost. We've lost a lot less business. So at 1

[Operator:]

Next up, we'll hear from Jay Gelb with Barclays Capital.

[Jay Gelb:]

On the buyback, I just wanted to make sure I understand it, Chubb's saying they'll buy back the remaining $16.7 million share repurchase authorization the second half?

[Richard Spiro:]

Jay, it's Ricky. It's our intent to buy back the 16.8 million shares still outstanding under the share repurchase program as of the end of June. But should market conditions remain stable, we would hope that we'd be able to complete that by the end of the year.

[Jay Gelb:]

And then on the Corporate line, which was I think about $40 million of expense in the second quarter, it's been running in the high 50s to low 60s on a quarterly basis. Why was it lower in the second quarter? And then, what's the right run rate going forward?

[Richard Spiro:]

I think the second quarter, it had one unusual item. We received about $20 million special cash dividend related to an equity investment that we held at the holding company. And so that's why you saw that change. So I think the historical numbers would probably more indicative of what you'll be seeing going forward as opposed to what you saw on the second quarter.

[Jay Gelb:]

And then, John, you were talking about sort of the hem and haw between exposure, growth not being as much of a drag but pricing potentially getting worse. As the economy recovers and premium charges potentially go up for customers, how much pushback do you think you could get on the ability to raise prices?

[John Degnan:]

We have very good producers. They're price-focused and value-focused for their customers, both in soft markets and hard markets. So I don't think there's a correlation between increased exposures and our ability or inability to get rate. Our buyers are sophisticated. They understand that they're paying based on a rate on line for what they're buying. So to the extent the exposures go up, it doesn't necessarily make it more or less difficult for us to get rate. That's going to be more determined, frankly, by whether sanity returns to the marketplace and competitors stop being irresponsible.

[Operator:]

Next, we'll hear from Matthew Heimermann with JPMorgan.

[Matthew Heimermann:]

John, I was wondering if you could talk maybe a little bit about, well, either John, about whether or not with exposures now picking up, there's any risk that we start to see some of the frequency benefits we've seen as of late revert. And I guess, is that part of the thinking in your more conservative view on the back half in terms of the accident year?

[John Finnegan:]

Let me say this on exposures picking up. Let me clarify that a little. This is -- what we see all the time here are measurements of the quarters year back and a year here. When we say exposures picking up -- the fact is, exposure was down one in the second quarter this year, so we're not talking about buoyant exposure. It's just that it was negative three or so in the second quarter of last year. So exposure in the second quarter of 2009 was effectively defined by what happened between the second quarter of 2008 and 2009, which was very negative. Between 2009 and 2010, things have stabilized somewhat. So unemployment has stayed pretty much the same. It hasn't improved, and I think that's just generally true. Same with premium adjustments. I mean, you're measuring against the change that occurred a year ago, so the improvement is an improvement, but it doesn't mean that things are actually going up. It's still, right now, we're still about flat on exposure, maybe we're up plus one in June, so it's not that buoyant yet.

[Matthew Heimermann:]

What if we took a longer view then of just the next six to 12 months, and we get to back to kind of a more normal economic environment?

[John Finnegan:]

Well, I think that frequency is a fact function of a lot of factors, to the extent that exposure increases one or two points, I don't think it's going to be a big driver of frequency. There's a lot of other things driving frequency, some of which we, frankly, you don't understand from period-to-period. But I can imagine it's going to be anything in terms of exposure increase in the near term significant enough to, by itself, have much of an impact on frequency.

[John Degnan:]

Some evidence of that is, probably, the fact that new arise accounts are down almost across the board in all lines of business, irrespective of whether exposure is changing or not. But I agree with John, while there may be some inevitable impact, there isn't a direct correlation between exposure growth and frequency.

[Matthew Heimermann:]

Just with respect to -- I guess I was a little surprised that with pricing going down, the new-to-lost ratio in CCI went up so much sequentially. And I was wondering if you could just give us some color on kind of the products and whether there are any specific products or account types that were driving that improvement.

[John Degnan:]

We'll, we're seeing some business come back, what I referred to on my comments as win-backs. We're also writing more new business in the niche lines that we've identified, where we still can sell value added on Cyber Liability, the traditional lines that we play to, like Life Sciences and Technology. With the examples of the two, also Lawyer's Program business where we cover what losses need other than their malpractice insurance, so those are some of the niches.

[John Finnegan:]

I can't remember that retention was up considerably. And when retention goes from 84 to 87, the same 16 points of new business, that was 1

[Operator:]

Our next questions come from Michael Nannizzi with Oppenheimer.

[Michael Nannizzi:]

Could you talk a little bit about how the book breaks down between international and domestic in the three different lines, and what those trends have been?

[John Finnegan:]

I'd say the book is about 25% now, about 25% International, maybe a little higher in Personal. So pretty close to on all three lines. A little lower in Personal, and then Specialty has been very strong overseas and Commercial. So I don't think there's a significant difference in the lines. It's about 25% International.

[Michael Nannizzi:]

And then, as far as the Auto book, it looks like premiums were up there. I think I remember you saying that non-U.S. drove some of that last quarter. Is that the same there? Or was that more sort of bundling here in the U.S.?

[John Finnegan:]

No, it's actually overseas.

[Michael Nannizzi:]

On your portfolio, can you just talk a little bit about, generally, risk selection, whether it's within the municipal portfolio or outside of the municipal portfolio and how you think of that relative to the way the environment is today and whether or not any changes in implied or perceived risk will impact how you allocate your dollars from here?

[Richard Spiro:]

I guess, I'll address that in a couple of ways. Maybe I'll start with sort of some absolute comments about our own Municipal portfolio, and then I'll make some relative comments related to the part of your question as it relates to risks selection. Clearly, we are in an interesting period of time, and there's significant headline risk as it relates to governments and municipal securities. We think that our particular portfolio is very high quality and very well-diversified. And I think that's part of, when we think about risks selection, we make these risk decisions ourselves. We choose our own investments, and we do all the work and all the credit works. So we feel very good about our individual portfolio. We have an average credit rating of AA2. More importantly, though, the way we structured the portfolio in terms of the securities, we think, gives us even more comfort that we're very comfortable with our portfolio. That 62% of the portfolio is invested in essential service revenue bonds that are supported by stable high-quality income streams and less susceptible, we believe, to some of the economic conditions we're seeing. About 25% of the portfolio is invested in state and local government general obligation bonds. And there, we tend to favor larger, more liquid issuers who we believe have greater financial flexibility. And the remaining 13% of the portfolio is invested in pre-fund and annual government-backed securities, which we also think are somewhat lower risk. We tend to avoid land development and lower-rated healthcare and airline bonds as well as smaller local issuers. So on just an absolute basis, given the portfolio that we have constructed and the way it has conformed historically and then, frankly, the way it's performed even through the credit crisis, we feel good about our portfolio. On a relative basis, obviously, we are in an environment where every asset class is more risky today than it was five years or 10 years ago. But as we look at the opportunities in the marketplace, we continue to see attractive relative value plays in the municipal bond world. And so, we have not made any major change to our existing investment strategy. We continue to invest in high-quality munis. We continue to invest in any maturity corporates, where we see total returns and values that we think are attractive. Should our views change over time, we'll be able to change as well. But as we sit here today, we don't think we need to make any major adjustments in the way we're investing our new money.

[Michael Nannizzi:]

And during the quarter, have you sold any contingency or a constituency of municipal bonds?

[Richard Spiro:]

No. Nothing significant, if we have.

[Operator:]

Next, we'll hear from Brian Meredith with UBS.

[Brian Meredith:]

First, Ricky, how are you accounting for your position in Alterra? Is that going to run through kind of the mark-to-market run through the income statement? Or how's that going to work? Is there a pick up there, equity pick up?

[Richard Spiro:]

No, it's an equity investment that shows up in the Investment portfolio of the holding company, the Corporate not the P&C businesses.

[Brian Meredith:]

So we shouldn't see any kind of income coming through that, should we?

[Richard Spiro:]

Just the dividend.

[Brian Meredith:]

John, I was wondering if you could talk a little bit about the competitive environment in the high-end homeowners business. I know there's a couple of players out there that have gotten a little more aggressive in going at that business. Are you seeing that?

[John Degnan:]

We certainly read their statements and have heard their intent. But we've been in this business for more than 30 years. During that time, we've developed the only brand in the business. We've had interactions on claims of more than 1 million of our customers. We've had several hundred thousand other contacts with our customers. We've got the best producer system in the world for high-network Personal Lines. This isn't a business you can come into overnight and replicate the Chubb model and make the kinds of margins that we're making. So we'll see them. If they follow the pattern of one their predecessors who came into this market, they'll do it by burning their way in, in catastrophe-prone states and have the losses catch up to their pricing strategy later on. But we're pretty confident that we're in a place in this space where we can both defend our existing position and, frankly, outcompete them in terms of growing in the future. So I don't want quote George Bush and say, "Bring them on." But we're recognizing it, we're acting smartly toward it, and we're confident.

[Operator:]

Next question will come from Jay Cohen with Bank of America.

[Jay Cohen:]

I did miss some of the call. So I hope you didn't address this yet, but I wanted to ask about the growth in the non-U.S. business, which certainly in the Personalized business really did accelerate. Now it's helped a little bit by currency, but it seems even x that, it accelerated. I'm wondering if you can give us a bit more color on what you're pushing there and how that's happening.

[John Finnegan:]

I think growth overall was about 3% x currency overseas. Soft market is a little bit more buoyant overseas, obviously, less so in the developed countries than in the developing countries. I think all lines have grown some. Our Auto business has certainly, and our Accident and Health, certainly businesses that have grown, that's a Personal Lines, certainly, businesses that have grown overseas. Maybe the lowest percentage vis-a-vis the other SBUs of overseas business, that's the one that has grown the most.

[Jay Cohen:]

Can you talk about the A&H business? What kind of margins you're getting there? What sort of returns do you write that business at?

[John Degnan:]

It's been the highest ROE business for the last five years of any other segment that we've written. We have targeted A&H, as potential growth opportunities, more outside the U.S. than in. And we're beginning to see some of the impact of a new team of people that we brought on board to pursue that business. So I'm not going to project what percentage of our revenues it'll be five years from, but we do see it as a growth opportunity going forward. And we operate it at a very healthy return on equity.

[Jay Cohen:]

I'd love to see some breakout on that, given the growth and good returns, if you can provide it at some point?

[John Degnan:]

We'll do that.

[Operator:]

Next up, we'll hear from Gregory Locraft with Morgan Stanley.

[Gregory Locraft:]

I just wanted to get an update on the holding company liquidity at the current time, did you say it was $2.3 billion?

[Richard Spiro:]

Yes, $2.3 billion of investments at the holding company, of which $760 million are in short term.

[Gregory Locraft:]

And how do you think about the right level for that over time?

[Richard Spiro:]

We intend to keep at least $1 billion at the holding company. And this is a level that the rating agencies think is appropriate as well. Currently, we're at 2x that, so we have some flexibility there. I don't know that we're going to get down to $1 billion in the near future, but we have the flexibility to do that. We think we have plenty of liquidity to manage our share repurchase program. So $1 billion sort of the minimum, and we've historically run at somewhere between that $1 billion and where we are today.

[Gregory Locraft:]

And were you at a 26-ish million level last quarter, or where were you last quarter on that?

[Richard Spiro:]

To be honest, I don't remember. Off the top of my head, it's probably in that range. Don't forget, we were very active buying back shares in the second quarter.

[John Finnegan:]

I think about 27 million, and we've had a big buyback program underway.

[Gregory Locraft:]

How do you guys -- you did about 7 million in the first and then 12-ish million in the second in terms of shares repurchased. How do you think about the right amount to do each quarter?

[John Finnegan:]

The authorization was higher in the second than it was in the first. We had a bigger buyback program in the second quarter. We increased the buyback overall by 750 million, so that's the starting point for that. As for how we look at it, what do we have left, 16 million left?

[Richard Spiro:]

Yes, there's 16.8 million shares left. We look at the opportunities, the price in the market and opportunities to acquire our shares. And that sort of what drives how we allocate it. Plus, we've made a statement that our intention is to complete the buyback program by the end of the year, so I think you can assume we'll be fairly aggressive to get that done.

[Gregory Locraft:]

I guess, one of the things I'm wrestling with is just that I can't get the hold call liquidity down anywhere close your target or even draw it down much given the amount of cash being generated in the core business the next couple of quarters. So I'm wondering how, even with 16-plus million purchased next two quarters, how will you get target liquidity level or how would you get liquidity in the holding company level down to more reasonable levels? Or would you just run it 2x-plus for the foreseeable future?

[John Finnegan:]

Our objective isn't really to get it down to $1 billion. I think that gives us our limitations and our framework of what we can do now. But the holding company is a function of -- liquidity is a function of how much we spend on things like buybacks and dividends, but also a function of what we do in terms of dividend from the operating company to the holding company. In today's environment, in order to execute a bigger repurchase program, we like a little bit more liquidity up in the holding company, because you can't do the buyback out of the operating company, you got to get it up to the holding company first. But we don't have an objective that we want to get it down to $1 billion as fast as possible or anything. The $2.3 billion versus $1 billion gives us, for the moment, how much we can spend on buybacks, and it'll last us quite a length of time. But during that period, we'll also have dividends up from operating companies.

[Gregory Locraft:]

Does the quarter in which you're repurchasing matter at all, i.e., does catastrophe season influence the pace? And then also, let's just say you blow through the 16 million authorization, what's the procedure to put more on the table?

[Richard Spiro:]

I think, we obviously, we'll be a little bit more cautious in the third quarter given that it is cat season. But we have a lot of shares to buy back between now and the end of the year. So we'll be cautious to a point. In terms of what's the process, we always go back to our Board when it's time for us to get a new authorization and should we, I guess, complete this much quicker than we anticipate, which is not what our plan is at the moment, we'll go back to the Board at the appropriate time.

[John Finnegan:]

Fortunately, our level of excess capital is such that fine tuning 100 million or 200 million of stock repurchases in the third quarter will make really much of a difference if we have a big catastrophe. It's not enough to make a difference if we have a substantial excess capital and liquidity position.

[Operator:]

Next, we'll hear from Ian Gutterman with Adage Capital.

[Ian Gutterman:]

Can you clarify for me, when you said the accident will be three or four points higher in the second half, did you mean versus the first half or year-over-year? What was it? Can you clarify?

[John Finnegan:]

Versus the first half.

[Ian Gutterman:]

And why that much? Could that's still -- when I look at that versus year-over-year, that seems maybe a couple of points higher than year-over-year second half, the second half this year versus second half of last year.

[John Finnegan:]

Let me restate that. What we're saying, basically, is that our x cat combined ratio in the second half will be three to four points worse than the first half. I might have misstated before. That can be composed of either a deterioration in accident year performance or lower favorable development or both. And we haven't broken out the wide range of how we would get there, so there's a good chance that three- or four-point deterioration will end up with being a much lower amount of accident year deterioration.

[Ian Gutterman:]

On the munis, can you talk about, when you say critical service revenue bonds, what exactly does that mean? Because I believe some of the muni defaults we've seen have been sewer projects, and I'm trying to remember what they want to [indiscernible] so I thought that was a critical service one, too, as I recall. How safe are we talking about? Could you guys put more detail there?

[Richard Spiro:]

Sure. It's a variety of things. There is some water, some sewer, electric, highway, some universities, some special tax revenue bonds. So it's a combination of things. It's pretty well-diversified, in that if you look at it on a percentage basis across our portfolio, no one of those categories would stand out. So we think we have it pretty well under control. We do tend to stay away from the ones where, as I mentioned earlier, some of the healthcare areas where you might have some higher default rates. Our experience in our portfolio in terms of defaults has been an extraordinarily good over a long period of time.

[Ian Gutterman:]

Can you clarify why was FX so positive this quarter? I assumed you'd be most exposed to euro, which obviously was, weakened a lot versus the dollar.

[Richard Spiro:]

Yes, it's actually interesting. It's because of the fact that the dollar did perform incredibly well against the euro and the pound, but it actually went the other way against most of the other major currencies like the Australian dollar, the Canadian dollar and the Brazilian currency. And the way our business actually works is, in Europe, in particular, a significant amount of the renewal business happens in the beginning of the year. And so, you have a bigger impact to some of the other currencies as you move forward throughout the year.

[Ian Gutterman:]

Can you give us just roughly, is there a real-time breakdown you can give as to sort of what your currency exposures are globally, sort of EU versus Canada versus the rest of the world or something like that?

[John Finnegan:]

You'd get what? You'd get $1 billion in euro. $1 billion in euro, you get 500 in Canada. You'd get 500 in Asia and 500 in Latin America probably, because it'll be in a big part of Latin America.

[Operator:]

We have a question from Paul Newsome with Sandler O'Neill.

[J. Paul Newsome:]

I'm having a little trouble myself getting the tax rate right for you folks. Was there anything in the quarter that was unusual from a tax perspective?

[John Finnegan:]

No.

[Operator:]

And our final question in the queue comes from Cliff Gallant with KWB (sic)[KBW] Financial Services.

[Cliff Gallant:]

The resurfacing of contingent commissions by the major brokers, and I was wondering if Chubb could comment on their view of contingents.

[John Degnan:]

We agreed in the settlement with the three states, Connecticut, Illinois and New York, not to pay contingents, but we replace them with something called supplemental-guaranteed commissions [guaranteed supplemental compensation (NYSEARCA

[Cliff Gallant:]

If the old structure were to come back, you would consider that structure again?

[John Degnan:]

We would.

[Operator:]

With no further questions in the queue, I'd like to turn it back to our speakers for any closing or additional comments.

[John Finnegan:]

Okay. Thank you very much for joining us tonight. Have a good evening.

[Operator:]

Once again, that does conclude our conference call for today. We thank you for your participation.