Chubb Limited
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

Good day, everyone, and welcome to the Chubb Corporation's First Quarter 2013 Earnings Conference Call. Today's call is being recorded. 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 may differ materially from estimates and forecasts that Chubb's management team makes today. Additional information regarding factors that could cause such differences appears in Chubb's filings with the Securities and Exchange Commission. In their prepared remarks and responses to questions during today's presentation, Chubb's management may refer to financial measures that are not derived from Generally Accepted Accounting Principles, or GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures and related information are provided in the press release with -- in the financial supplements for the first quarter 2013, 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 Chubb's prior written consent. Replays of this webcast will be available through May 24, 2013. Those listening after April 25, 2013 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 will turn the call over to Mr. Finnegan.

[John D. Finnegan:]

Thank you for joining us. As you can see from our earnings release, Chubb had a great first quarter. We recorded the highest operating income per share and the highest net income per share of any quarter in the company's history. The quarter was highlighted by strong underlying performance in each of our business units and relatively benign catastrophe losses. We're also very pleased that the positive rate momentum we've seen in recent quarters has continued. Operating income per share was $2.14, a 26% increase over last year's first quarter. Annualized operating ROE was 16.3% for the first quarter of this year. The combined ratio for the quarter was 84.6% compared to 94.2% last year. Excluding the impact of cats, the combined ratio for the first quarter was 84% in 2013, a 5.4 improvement -- a 5.4 point improvement over last year's first quarter. Our overall gross and net loss estimates for Storm Sandy remained unchanged, although the CCI loss estimate declined slightly and the CPI loss estimate increase by a similar amount. During the first quarter, we had net realized investment gains of $138 million before tax, with $0.34 per share after tax. This brought our first quarter net income per share to $2.48, resulting in an annualized ROE of 16.5%. GAAP book value per share at March 31, 2013 was $61.79, that's a 2% increase since year-end 2012 and 8% increase since March 31, a year ago. Our capital position is excellent. During the first quarter, we increased our common stock dividend for the 31st consecutive year, and we also continued our share repurchase program, as Ricky will discuss later. Net written premiums were up 4% driven by growth in all 3 of our business units. In terms of pricing, average renewal rates increased in both our U.S. commercial and specialty lines by high single digits in the first quarter, consistent with the rate increases we saw in the second half of last year. We also had continued rate improvement in Personal lines. We continue to push for rate as we focus on improving the profitability of our business in the face of low interest rates and the higher catastrophe losses that the industry has experienced over the past several years. And now, for more details on our operating performance, we'll start with Paul, who will discuss Chubb's commercial and specialty insurance operations.

[Paul J. Krump:]

Thanks, John. The Chubb Commercial Insurance net written premiums for the first quarter increased 2% to $1.4 billion. The combined ratio was a terrific 89 -- 81.9% versus 93.3% in the first quarter of 2012. The impact of catastrophes in the first quarter of 2013 improved CCI’s combined ratio by 1.7 percentage points, of which 2.1 points were related to a decrease in estimated commercial losses from Storm Sandy. Excluding the impact of catastrophes, CCI’s first quarter combined ratio was 83.6% compared to 92.4% in the first quarter of 2012. This was an outstanding quarter as CCI benefited from continued favorable development and the impact of earned rate increases and excess of loss costs in our current accident year. Much of our favorable loss experience is attributable to our underwriting initiatives, which we commenced in 2011, and which we have discussed at length on previous calls. At the same time, we recognize that we also had a measure of good fortune in the form of a very low level of large losses in our property and marine business, which contributed to its exceptionally low combined ratio in the first quarter. This is obviously attributable to luck as well as underwriting discipline, and it is unlikely to persist indefinitely. Accordingly, while we expected our performance will continue to benefit from the earn out of higher rates and underwriting discipline, we also believe that there is a good chance we could see some reversion to higher historical levels of loss experience for large losses sometime in future quarters. We are pleased that CCI’s average U.S. renewal rates increased by 8% in the first quarter, continuing the favorable rate environment we experienced in 2012. This 8% is consistent with the average renewal rate increases we obtained throughout last year. In the first quarter of this year, CCI secured average renewal increases in the U.S. in every line of business, led by workers' compensation and general liability, which were in the low double digits. These lines were followed by Monoline property, package, automobile and Excess/Umbrella, all of which were in the mid-to-high single digits. Turning to markets outside of the U.S., CCI saw renewal rate increases in the low single digits in both Canada and Europe. In Latin America and Asia Pacific, renewal rates where flat to slightly positive. CCI’s first quarter U.S. renewal retention was 84%, up 1 point from the fourth quarter of 2012. The new-to-lost-business ratio in the U.S. was 0.8

[Dino E. Robusto:]

Thanks, Paul. Chubb Personal Insurance had another very good quarter. Net written premiums increased 5% to $987 million. And CPI produced a combined ratio of 87% compared to 85.5% in the corresponding quarter last year. The impact of catastrophes on CPI's first quarter combined ratio was 3.9 points in 2013 of which 2.6 points were related to an increase in estimated personal lines losses from Storm Sandy. In the first quarter a year ago, the cat impact on CPI's combined ratio was 1.2 points. On an x cat basis, CPI's combined ratio was 83.1% in the first quarter compared to 84.3% in the first quarter of 2012. Homeowners premiums grew 3% for the quarter and the combined ratio was 82.5% compared to 80.1% in the corresponding quarter last year. Cat losses accounted for 6.1 points of the homeowners combined ratio in the first quarter of 2013 compared to 1.9 points in the first quarter of 2012. The 6.1 points of homeowners cats in this year's quarter includes 4.1 points related to the increase in estimated Storm Sandy losses. Excluding the impact of catastrophes, the 2013 first quarter homeowners combined ratio was 76.4% compared to 78.2% in the same period a year ago. Personal auto premiums increased 7% and the combined ratio was 94% compared to 91.3% in the first quarter of 2012. The strong growth in personal auto for the quarter reflected higher growth, both in the United States and outside the U.S. In other personal, which includes our accident, personal excess liability and yacht line, premiums were up 9% and the combined ratio was 94% compared to 97.3% in the first quarter a year ago. The first quarter of 2013 was the 10th consecutive quarter of net written premium growth in the U.S. for both homeowners and personal auto. Policy retention in the first quarter was 91% for homeowners and 89% for auto, both of which are essentially unchanged from the fourth quarter of 2012 and the first quarter of 2012. In the first quarter of 2013, we achieved homeowners rate and exposure premium increases totaling 7% in the United States. Given rate changes either already approved or being planned for later this year, we anticipate the momentum of rate and exposure increases continuing throughout 2013. In short, we are very pleased with the performance and prospects of personal lines. Turning now to claims, corporate-wide. In the first quarter of 2013, the cat impact on the combined ratio was only 0.6 points reflecting about $21 million of losses from 3 cat events in the United States and 1 event outside the U.S., partially offset by about a $3 million decrease in our estimated losses from catastrophes, which occurred in prior years. As John mentioned earlier, the overall growth in net loss numbers for Storm Sandy that we provided last quarter remained unchanged, although the amount of CPI losses increased slightly and the amount of CCI losses decreased by about the same amount. In dollar terms, the shift was about $25 million. Now, I'll turn it over to Ricky who will review our financial results in more detail.

[Richard G. Spiro:]

Thanks, Dino. As usual, I'll discuss our financial results for the quarter and I will also provide an update on the April 1 renewal of our major property reinsurance program. Looking first at our operating results, we had very strong underwriting income of $485 million in the quarter, a 60% increase over the first quarter a year ago. Property and casualty investment income after tax was down 6% to $288 million due, once again, to lower reinvestment rates in both our domestic and international fixed maturity portfolios. Net income was higher than operating income in the quarter due to net realized investment gains before tax of $138 million or $0.34 per share after tax, with $0.14 per share coming from our alternative investment portfolio. For comparison, in the first quarter of 2012, we had net realized investment gains before tax of $56 million or $0.13 per share after tax, of which $0.02 per share came from alternatives. Unrealized depreciation before tax at March 31, 2013 was $3.1 billion, which is unchanged from year-end 2012. The total carrying value of our consolidated investment portfolio was $43.8 billion as of March 31, 2013. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 3.7 years and the average credit rating is AA3. We continue to have excellent liquidity at the holding company. At March 31, our holding company portfolio had $1.9 billion of investments, including approximately $250 million of short-term investments. These amounts have already been reduced by the funds we set aside to repay $275 million of senior notes that matured on April 1. Book value per share under GAAP at March 31 was $61.79 compared to $60.45 at year-end 2012. Adjusted book value per share, which we calculate with available-for-sale fixed maturities at amortized costs was $55.57 compared to $53.80 at 2012 year end. As for loss reserves, we estimate that we had favorable development in the first quarter of 2013 on prior year reserves by SBU as follows

[John D. Finnegan:]

Thanks, Ricky. In short, we had outstanding quarter. Record operating income per share was driven by very strong underwriting results. Substantial realized gains reflected excellent investment performance. And the combination of the 2 resulted in record quarterly net income per share and an ROE of 16.5%. On the underwriting side, we benefited from both very favorable prior period development, as well as excellent current accident year performance. Favorable development came in at 6 points, reflecting continued benign loss experience. On the accident year side, we are also benefiting from favorable loss experience as well as the impact of continued rate increases. Our x cat accident year combined ratio of 90.2% is almost 2 points better than last year's first quarter and reflects strong contributions from all 3 business units, including significantly improved performance of CSI. Importantly, earn rate increases are now exceeding longer-term, loss-cost trends in all 3 of our major business units, all doing well for future profitability. Of course results in any quarter are more a function of actual loss experience in that quarter than longer-term, lost-cost trend lines. Over the last 5 quarters, our results have benefited from very benign x cat loss experience, well below longer-term trends. We believe much of this improvement and loss experience reflects underwriting initiatives we implemented beginning in the second half of 2011 to call our existing book and to greatly enhance our underwriting discipline as it relates to new business. On the other hand, we've undoubtedly also enjoyed a great run of good fortune in terms of non-cat-related weather and an unusually low level of other large losses. As Paul mentioned, this is particularly illustrated by the property and marine line, where our extremely low combined ratio this quarter benefited from the absence of almost any major fire or other large losses. And an unusually positive occurrence, which can hardly be attribute it underwriting discipline alone. In terms of the current environment, the market remains firm as evidenced by the fact that we continued in the first quarter to achieve mid- to high-single-digit renewal increases on all over business units with generally stable retention levels. Going forward, assuming we achieve rate increases at current levels, we will see continued margin expansion. Although results in any given quarter would be more a function of swings and actual loss experience than longer-term loss trends, where we might expect some reversion to higher historical levels of loss experience for large losses as the year goes on. On balance, however, 2013 is off to a great start from both market and profitability perspective, and we believe we have every reason to be optimistic about the rest of the year. And with that, I'll open the line to your questions.

[Operator:]

[Operator Instructions] And we'll go first to Mike Zaremski with Credit Suisse.

[Michael Zaremski:]

John, I noticed this isn't an exact science, but if I understood your commentary correctly, it sounded like this was a very benign, non-cat weather quarter. I believe I could be wrong that -- I know last year was also benign, not cat -- non-cat weather, so was this quarter even more benign than 1Q12 ,and is there any way to put some numbers behind how low it was versus "normal"?

[John D. Finnegan:]

I think that -- we've had some good, non-cat-related weather experience in the last 5 quarters. Now that's probably because we've had some pretty good weather. Although this quarter, it was a little bit different in that there were a number of storms, and yet, many are not cats and yet they came in pretty good. But we're up, I think, maybe 1 point in non-cat-related...

[Richard G. Spiro:]

1.5 in homeowners against the first quarter, still a little bit lower than our 5-year average.

[John D. Finnegan:]

Maybe 1 to 2 points below our 5-year average?

[Richard G. Spiro:]

Yes. Yes.

[John D. Finnegan:]

I would say -- so that's good. I would say the real -- the very benign loss experience we suffered -- we enjoyed in this quarter really related more to the lack of major large losses. Some of that in specialty, but primarily, where you see the biggest impact would be in the property and marine line. No -- there, obviously, our combined ratio is benefiting from another number of things. It's incredibly low at 60%, right, it's benefiting from a number of things. I mean, for one, you got about a 5 or 6-point positive from change in estimate on Sandy. We also have some good, favorable development against the year last year where we didn't have farther development in the first quarter. But -- and I can't overlook the fact we've gotten substantial rate increase in that business for a couple of years.

[Richard G. Spiro:]

Yes. Over 20%.

[John D. Finnegan:]

Yes. So that certainly impact it. But having said all of that, we had very few fire losses or other large losses in the quarter in the property line.

[Michael Zaremski:]

Okay, that's helpful. And lastly, on workers comp. One of your competitors put up reserve for legislation in New York related to reopening workers' comp cases. I was hoping you could comment on that. And also, just on loss costs and workers comp.

[Dino E. Robusto:]

Okay. On the legislation, once you know -- I mean, the legislation was just signed into law in April and it's got many facets. So we're still analyzing the impact of the reopened case fund being eliminated January 1, 2014. Our review to date indicates that in recent years only a very small percentage of Chubb claims have been submitted to the fund, but we obviously need to complete our analysis on that. Giving you some information on work comp and just what we're seeing in terms of loss trends. Now I think it's important to keep in mind that our period to period claims stats may not be as indicative as the industry trends as we are less than about 2% market share. But work comp newer rise claim counts are down 3%. And from a severity perspective, work comp claim cost in the first quarter were somewhat favorable relative to longer-term trends in the mid to high single digits. However, severity data, is inherently noisy, and considering the long-tail nature of these claims, our primary focus still remains on the longer-term trends.

[Michael Zaremski:]

If I can slip one in on workers comp. Then lastly, the premium growth was flat versus high teens last year, is that just lumpiness as well?

[Paul J. Krump:]

Yes, Mike, this is Paul. There's a number of factors that cause workers compensation growth to be flat this past quarter. The first thing, I guess, I would note is that the comparable and the year-ago first quarter was particularly strong at plus 23%. So we're comparing a relatively high basic amount in terms of the various timing-related issues that can affect the work comp premium. For one thing, the year-over-year change in audit endorsement premiums was slightly negative in the first quarter this year compared to a significant positive effect in 2012. Then we also reduced our participation in a large work comp program last year, and that had a slightly bigger negative impact this quarter than in the preceding few quarters. That effect was largely -- has largely worked its way through, though. So I want to make certain that you understand that should taper off from here. We also saw fewer favorable large new business opportunities and had a lower renewal retention compared to the first quarter of 2012. You have to keep in mind that workers comp for us is only about 20% of our overall CCI book, which is going to be a much smaller percentage than most of our competitors. And most of our work comp business is written as part of an overall account. So that being the case, our goal is to have this line produce a consistent profit over the long term. This strategy, along with our underwriting discipline will sometimes result in quarters where growth just lags or it surges. And going forward, I think, bottom line, what I'd say is we think that it's likely that our work comp growth will be neither as small as it was in this past quarter nor as large as it was in the first quarter of 2012. So hopefully, that gives you a little bit of color on our thinking.

[Operator:]

And we'll take our next question from Jay Gelb of Barclays.

[Jay Gelb:]

My first question was on the negative 1% exposure growth in the quarter, that's a little contrary to what we would have thought, given the improvement in the overall economy. So can you discuss that a bit?

[John D. Finnegan:]

Sure. I'm going to -- I'll have Paul address it.

[Paul J. Krump:]

Sure. First off, the CCI renewal exposure change was just slightly negative. To put a little more color on it, we experienced some positive exposure increases in workers comp. But we're dealing with a fairly sluggish economy and we just didn't see that -- see it as much as we normally would expect to see. But that said, it's been running in a pretty tight range over the last couple of years of negative 1 to plus 1. So it wasn't all that surprising to us.

[Jay Gelb:]

And then on loss cost inflation, can you tell us about where you set your picks at for 2013 versus '12? And what type of underlying loss-cost inflation are you assuming in the CCI book as opposed to the specialty book?

[John D. Finnegan:]

Let's talk about longer term trend lines and loss cost being about 4% in CCI and 4.5% in CSI. That's gone up in general -- each line, though, obviously, has significantly different trends. But that's going to be the long-term, loss-cost trends.

[Jay Gelb:]

So that means it's coming in -- where 2% to 3%?

[John D. Finnegan:]

Well, Jay, this is a -- it's not a science in this area. If you looked at the fourth quarter of this year -- last year and our results and compare it to the fourth quarter of the prior year, you would have attributed a -- if you just did it mathematically and looked at the improvement in combined ratio, the improvement in combined ratio significantly exceeded what one would otherwise call margin expansion, that is the comparison of earn rate long-term, loss trend cost. In the first quarter of this year, if you take the 5.5-point improvement in combined ratio, take out the 3 points of development, you get 3.5 points, you got 2 points of improvement in the accident year. And as it happens, mathematically, margin expansion was about 2 points on average in our lines -- or aggregate in our lines. So you wouldn't say -- you'd say maybe loss cost actually was experienced year-over-year, first quarter to first quarter, was about in line with the trend. There's no real science to that. And it moves from period to period, though. One of the reasons is the fourth quarter of 2011, loss cost are very bad. The first quarter of 2012, loss cost were pretty good. So I attributed the fourth quarter performance largely to better than -- loss cost better than long-term trends. The first quarter, I really can't do that except for the development area, which was very positive. Mathematically, it comes out to be about equivalent to margin expansion.

[Jay Gelb:]

And then, can you comment on competition for new business as opposed to your renewals?

[Paul J. Krump:]

Sure. This is Paul, again. I would tell you that the competition for new is still alive and well, and that is one of the reasons that you see our new-to-lost business ratio's running where they are. Now that said, I want to remind everybody, and John talked about this in his prepared remarks, that we had some experiences in the past that were pretty rough, in particular in 2011. We commenced on an action to tighten the GAAP between the performance of our new business versus our renewals. And that meant -- the consequence of that was that we would see less new business. So we're being very disciplined in the amount of new business that we're taking on as respects the standard commercial lines and professional liability.

[Operator:]

And we'll go next to Amit Kumar of Macquarie.

[Amit Kumar:]

I guess, 2 questions. So the first question is on the CSI reserve release number of $55 million. Is that all favorable or was there any adverse in recent years, which was more than offset by releases from prior years?

[John D. Finnegan:]

No. The answer is that it was primarily 2008 and prior were the positives. You get, in 2009 to '12, really, they come out pretty flat. Actually, 2011 was slightly favorable, '09 was slightly adverse, '10 and '12 were close to flat. So you take '09 to '12 it's flat.

[Richard G. Spiro:]

And then you want me to give you a little colors, it's Ricky, you want me to give a little color on the individual lines within that $55 million?

[Amit Kumar:]

Absolutely.

[Richard G. Spiro:]

Okay. So within that $55 million in the quarter, both professional liability and surety, although surety, for a lesser extent, were favorable. The favorable development in professional liability was led by D&O, but also from fiduciary and E&O. And there were some modest adverse development in both EPL and the crime infidelity lines. I hope that, that gives you a little more color.

[Amit Kumar:]

Yes, that's very helpful. I guess related to that is, there have been some press reports regarding the News Corp settlement and Chubb, I'm not sure. Can you address that? And would that impact the Q2 numbers?

[Paul J. Krump:]

This is Paul. Why don't I, just first of all, just to make the comment that we're not going to comment on any specific matters or whether we provide insurance to any specific customer because this case though was reported in the press, and it's a significant D&O resolution to a shareholder derivative action. I guess it would be fair to make a couple of general comments as it relates to our thinking. First, the size of the reported settlement underscores the value that D&O coverage provides the publicly traded companies, and in particular the protection that D&O insurance provides specifically for the individual directors via Side A coverage, who are the targets of such derivative -- of securities derivative actions? Second, from our underwriting perspective, it demonstrates the severity and potential volatile nature of settlement values in the D&O product line, which clearly puts a premium then on vigilant underwriting, prudent risk selection and appropriate pricing to fund for just such situations. Third, I think it really underscores and supports the significant efforts we have been taking over the last couple of years to drive increased rate along with disciplined underwriting in the D&O line. Those underwriting and pricing efforts will obviously continue in 2013.

[John D. Finnegan:]

I don't think you shouldn't. Professional liability, you shouldn't -- it's complicated. You can't equate -- if you take anybody who's insured in that, and I don't know who the insurer is on it, but if you look at the insurers, see, you can't equate the timing of the settlements to the timing of a charge to income. These things tend to be case-reserved over time as they become more likely. Companies don't wait around until the settlement occurs necessarily to take them into account and they reserve positions and things. So it'll be a simplified assumption for any company to, when you hear about the settlement to think they've found that someone was insured to think it's going into the current quarter.

[Operator:]

And we'll take our next question from Michael Nannizzi with Goldman Sachs.

[Michael Nannizzi:]

Just trying to reconcile something here. So it looks like the underlying combined in CCI is about 96%, I think, if my math is right. How do we -- is that right or...

[John D. Finnegan:]

96%? What's your underlying mean, by the way?

[Michael Nannizzi:]

X development?

[John D. Finnegan:]

X development, underlying. All right. Well, if we look at the first quarter, I guess, calendar year, if we look at...

[Michael Nannizzi:]

84% spot for you, sorry.

[John D. Finnegan:]

Go ahead. Accident year x cat was 91% or so.

[Michael Nannizzi:]

So your 84% combined reported and then minus, you had a negative 1.7 points of cats? Is that right?

[John D. Finnegan:]

Yes, yes.

[Michael Nannizzi:]

And then plus, is that 9 points of development? 9.5, no?

[John D. Finnegan:]

Yes. You have to double -- you have to watch when you have development in the cat area, you can tend to double count. But our calendar year published was 81.9% x cat 83.6%, accident year published 91.5%, x cat 90.9%.

[Michael Nannizzi:]

Got it. Okay, my mistake, my mistake. But I guess, I mean still -- so I guess [indiscernible] so last year, so you've seen that number improve by about 5 points over the last year, where you had rate -- I assume you had 8 points of rate 2 years in a row. How does that work? I mean, should we be seeing -- like what's the order of magnitude when you have the rate gains versus the change in the combined ratio?

[John D. Finnegan:]

So I think if I look at accident year x cat a year ago, it was 92.8%. So you're talking about a 2-point improvement from the first quarter of last year. So if you looked at margin expansion in the first quarter, it was 2% to 3%, maybe about 3%. So you're saying that theoretical margin expansion is just theoretical. You'd say maybe losses were a point worse than long term loss trend lines, now that's cutting it pretty precise and nothing that's scientific. So it kind of performed along the lines of margin expansion. But having said that, as Paul pointed out in his remarks, I mean we had an awfully good quarter in terms of large losses. I mean, so you can't just extrapolate in for the future like that. This quarter, in Property and Marine was so good that when one takes into account margin expansion, you also got to take into account what the base year is and whether it's indicative, it's truly indicative, I mean you should extrapolate off. And I'd say this first quarter of this year, in Commercial, especially the Property, Marine line, we're a little bit fortuitous in terms of large losses.

[Michael Nannizzi:]

Got you, got you. And then on the Specialty side as well. Yes, I mean you've -- is it fair to assume that the development, most of the development, is coming from professional liability or...

[John D. Finnegan:]

Yes, 90%, yes.

[Michael Nannizzi:]

All right. So -- and then just maybe my math won't be right here, but we calculate that number about 100 and would be like 102, which is just a couple of points better than it was a year ago. I'm just trying to reconcile that versus 13 cumulative points of rate gain that you -- 4 points in the first quarter last year, 9 points this year. I would, is it -- are you setting your loss pick higher than where you expect to be, so you're kind of building more reserves? Or I would just think that, that underlying would be improving much more rapidly?

[John D. Finnegan:]

First of all, you'd have to look at the earned rate improvement that in a -- if you look at margin expansion versus the earn rate versus longer term loss trend lines, in the first quarter, you're only talking about an improvement of about 1.5 points. You're accumulating 13 points written, not taking into account earned, not taking into account overseas and not offsetting by long term trend lines. So really, on a margin expansion basis, if I took the rate increases, diluted them by the lesser rate increases we're getting overseas, took them over time and took into account the expected loss cost trends over that time, I'd have expected about a 1.5 improvement in the first quarter on accident year. Now the answer is pretty good. We did have about a 2-point. We were at about 100. And that combined ratio and our accident year is about 100 in professional liability this quarter. Now our reported combined of 92.4% is significantly higher than the -- oh, so let's compare it maybe to the first quarter of last year. It's about 4 points better, of which 1 point was loss, 3 points was -- 1 point was expense, 3 points were loss. You compare it to the fourth quarter of last year, it's only about 1 point, 3 points better so the last quarter. But prior-period development was .5 point less. So let's call it 2 points better. But due to the significant seasonality in the quarter-over-quarter expense ratios, our expense ratio was 4.4 points lower in the fourth quarter of last year. And that was also helped by the treatment of incentive compensation due to hurricane -- due to superstorm Sandy. So our loss ratio actually improved by 6 points from the last quarter of 2012. So nutshell, loss ratio deteriorated over the year 2012. We had a couple of point better loss ratio first quarter to first quarter. And we had a 6-point better loss ratio, first quarter to fourth quarter.

[Operator:]

And moving on, we will go to Josh Shanker of Deutsche Bank.

[Joshua D. Shanker:]

I want to talk about 2 items. The first one is that, John, you were very pleased with the professional liability citing a combined ratio from first quarter '12 of 99% going down to a 92% in the first quarter of '13. I also note that it was an 87% back in the first quarter of 2011. I realize talking much different quarters is kind of foolish in this industry, but maybe we can understand how much of this is pure rate and how much is loss trend? Was 2011 a particularly good year? Is 2013 more normal? Can we make any statements of this nature?

[John D. Finnegan:]

We know that professional liability performance has deteriorated over the last year. We have talked about it at great length. 2011, a particularly good year at 87%. I don't have the data in front me. I'd say compared to what else happened in the rest of the -- from 2005 to 2010, I would think it wasn't particularly good. We had some better years over that period for sure. We had substantial favorable development. If you remember, we got huge rate increases in the 2003 and '04 period. After the WorldCom and Enron's, you have a lagged impact. We had a lot of development in the later 2000s but the net impact, what occurred is that, over a period from 2005 to 2010 or '11 we lost 10 points in rate. Rate went down 10 points. Cost pressure increased. You had the credit crisis. You had some sort of not directly credit crisis, but economic-related stuff and crime and infidelity. So listen, the bottom line is, we've expressed it, and I'm not happy this is where our professional liability was running. We think this is a good improvement. But this is a long tail of line of business. We'll see if it'll all comes out this way, but we still have a long ways to go. We have to get rates, and we have to keep up our calling actions. But we think this is a good step in the right direction. But no, you know you have to get to the low 90s in this business, and I mean on an accident year basis, not on a reported basis, to meet targeted returns, and we're not there yet, but a step on the right direction.

[Joshua D. Shanker:]

Okay. And the other question was to what extent are clients wanting to buy less coverage in the face of rising rates?

[Paul J. Krump:]

Josh, this is Paul. We're not seeing any thing new on that horizon. I think when the financial crisis hit a couple of years ago, we saw some people asking for options around deductibles. They might have been lowering their umbrella in excess limits a little bit to try to ease the squeeze there. But quite frankly, that hasn't been anything that's really been impacting us much in the last couple of years.

[Operator:]

And we'll go to Jay Cohen of Bank of America Merrill Lynch.

[Jay Adam Cohen:]

Just, I guess, first, I wanted to understand the development that you gave us, the prior-year development, that includes the change in the Sandy loss, correct?

[John D. Finnegan:]

Yes.

[Jay Adam Cohen:]

Okay. So we need to adjust either that number or the cat number to make sure we're not double counting?

[John D. Finnegan:]

Yes. So to give you an example, on development, if you look at CPI, they only had 0.5 point of the positive development. But if you took out the Sandy loss, they had 3.1. And CCI, go the other way, they had 9.6 sort of reported, but 7.3 if you adjusted excluding the cats. Did that give you a feel?

[Jay Adam Cohen:]

Yes. No, that's helpful, that's helpful. And I guess maybe the question is on the CCI development. Even if I take out the positive development from Sandy, it looks like a fairly robust number. And you gave us some of the details on the CSI development. I'm wondering if you can do the same for CCI?

[John D. Finnegan:]

I'm going to ask Ricky to do that. Let me point out, last year, we had very little development in the first quarter in CCI, ran about 5 to 6 points in the second and third quarters, but it ran 8 in the fourth quarter. So at 7.3, excluding cat, it was certainly better than we ran for the year last year, but it was down a little from the fourth quarter. Ricky, why don't you talk about the...

[Richard G. Spiro:]

Sure. So again, just to level set, so that the total development we saw from CCI in the quarter was $125 million. And all 4 of the lines within CCI were favorable. It was led by the Property and Marine line, partly due to what we just talked about, the change in the Sandy estimate. And then we also had favorable development in some of our other short tail lines like CNP property. And then the favorable prior period development in casualty was driven mainly by excess umbrella. And workers comp was also slightly favorable. And the one area where we had a little bit of adverse development was in the ANE area, almost all due to the environmental side of it. But that hopefully gives you some idea of what was happening underneath.

[Jay Adam Cohen:]

And then accident years, I assume some of the later years as well, except for the property stuff?

[John D. Finnegan:]

I think, I don't know CCI. I will tell you, in general, all of our accident years were good as a business. We didn't have any adverse accident years. So, yes, the short-tail development came from accident year in 2011 and 2012, and most of the long-tail development from 2010 and prior. And probably most of the development of long-tail revenue in short tails.

[Operator:]

And now to Meyer Shields of KBW.

[Meyer Shields:]

Two questions, if I can. One, when we focus on CSI, I think the new-to-lost ratio was near 0.6

[John D. Finnegan:]

Yes.

[Meyer Shields:]

Is it fair to assume that after you go through about a year of that, you've disproportionately lost most of the least profitable accounts, and therefore that resource should improve?

[John D. Finnegan:]

We've talked in the past that we have already targeted e-fit in terms of which accounts we're looking to calls directly, which accounts we were looking to perhaps call indirectly by requesting rate increases we need, whether it's a dramatic rate increase as required. I think we've given, I don't know, do you have updated statistics, Paul, on which areas by segment whether something's come out?

[Paul J. Krump:]

Yes. Sure, John. Meyer, just to think about this, our starting point really is the accident year currently at 100. And what John said just a few minutes ago is first and foremost in our mind, and that is we have to be in the low 90s on an accident-year basis. So we are taking a very tough decisive action on this book of business to get there, and that means that we continue to push rate pretty much across-the-board. Now that said, there are obviously cohorts and accounts that are adequately priced, and there are others that need a fair amount of rate. So we take it down to a very granular level. And it's a by-product. If you think about it by jurisdiction, but we are certainly out there pushing for rate in that area. And that will, of course, mean that we're also taking a very disciplined eye towards the new business just because we see sometimes business coming to market because the agents hearing the income wants to raise the price, whatever, x 10%. But in reality, we might price that thing up and say it needs to be closer to say, a 30% increase. Now when John talks about the tiering, or what we used to call or sometimes I refer to as the star system, think of it like movies. 5 star is great, 1 star is not that great of a movie. So in our 5-star range, we basically got a low-single-digit rate increases and had nearly 90% retention. And then in our 1-star accounts that were the worst, quite frankly, we were pushing up over or close to 30% rate increases. But there, we only renewed right between 65% and 70% of those accounts. So hopefully, that gives you a sense of how we're attacking the book.

[Meyer Shields:]

No, it doesn't. That was very helpful. I guess what I'm wondering is that after we go through 1 or 2 years of that, then it should be much less business in the fewer stars category because other -- it's gotten a rate or it's gone away.

[Paul J. Krump:]

Yes. But of course, if you're still at 100, you still have a good deal, just on the lower averages, you must have still have a good deal of business that's above 100, and it's not generating attractive returns. So you still have to get at that. You have to have 100 average. You have to have some 110s and 120s still in your book.

[Meyer Shields:]

Okay, that's helpful. Second question, I think I've asked this in the past. With regard to workers compensation or really any line of business exposed to medical inflation, are you pricing it at long-term inflation or is there a higher inflation rate because of the uncertainty as healthcare reform is enacted or implemented?

[Paul J. Krump:]

When we think about the long-term trend lines that John was talking about, say 4% for CCI, that's obviously a composite number of all the products when we think about the mix. So workers comp has the higher number. And within workers compensation, different states will have a higher number. California, for example, would be much higher than the typical state. And we think about permanent partial disabilities and many different other factors when we think about medical inflation.

[Operator:]

And we'll go now to Vinay Misquith of Evercore Partners.

[Vinay Misquith:]

Just a follow-up on the pricing question. And it's admirable that you guys are going for 90%. I mean, are low 90s combined on the professional lines? But just curious, given the environment and given the economy we're in, how possible is that? And what's your view on that? And given where the stock is trading and the tradeoff versus buying back stock versus writing your business, how do you look at pricing, both on the professional liability side, as well as on the normal commercial line side?

[John D. Finnegan:]

Vinay, I'm glad you think it's admirable we're aiming for 92%. It'd be more admirable if we achieved it, of course. The -- how possible is it? Well, I mean when you're at 100 and you were at 102, you're coming in the right direction, but it obviously takes a lot of work to get there. I might also point out, we're at 100 in the first quarter. The expenses are seasonally high in the first quarter. If we were in the same loss ratio for the balance of the year, we might be at 98% in the fourth quarter. It's still a long way from 92%. If you're getting 8% or 9% rate increases for a couple of years, it becomes possible. But setting targets is easy, achieving them is hard, and we have a ways to go. But we think we've taken a step in the right direction. And this has been a line that's performed very, very well over the last 10 years. I will point out, it's had a significant amount of favorable development. So you could go back to even the housing years in 2005 and 2006, and were we recorded low 80's combined ratios and you would find that our accident year combined ratio was still low- to mid-90s at a minimum. So this is -- it's not unusual that we have fairly high accident year combined ratios in professional liability. Now I think I'll turn it over to Ricky, the tradeoff question.

[Richard G. Spiro:]

Sure. Obviously, when we think about our excess capital position and what we want to do with it, we take into account a number of factors including, do we have opportunities to invest in our existing businesses. I think where we sit here today, we think that we have enough excess capital not only to continue with our share buyback efforts, but also to support our existing business and any growth that we see in the foreseeable future. And I guess the short answer to come back on the buyback front is that we remain committed to returning excess capital to our shareholders, and we continue to believe that our shares are attractively priced. As you point out, the price of our stock has risen recently, and obviously, the price-to-book multiple as well. On the other hand, we believe that our price-to-book valuations still remains attractive based on historical levels. And don't forget, interest rates still are very low making alternative investments somewhat less attractive. So balancing these considerations as well as a number of factors that we take into consideration when thinking about our buyback, we still see attractive economic opportunities at repurchasing our shares at our current price. So I think we're going to continue to do both, and we can make appropriate investments in our business as we see fit.

[Vinay Misquith:]

So that's helpful. Just as a follow-up. How receptive are clients right now to rate increases? So we've seen the order retention stay pretty flat. So it seems that there's no change in client behavior. But just curious as to how it is and how you think it's going to move within the next 9 months?

[John D. Finnegan:]

Well, the people in the 1-star getting those 42% increases aren't too happy, I'm sure. I think that -- I mean, nobody is happy to get an increase no matter what the reason, right. But the market is up. I think in professional liability, we've been encouraged by the fact that we think we led that market, but we think the market environment there has improved significantly. So you have people reporting on calls that they're getting rate increases in lots of lines of business, high-single digits. And professional liability I think all the indicator are that, that market has firmed. So I mean, as you say, we haven't seen -- yes, we've seen a decline in retention from if you go back a year or 2, but we weren't -- we were writing business probably we shouldn't have been writing. So hopefully, most of the retention we've lost has been in the areas we wanted to lose it or we weren't able to -- we weren't willing to give it the rate base the customer wanted. So I mean the market stats over the last 3 quarters have been pretty consistent in terms of rate and retention. So I guess that's the best indicator rather than anecdotal events.

[Operator:]

And we'll go to Josh Stirling of Sanford Bernstein.

[Josh Stirling:]

So just a quick question, or 2 actually. First, we're sort of halfway presumably into a cycle, wondering if you can give us any visibility. Are there any product areas or product lines, regions, anything, any place you operate where you feel like you're starting to see more competition rise? Or has it been sort of a stable environment over the past year?

[Paul J. Krump:]

This is Paul, again. Again, I think just what John said, we've seen the market become a little less competitive in the professional liability seen here in the United States. The Australian property market, frankly, would be an example of some place I'd say that the last couple of years we were seeing significant rate increases, given the severity of the weather there. And that has slowed down, abated a little bit. Chile, after the last earthquake, was a very hard market, small, but it was very hard market. And that's abated after a few years of very large cumulative rate increases. So again, you have to think about this by line, by country, but within big countries like the United States, it can boil down to geographies, and sometimes even neighborhoods.

[Josh Stirling:]

Got it. The -- looking outside, looking in, this is sort of an odd market because there's some people that are very constructive in growth in this environment, and I think you guys are sort of famously not. Wondering how investors think that through and just if I sort of ask the anecdotal question just because it's sort of sprung into mind when you made the point about the 42% rate increase. Yes, I'm wondering, what price do you think that the market when that customer ultimately renews to somebody else, how much of an increase they were actually taking? And then I'll drop off.

[John D. Finnegan:]

I don't know. The statistics that Paul gave you, about 60% to 70% of those people were retained, the rate increases we were talking about. So for a lot of them, there weren't a lot of good alternatives. These are accounts that have challenges. But obviously, the ones that don't come back are probably getting better rates. So I don't really -- I can't really tell you the answer to that question.

[Operator:]

[Operator Instructions] And we'll go to Ian Gutterman of Adage Capital.

[Ian Gutterman:]

Just a follow-up, I guess, on a couple of the other questions, CCI. John, you said the -- I was a little confused when you said the accident year x cat improved 2 points this quarter. And then you also said the fire loss were extremely low. So if I were to guess, that was maybe a point or 2, it seems there's sort of x, x, x underlying is kind of flat. So why wasn't there more improvement?

[John D. Finnegan:]

Well, Ian, there's a lot of moving parts. I mean, what we said was as -- let's inventory what we say. We said the accident year improved by 2 points. We said also, we were coming off a pretty good quarter last quarter, where -- first quarter last year. It was a quarter which was benign on x -- a non-cat related weather. We did have a very favorable loss experience losses this quarter, but we also have pretty good favorable experience first quarter last year on losses not as good. But just doing your math, if you have -- if you take 1.5 in Personal lines from non-cat-related weather, you take a point or whatever you estimate on large losses in commercial, they kind of offset and give you the 2-point improvement, which is sort of in line with the margin expansion in the company. And that's not a CCI thing, it's -- the x cat you're talking about is for the company as a whole, 2 points.

[Ian Gutterman:]

Got it, got it. Okay. And then the other one is just when I was looking at the releases in CCI for the last 2 quarters, Q4 was, since you've been disclosing this, Q4 was a record high of releases and Q1 just beat it. I know part of that's Sandy, but basically you've had sort of your 2 best quarters of releases in CCI in this hard market, and I'm just kind of wondering, I mean you obviously use some detail lines are sort of what's driving releases to trend new heights?

[John D. Finnegan:]

Well, I mean CCI, if you look at it, I think you'd should agree, should look at it x Sandy, right, it was 7.3 We ran 8.2 let's just say. So we ran in the 5s, so it's a little bit higher. But last year, the first quarter, we ran 3. So Property, I think the big driver this quarter that was out of the ordinary with a terrific experience in Property and Marine that we -- went the opposite way in the first quarter of last year. And that was what drove it up this year. We also -- we continue to have a good underlying in casualty, but the Property and Marine is probably what drove it up in the first quarter of this year.

[Ian Gutterman:]

Got it. And then just my last one, Ricky, this is a little bit of an issue. But the difference between your stat and GAAP expenses, the basically deferrals was $41 million, which again was abnormally high. So I was just wondering anything unusual there or is this just a new deck account that's causing change in the throw patterns versus the past or...

[Richard G. Spiro:]

It's because the expense ratio was up a little bit.

[Ian Gutterman:]

The stat expense ratio or the GAAP expense ratio?

[Richard G. Spiro:]

The GAAP.

[Ian Gutterman:]

Okay, GAAP was okay. So that was sort of a onetime thing, you shouldn't expect it to repeat?

[John D. Finnegan:]

Well, in terms of GAAP expense ratios, we have no reason to believe that's going to have a significant increase in our GAAP expense ratios this year versus last, and it could move a point in either direction. But it probably will be a little higher this year just simply because last year, we benefited -- because we benefited from the Sandy in terms of the impact on the incentive accrual. But other than that, it shouldn't be moved too much one way or another.

[Operator:]

And this time, we have no further questions. I'll turn things back over to management for any closing or additional comments.

[John D. Finnegan:]

Thank you very much, and have a good evening.

[Operator:]

And once again, that concludes our conference. Thank you all for joining.