Chubb Limited
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Good day, everyone, and welcome to the Chubb Corporation's Second Quarter 2013 Earnings Conference. 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 might differ 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 the prepared remarks today 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. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information are provided in the press release and the financial supplement for the second 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 August 23, 2013. Those listening after July 25, 2013, should please note that the information and forecast provided in this recording will not necessarily be updated, and it's possible that the information will no longer be current. I would now like to turn the call over to Mr. Finnegan.

[John D. Finnegan:]

Thank you for joining us. As we said in our earnings release, Chubb produced excellent results in the second quarter of 2013. We generated operating income per share of $1.77 and net income per share of $2.21, both of which were among the highest of any quarter in Chubb's history. These results were achieved despite the adverse impact of catastrophe losses of $0.59 per share. Earnings in the quarter benefited from a positive effect on earned premiums of rate increases in recent periods and the continued low level of non-cat loss activity. Net written premiums for the quarter were flat. We produced a combined ratio of 88.8, including nearly 8 points of catastrophe losses. Excluding catastrophes, our combined ratio was 80.9%, which is 5.4 points better than in the second quarter of last year and the best x cat combined ratio we'd have in any quarter since 2007. These results reflect our focus on bottom line profitability, underwriting discipline and push for higher rates, necessitated by the dual headwinds of lower investment income and continued high levels of catastrophe losses. Annualized operating ROE for the second quarter was 13.1%. Annualized GAAP ROE was 14.7%. GAAP book value per share at June 30, 2013, was $60.76. Our capital position is excellent, and we made good progress in our share repurchase program as Ricky will discuss later. In terms of the U.S. market environment, the data would indicate that the second quarter was at least as strong as the first. In homeowners, written renewal change increased nearly 0.5 point to just over 7 points and is now more than 2 points higher than in the second quarter of 2012 without any impact on retention. Professional liability was especially strong with a 9-point renewal rate increase, the same as in the first quarter, with retention moving up 3 points from 81 to 84. Professional liability renewal rate increases are now 2 points higher than they were all of calendar year 2012, with a slightly higher retention level. In standard commercial lines, renewal rates continued to increase at an 8% level, consistent with our experience over the last 18 months, with retention dropping 1 point from 84 to 83, through the intentional non-renewal of one large poor performing account. Outside the U.S., renewal rates for CCI and CSI ranged from flat to low-single digit increases. We also had rate improvement in personal lines comparable to that in the U.S. Coming on the heels of a great first quarter, the outstanding second quarter helped us attain a record operating income per share of $3.91 for the first 6 months of 2013, as well as record net income per share of $4.69. In light of our performance in the first half of the year and our outlook for the second half, we've increased our guidance for full year 2013 operating income per share to a range of $7.30 to $7.50 from the $6.40 to $6.80 range we provided in our January 2013 guidance. We have raised our guidance despite an increase in our catastrophe loss assumption for the full year from 4 percentage points to 4.6 points. 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 second quarter declined 3% to $1.3 billion. The combined ratio was 89.9 versus 97.5 in the second quarter of 2012. The impact of catastrophes in the second quarter of 2013 was 8.1 percentage points, nearly identical to the 8.2 points we had in the corresponding quarter of 2012. Excluding the impact of catastrophes, CCI’s second quarter combined ratio improved 7.5 points to 81.8 from 89.3 in the second quarter of 2012, due to improved rate levels, as well as unusually low non-cat property losses. We are pleased that CCI's average U.S. renewal rates increased in the second quarter by 8%, the ninth consecutive quarter of rate increases in the United States for CCI. The 8% compares with the 8% we obtained in this year's first quarter and 9% in the year-ago second quarter. This level of rate increases has been consistent through the past 6 quarters. CCI obtained U.S. renewal rate increases in each line of business in the second quarter of 2013. General liability rates increased the most with a low double-digit average. These were followed by monoline property, workers' compensation, package, Excess/Umbrella, automobile, boiler and marine. Rate increases across the product lines were very similar to what we obtained in the first quarter of this year. In CCI markets outside of the United States, average renewal rate increases in Canada, Europe and Australia were in the low-single digit range in the second quarter, similar to the first quarter of this year. Average renewal rates in Latin America and Asia were flat in the second quarter, also similar to the first quarter. CCI’s second quarter U.S. renewal retention rate was 83%, down 1 point from the first quarter of the year. CCI’s new-to-lost business ratio in the United States was 0.7

[Dino E. Robusto:]

Thanks, Paul. Chubb Personal Insurance net written premiums increased 4% to $1.2 billion, and CPI produced a combined ratio of 89.6% compared to 91.2% in the corresponding quarter last year. The impact of catastrophes on CPI's second quarter combined ratio was 12.7 points in 2013. In the second quarter a year ago, the cat impact on CPI's combined ratio was 11.5 points. On an x cat basis, CPI's combined ratio was 76.9% in the second quarter compared to 79.7% in the second quarter of 2012. Homeowners' premiums grew 4% for the quarter, and the combined ratio was 86.9% compared to 90.3% in the corresponding quarter last year. Cat losses accounted for 20.1 points of the homeowners combined ratio in the second quarter of 2013 compared to 18 points in the second quarter of 2012. I'll provide more detail on catastrophes when I review corporate-wide claims activity. Excluding the impact of catastrophes, the 2013 second quarter homeowners' combined ratio improved to 66.8% from 72.3% in the same period a year ago, reflecting an unusually low level of non-cat fire losses. Personal auto premiums increased 5%, and the combined ratio was 95.3% compared to 93.2% in the second quarter of 2012. The growth in personal auto for the quarter reflected higher premiums both in the United States and outside the U.S. In other personal, which includes our accident, personal excess liability and yacht lines, premiums were up 3%, and the combined ratio was 93.3% compared to 92.6% in the second quarter a year ago. Policy retention in the second quarter was 91% for homeowners and 89% for auto, both of which are essentially unchanged from the first quarter of 2013 and the second quarter of 2012. In the second quarter of 2013, we achieved homeowners rate and exposure premium increases totaling about 7% in the United States. In short, Personal lines had another excellent quarter. Turning now to claims corporate wide, catastrophe losses for the second quarter totaled $237 million before tax, with $173 million coming from the U.S. and $64 million stemming from catastrophes outside the U.S.. Personal lines accounted for about 55% of the catastrophe losses, and Commercial Lines for about 45%. There were 14 declared cat events in the United States in the second quarter of this year. However, most of the losses we experienced were from 4 severe thunderstorms, hail and wind events in the central United States. The most severe of the 4 was the tornado in Moore, Oklahoma, which particularly affected one of our large commercial customers. Outside the United States, we had 5 cat events, but roughly 90% of our losses were attributable to the floods in Southern Alberta. Several affluent communities in Calgary, where we have a significant market share of the high-value homes, were particularly impacted by this unprecedented event in Alberta's recorded history. By contrast, we had virtually no losses from the severe flooding event in Central Europe. 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 will discuss our financial results for the quarter and I will also review our updated earnings guidance. Looking first at our operating results, we had strong underwriting income of $317 million in the quarter compared to $159 million in the second quarter a year ago. Property and casualty investment income after tax was down 6% to $286 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 $179 million, or $0.44 per share after tax, of which $0.12 per share came from our alternative investments. During the quarter, we also recognized a gain of $0.21 per share related to the merger of Alterra Capital and Markel Corporation. The remainder of our gains during the quarter came principally from the sale of equity securities. For comparison, in the second quarter of 2012, we had net realized investment gains before tax of $47 million, or $0.11 per share after tax, of which $0.13 per share came from alternative investments. Unrealized depreciation before tax at June 30, 2013, was $2 billion compared to $3.1 billion at the end of the first quarter. Unrealized depreciation declined this quarter due to the recent sharp rise in interest rates. The total carrying value of our consolidated investment portfolio was $42.9 billion as of June 30. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 3.8 years, and the average credit rating is Aa3. We continue to have excellent liquidity at the holding company. At June 30, 2013, our holding company portfolio had $2 billion of investments, including approximately $600 million of short-term investments. Book value per share under GAAP at June 30, 2013, was $60.76 compared to $60.45 at year-end 2012 and $58.54 a year ago. GAAP book value in the quarter was negatively affected by the change in unrealized depreciation that I described earlier. Adjusted book value per share, which we calculate with available-for-sale fixed maturities at amortized cost, was $57.03 compared to $53.80 at 2012 year end and $52.34 a year ago. As for loss reserves, we estimate that we had favorable development in the second quarter of 2013 on prior year reserves by SBU as follows

[John D. Finnegan:]

We had an outstanding second quarter with operating earnings per share of $1.77 and an annualized operating ROE of 13.1%. This performance was driven by a terrific x cat combined ratio of 80.9%. These results came on top of record first quarter performance and resulted in a record 6-month operating income per share of $3.91, an x cat combined ratio of 82.4% and an annualized operating ROE of 14.7%. GAAP ROE for the first 6 months was 15.6%. As has frequently been the case over the last few years, this quarter was marked by a high level of catastrophe losses and an unusually low level of non-cat losses. On the catastrophe side, losses have been above our historical averages for the last 3 years, and this trend has continued into the first half of 2013. It's the combination of higher catastrophe losses and lower investment yields, which continues to drive our rate [indiscernible]. Excluding catastrophes, our first half combined ratio of 82.4% was the second best we've recorded in recent memory. These outstanding results have been driven in part by significant rate increases, which have resulted in longer-term margin expansion in the United States, as our earned rate is now running about 2 to 3 points above our long-term x cat loss cost trends. In addition to margin expansion, our results have benefited from an unusually low level of non-catastrophe-related losses, which recently have been running well below longer-term trend lines. In part, this can be ascribed to rigorous underwriting initiatives implemented 2 years ago to color our existing book as to greatly enhance underwriting discipline as it relates to new business. Both have had the intended effect of significantly re-profiling our book for the better. At the same time, however, we recognize that we've also enjoyed a great deal of good fortune in terms of the unusually low level of non-catastrophe-related losses. This is particularly illustrated by our outstanding first half results in our commercial and homeowners property lines. We have benefited from the absence of almost any large losses. In homeowners alone, fire losses were down 5 points in the second quarter from historical averages. In terms of the current environment, the U.S. market remains firm as evidenced by the fact that we continued to achieve mid- to high-single digit rate increases in all our business units in the second quarter, with generally stable retention levels. Assuming rate increases at or close to current levels in the second half of the year, this should result in continued margin expansion, although actual results in the second half will be more a function of swings in actual loss experience than longer-term trends. In developing our updated guidance, we believe it to be overly optimistic to assume that large losses would continue to run at unusually low levels. Thus we have assumed some partial reversion to higher historical levels of loss experience from large losses in the second half of the year. This is one of the reasons for our forecast 2-point deterioration in our second half x cat combined ratio from our near record first half performance. Even with this forecast of deterioration, our revised guidance at the midpoint implies operating income per share in the second half of $3.49, which will be the best operating EPS of any second half in our history. The bottom line is that we performed superbly in the first half of 2013 from both a market and profitability perspective. Going forward, we are optimistic about the rest of the year as is evidenced by our updated guidance. As Ricky has indicated, all of this results in updated operating income per share guidance of $7.30 to $7.50 for the full year, which would easily be record calendar year results for Chubb. And with that, I'll open the line for questions.

[Operator:]

[Operator Instructions] We'll hear first from Amit Kumar with Macquarie.

[Amit Kumar:]

2 quick questions. I guess, first is a numbers question. You mentioned there was a large unprofitable account that was non-renewed. Can you sort of quantify what the impact was?

[John D. Finnegan:]

It was about 1 point. It was about the entire reason for the 1 point decline in retention. Now there are obviously a lot of pluses and minuses around that, but it was about 1 point.

[Amit Kumar:]

1 point. Okay, that's helpful. The other question is, in the opening remarks you mentioned this is the ninth consecutive quarter of rate increases, obviously, very strong rates. As you look forward, do you expect to be able to push forward for these rates? Or do you think we are at an inflection point in terms of pricing?

[John D. Finnegan:]

I don't have a crystal ball, and there are lots of opinions all over the place. I'd say that we had as strong second quarter as we had a first. And we seem to be off to a pretty good start in the third quarter. So I guess trees don't grow to heaven and at some time, it may change but right now, we're feeling pretty good about the market.

[Amit Kumar:]

Got it. And then can you also talk about -- and this is the last question, on -- I guess, the interplay between exposure change and the economy? Have you seen some initial impact of that on your numbers yet?

[Paul J. Krump:]

Amit, this is Paul, and thanks for congratulating us on the quarter. As respect to the CCI numbers, the interplay here is quite interesting for the quarter. First of all, workers' compensation actually had some renewal exposure increase, that means our customers actually gave us higher payroll projections for the year going forward than they had in the past. The drop was really in the other lines, and I would tell you that after Irene and Sandy, we looked at our cat exposure, in particular in the Northeast, and there were a number of accounts where we decided to take smaller participations on them. That dropoff in participation gets recorded as an exposure dropoff, and that's really what impacted the exposure. As respects going forward, you probably have a better handle than I do on the economy, but I think it's probably much the same. But I don't think we'll have the same type of culling exercise going on in the Northeast that we experienced in the second quarter.

[Operator:]

We'll take our next question from Mike Zaremski from Credit Suisse.

[Michael Zaremski:]

Could you comment on pricing and competition in Personal lines in the U.S., auto versus homeowners?

[Dino E. Robusto:]

Yes, in our case, the pricing continues. We continue to have good momentum in both the auto and homeowners. On our homeowner rate increases, we are in the process of filing mid- to high-single digits and up to about the low teens in some areas of the Northeast, as I've mentioned previously. And so, that's -- so continued momentum because if you look at it historically, 2011, we had ended the year with our homeowner renewal change written impact for a rate and exposure about 3%. By year-end '12, we had gotten a 5% and we expect to have about 7% at the end of '13. And in auto, we've gotten a couple of points of rate and we're also seeing some exposure on auto and we expect that to continue. Momentum is good on both homeowners and auto.

[Michael Zaremski:]

And what about auto loss cost expenses, if I may?

[Dino E. Robusto:]

Yes, so our loss cost trend on auto is roughly about 3 points. So with our pricing and our exposure changes that we're seeing, we're about at loss cost, and going forward, we'll see some meaningful margin expansion, all else, of course, being equal.

[Michael Zaremski:]

Okay. And lastly, I know you guys don't have a crystal ball, but you have a decent size of book of business of workers' comp, does Chubb expect medical loss inflation levels to rise next year when the Affordable Care Act is implemented?

[Paul J. Krump:]

I don't think we're necessarily going to predict which way it's going to flow. We've had a lot of debates here. But at this point, it's really -- the house is divided it's going to go up or maybe even come down.

[Operator:]

We'll take our next question from Gregory Locraft from Morgan Stanley.

[Gregory Locraft:]

I wanted to just sort of understand, from an ROE perspective, things are running really well now. It sounds like you're not going to take the foot off on the pricing side, margins should continue to expand. Is there an ROE that you're sort of aiming for or trying to get to or -- yes, I mean how do you think about where -- how much you want to do?

[Richard G. Spiro:]

Greg, it's Ricky. As we stated in the past, our ROE target has been pretty consistent over the last number of years. Our goal is to achieve a return on equity of inflation plus 10% over the life of a cycle. This, obviously, would imply that we would expect that to perform its target in hard markets and possibly underperform it in soft markets. And if you look at our historical results, we've tracked pretty well with this objective through past cycles and at this time, that -- we're sticking with that ROE target.

[Gregory Locraft:]

Okay, are you at that target now? I mean, it seems like you guys are hitting that.

[Richard G. Spiro:]

Yes, yes, we are hitting it. When you look at it on a reported basis. But when you look at it on an accident year basis, even with the 88% x cat accident year combined ratio we had in the second quarter, if you add a normalized cat load on top of that, and we can all debate what's the right normalized cat load, you're still talking about accident year ROEs that are high-single digits, low-double digits and that's, for us, and we think our numbers are going to be probably as good as anyone in the industry, right? So if you look at the rest of the industry, they're still in single-digit land in terms of ROE on an accident-year basis.

[Operator:]

We'll take our next question from Jay Gelb with Barclays.

[Jay Gelb:]

With regard to the pace of rate improvement, particularly in CCI, we've heard from a number of other insurers that the pace of improvement in rate and price has crested. So I'm just thinking -- I'm just trying to get a better sense of what you feel is different about your book that rate increases are sustained, not only in 2Q, but you're saying also that, that could probably still be the case for the remainder of this year?

[Paul J. Krump:]

Jay, it's Paul. I'll take a stab at this. Let me maybe just talk a little bit about the second quarter and then what we know so far. I mean, rate increases for our commercial business in June were very consistent with the overall rate increases for the entire second quarter. With respect to the market in July, we obviously do not have the final data for the month. However, based on the preliminary assessment of interim monthly reports, some of the feedback from our most trusted field officers, we're seeing no significant change in overall market tone. This is probably at odds with some of the industry participants who have suggested that some parts of the commercial market may be softening or experiencing some additional competition. But probably the big difference with us is that we're primary a middle-market commercial player. We hear the talk about the large property accounts. We have much less participation in that jumbo risk management property market than many others that might be making those comments. So we'll -- right now, everything that we see, it's very much similar to what we saw in the first quarter and what we saw in the second quarter. And speculating going forward is -- we're just not going to do it.

[Jay Gelb:]

Okay. And then the other point I just wanted to clarify was on the 2Q CSI, the downshifting in growth there. I mean, I know you talked about pulling back a bit on catastrophe exposed, commercial accounts, including in the Northeast, but I'm just wondering, what else is going on there to have overall CCI down 3% year-over-year, when it was, I believe, up around 3% in the first quarter?

[Paul J. Krump:]

Yes, you're going to see some bouncing around when it comes to the exposure. I mean, it really was, I think, the anomaly when we looked at it, really was that, that action that we were taking on a number of the property accounts. Obviously, the sluggish economy is playing a role here. And then overseas is playing a big piece of it as well. In the markets overseas, we haven't been getting the overall rate increases that we've been getting in the United States. Our focus overseas is very much like it is in the United States -- it's on profit. Our book overseas is as profitable as our book in the United States over the recent years. So -- but we still believe ultimately, we need to take rate there as well.

[John D. Finnegan:]

Jay, I'd add that I think the second quarter had a few anomalies in it. But I do think that growth will be -- will not be robust in CCI, given our focus on profitability. However, we are certainly expecting to be back in the positive zone in CCI growth in the second half of the year without affecting the way we underwrite. So we -- what we have in guidance implies a positive growth in CCI in the second half of the year.

[Richard G. Spiro:]

This is Ricky. One quick clarification to my earlier comment on accident year ROE. I just want to make it clear that when I'm talking about accident year return, we are talking about new money rates and not looking at the existing portfolio yield on our portfolio. Thanks.

[Operator:]

Our next question will come from Michael Nannizzi from Goldman Sachs.

[Michael Nannizzi:]

So, I guess, first question. Do you guys, by any chance, do you use, Ricky, any derivatives or anything on the interest and management side as far as the portfolio is concerned? And is there an interest rate scenario where you might do that or is that not kind of part of the protocol?

[Richard G. Spiro:]

It's something that we've looked at from time to time. We just never thought that the risk reward of it made sense, so we have not done it in the past. I wouldn't really doubt, but it's not something we've done historically to any great extent.

[Michael Nannizzi:]

And then, I guess, I mean, I could try to do the math and get close. But if you were to back out to the second quarter, I mean, how much of the increase in guidance is related to the big favorable development that we saw in the second quarter, as opposed to better outlook for the back half of the year on an underlying basis?

[John D. Finnegan:]

I'll take that. It's sort of 2 different questions. I mean, obviously, the improvement of guidance per year is a function of how well we did in the first half to some degree, clearly. As I said, we are forecasting about a 2-point deterioration in x cat combined ratio in the second half from the first half due to what we believe to be -- it'd be very bullish to assume we're going to continue to have such a low level of large losses. That 2-point deterioration still gives us a second half x cat combined ratio which is better than the -- our initial January guidance for the full year. How those come about, those -- some come in a variety of scenarios and the large losses could hit in a variety of ways whether it be by business unit or accident year prior period development. So we don't break out any prior period development number for the second half of the year. I think that attainment of the -- our objective in the second half will require some prior period development, clearly, but it's under a variety of scenarios, it has no precise development number in it.

[Michael Nannizzi:]

I see. So I mean, and I guess professional liability and you're definitely getting a lot of rate. It seems like there may be some new folks looking to compete there -- obviously, you're not seeing that. But when I look at the rate gains that you've got and you're still kind of now several quarters of now, mid- to high-single-digit rate gains -- right, so you've got 1, 2, 3, 4, 5, 5 quarters above 5%, but it looks like if all the development in that segment is related to professional liability, you're still writing that business at over 100%. And maybe my math is wrong, but it seems to be the case. So I'm just trying to connect those 2. At what point do you get to -- how much more rate do you need to get to action your underwriting profitability there?

[John D. Finnegan:]

It's a good point, you did -- your farmer's math is good. We ran the accident year at about 100% in the second quarter, similar to first quarter, slightly better. If you compare it to last year, our reported number was significantly better, 6 or 7 points, and about half of that was more development. The other half, we had an improvement of 3 points or so, a little -- an accident year combined ratio closer to 4 if you account for the the loss ratio. We talked about this on the year-end call and the first quarter call. We're not obviously happy with where we are. The rate we're getting is going to help us. Our loss ratios have continued to improve. It's a long tail line of business so I wouldn't expect we have a significant improvement in accident year during the current year. We have to get the data in. But if rates continue, we'll continue to improve next year on our accident year. And we're on the right wicket, but we have ways to go in professional liability. You're going to get down that -- get that down pretty low. But fortunately, we have a good deal of development that's occurred so we're happy about that.

[Michael Nannizzi:]

Got it. And then just last one [indiscernible], Ricky, if you could talk a little about the reinsurance program? Any changes in price or coverage that you purchased specifically? And did you take up any -- or did you have any alternative capital participants take up any of your program?

[Richard G. Spiro:]

Sure. I talked a little bit about the renewable of our cat program on the last call and there was a description in the first quarter Q. Really, no significant changes. And in terms of capital market's participants, other than the cap on that we've done, nothing significant at all from that point of view.

[Operator:]

We'll hear next from Josh Stirling with Sanford Bernstein.

[Josh Stirling:]

So over the past couple of years, you folks have been awfully disciplined, started early re-underwriting. And now, we're seeing -- the market maybe move away from me a little bit. I'm wondering when do you think you'll be able to shift back from sort of a clear focus on profitability to one that's a bit more balanced with growth in U.S. commercial and specialty, for example?

[John D. Finnegan:]

Well, I think you take specialty, I mean, we've got to continue to focus. You heard the way we answered the last question, we have to continue to focus on profitability because at 100, there's no balance to be had. I mean, an accident year of 100 isn't acceptable, so we'll have a foot on the metal on that one for a while. If the market continues to improve, we'll see some growth to go with it, but we shall see. In commercial, obviously, we have a more profitable book. We are hoping that given the right environment, that you're going to see some new business now that's acceptable to us. The more rates improved, the more likely that is to occur. Look for a little improvement in Europe. I think that -- you see that second quarter when growth was low, 4% in the first quarter was probably in line with industry. And we expect to revert to the positive in the third and fourth quarters. So we'll always err on the side of profitability, especially in areas that require more rate, but we expect growth to improve from the second quarter until we get into the second half of this year.

[Josh Stirling:]

Okay, got it. That's helpful. And the question now, just a follow-up on the question of the low double-digit ROEs as starting to do with new money pricing targets. The question would be, with -- as written rate is running ahead of earned and we're starting to see the money rates rise, when you're sitting and working with your actuaries, what sort of magnitude of rate increases do you think we still need? And I think that's sort of a factual question, not a forecast one.

[John D. Finnegan:]

Well, first -- I'll start on it. Written rate now, just to clarify, we've kind of caught up with earned rates and written rates for the most part except in Personal lines, it's a little to go, but commercial has been running 8% for so long, and written it, earned is there, and professional, there's not much of a difference. Personal, maybe there's a 1 point or 2 difference. So think of written and earned as being pretty close together. Now in terms of money rates, I'll let Rick to take that.

[Richard G. Spiro:]

Sure. Look, honestly, we welcome the impact of higher yields on our investment income, but as I mentioned earlier, even with where new money rates are today, we're still not making what we deem to be acceptable accident year ROEs. And again, the industry is doing probably well behind us. So while the rise in rates is a nice -- in interest rates is a nice thing, it's certainly better than a decline in interest rates, there's still a long way to go. And we don't see that really impacting our push for rate.

[Operator:]

We'll hear next from Jay Cohen with Bank of America Merrill Lynch.

[Jay Adam Cohen:]

2 questions. The first is, you brought up your yield assumptions for the year on your portfolio modestly, but you took it up a little bit. I assume, I shouldn't say that, you took up your investment income assumption? Is that due to the good first half result or is it more due to the recent rise in interest rates that we've seen?

[Richard G. Spiro:]

It's probably a combination, but -- the recent rise in interest rates has improved our outlook for reinvestment yields going forward compared to where we were when we started the year.

[Jay Adam Cohen:]

Got it. And then, I guess, for Dino. I think I probably know the answer to this, based on the reserving actions you've taken, but can you talk about what you're seeing in liability claims cost for some of the longer-tail businesses you guys write?

[Dino E. Robusto:]

Yes. So I'll give you a few stats on our claim trends. So I'll start with -- I'll give you some counts and then I'll give you a little view of severity on claims in general. Claim counts continue to be a good story in the U.S., excluding catastrophes, P&C, new writes claim counts overall we're down about 5% for the second quarter against the prior quarter and down 3% for 6 months of 2013, compared to the first 6 months of 2012. New write counts increased slightly for personal auto, physical damage. We're seeing exposure growth in that line. Homeowners, commercial property counts decreased despite an increase in non-cat weather and new write counts also decreased for commercial work comp, commercial general liability and professional liability. Let me get to severity and more of in line with your question, I mean the trends obviously vary significantly by line of business based on obviously different cost drivers. But we're seeing essentially claim cost severity increases that are generally consistent with our longer-term trend assumptions, but low- to mid-single digit severity for auto classes, mid-single digits for the core property and general liability classes and the mid- to upper-single digits for work comp and some excess liability. Now, on the longer tail professional liability severity, these we obviously look at a little bit differently from, obviously, auto and homeowners where there's a lot more consistency. So that we tend to look at, as we spoke in the past, some leading indicators such as security, class action filings and if you take a look at that, the number of SDAs under [indiscernible] is down for the second quarter against the prior quarter, and it's lower than the average -- the prior 4 second quarter so -- but in general, but from a severity standpoint, it's consistent with our longer-term assumptions that we've had.

[Jay Adam Cohen:]

And obviously, no change for the adverse this quarter?

[John D. Finnegan:]

What [indiscernible], no change for the what?

[Jay Adam Cohen:]

For the worse, so in other words, you're not seeing any deterioration in this environment. It's remaining fairly benign, is that fair?

[John D. Finnegan:]

Yes, I think claims count continue to come in very well. Loss experience on prior period, as you can tell, is coming very strong. Yes, things have been looking good on the loss front for about 1.5 years now.

[Operator:]

We'll hear next from Josh Shanker with Deutsche Bank.

[Joshua D. Shanker:]

Yes, mostly a numbers question. On the guidance revision on the cat number. Is the increase related to higher-than-projected first half cats or are you guys thinking, we're going to be more conservative going forward on how we project our cats for the back half?

[Richard G. Spiro:]

Last July we used the 4.5-point assumption for cat losses in the second half of the year in our updated guidance, Josh. This year we did decide to increase the pick by 0.5, really to reflect the higher level of cat losses that we've experienced in recent periods. No real magic or silver bullet, but we definitely have seen an uptick in the second half over the last few years. So we conservatively added 0.5 point to our normal second-half assumption.

[John D. Finnegan:]

Probably comes from both, Josh. I mean, a little bit, but primarily from first half being higher than one would imply by our original 4 points, right? And then a little bit of conservatism maybe in the second half, although no cat assumptions have proved to be conservative in recent memory.

[Joshua D. Shanker:]

Understandable, understandable. And then on the -- is there a new to retain business -- or new-to-lost business ratio that you can now share with us or some sort of details on that?

[John D. Finnegan:]

What -- are you talking about a particular business line?

[Joshua D. Shanker:]

I mean -- particularly, in the CCI lines mostly. But I mean, if you -- Personal lines, I don't think it matters much, given your business is somewhat unique, but on the Commercial lines.

[Paul J. Krump:]

Yes, Josh, in the early remarks, the prepared remarks, I gave it both for CCI and CSI. And CCI, how quickly one forgets. It was 0.7

[John D. Finnegan:]

Probably due to higher retention.

[Paul J. Krump:]

Yes, we had 3 points of better retention. So that's what helped drive that up.

[Operator:]

We'll hear next from Meyer Shields with KBW.

[Meyer Shields:]

John, is it fair for 2Q to infer that the year-to-date outperformance due to fewer large losses is 2 points?

[John D. Finnegan:]

You probably -- you must be into mathematics. I don't think we have that number, but you can -- we can talk about fire losses, we can talk about non-cat-related weather, it's easy -- you can get non-cat-related weather and you can itemize that a little bit more and quantify it better in Personal lines than in Commercial. Fire losses, especially, can quantify -- you can quantify them in both. And then you have Specialty where large losses affect you, too. So what I will say, in the second quarter, if you look at -- year-over-year second quarter, we had a 5.5-point improvement, 2 points of that was development, 3.4 points of that was accident year. If you apply the margin expansion, the theoretical margin expansion number to it, which assumes that your losses are running in line with longer-term loss trends, that's 2 points. So it gives you 1.5 in loss trends that -- actually loss cost that are below trend line, of which a big bunch or maybe even it all is related to unusual large losses.

[Meyer Shields:]

Okay, that's very helpful. You talked for a while, I think about the continued need for some rate increases in Professional liability. Have you been trying to take bigger rate increases over the past couple of years than you've actually been able to?

[John D. Finnegan:]

Oh, sure. If you're running 100, you'd like -- you'd need a lot more. We have. I mean, if you go back 2 -- if you go back only 2 years ago, we weren't getting any. So this has been kind of ramped up and it's pretty good. We'd like either larger and we'd like the ones we have to last a longer time, but we could use more rate in this business and also some improvement in the EPL area, a variety of areas where loss did trend up.

[Paul J. Krump:]

This is Paul. Just to augment what John just said. We don't just take a one size fits all approach, though, to the pricing in this business. We spend a lot of time thinking about each account and what does it actually need. We tend to start off by putting each of the accounts into a 1 of 5 ranking and go from there, thinking about what we really need. There are certainly some accounts that we're happy to renew at flat. And there's others, quite frankly, that we've gotten 40% to 50% rate increases on. And if they walk, they walk.

[Meyer Shields:]

Understood. Okay, and one last question, if I can. Obviously, there's been a lot of talk about the impact of interest rate increases on investment income expectations. I know that you've been reserving sort of incredibly conservatively, we see that in the releases. Is there any reason to expect future loss cost inflation to reflect the interest rate increase?

[John D. Finnegan:]

No, I don't think there's any direct relationship between the 2 except to the extent that you believe that inflation is going to run up with interest rates. We haven't seen that to date. So you'd focus more on the underlying inflation rate than the interest rate. Obviously, in many periods, they are correlated but we haven't seen that yet. And even within the inflation rate, you've got to look at things that are very important to us, construction cost, health care cost, not quite the same as the CPI. And then as we said on analyst calls, we've had very benign loss experience except for 2 quarters in 2011 for a number of years. Inflation has been relatively low over that period, but loss cost things we've done have helped. Loss cost trends have been good. So right now, there's no sign of a lot greater inflation, so I don't think the interest rates have anything to do with that.

[Operator:]

We'll hear next from Vinay Misquith with Evercore.

[Vinay Misquith:]

The first question is a numbers question. I just wanted to clarify that the benefit from lower large losses were about 1 to 1.5 points, is that what you said before? For the first half of this year?

[John D. Finnegan:]

Let me clarify then, Vinay. No, what I said is, and I wasn't too precise. There's no real number for that. What I try to do is say, a question many of you asked is that how much of the quarter's improvement was due to margin expansion and how much was it due to loss experience that was different than margin expansion? So I just took a simple analysis of looking at this year's second quarter versus last year's second quarter, said it was about a 5.5-point improvement, of which 2 points were attributable to favorable development of the 3 -- other 3.5, you could theoretically attribute to the earned rate margin expansion. It was about 1.5. The 1.5 I referred to was that loss experience below theoretical long cost loss...

[Richard G. Spiro:]

Long term.

[John D. Finnegan:]

Long-term loss cost trends that are implicit in the margin expansion calculation. So if you just thought we'd improved by the amount of the margin expansion, we improved by 1.5 better than that because of lower loss -- lower actual loss experience. And that, I think that -- a good deal, all or maybe even all -- more than all were due to lower large losses but that's hard to break out.

[Vinay Misquith:]

Sure. And that's only for the second quarter, you're not talking about the first quarter, correct?

[John D. Finnegan:]

Not talking about the first quarter, although the first quarter I think we had pretty -- we've similar. I forget the exact numbers, but yes, actual losses in the first quarter were lower than the long-term trend, too.

[Vinay Misquith:]

Sure, fair enough. And these trends, I mean, these are not specific only to Chubb, it's -- I mean I'm sure it's true with everybody, correct? About low loss cost trends or low loss cost?

[John D. Finnegan:]

Yes, let's say -- so, yes, I mean I gather from the reports that it looks to me, like I don't know it looks like people had a pretty favorable loss experience. Non-cat-related weather, for example, is probably going to be relatively similar to everyone. Fire losses can be different. I mean, I don't think -- sometimes, people underestimate the sensitivity. In a quarter, we run $3 billion a premium. We have 1 limit fire loss of $30 million, you're talking 1 point on your combined ratio that can't be explained by margin expansion. We've had many quarters with 1 big loss or even 2 big losses. So fire losses tend to be a little bit more unique to an individual company than non-cat-related weather.

[Vinay Misquith:]

Sure, fair enough. Just a second question. And like this is an overall sort of industry question. And you guys have been pushing rates stronger and harder than I think most people have. But within the industry, we've seen rising interest rates, we've seen margins improving, low loss cost trends. What do you think keeps the momentum going for the industry to keep rates high?

[John D. Finnegan:]

I believe that we don't know that will occur. We hope it will occur. What would be the driver? The driver would be the fact that alluding to what Ricky said, that accident year x cat combined ratios are not at target levels. Or stated another way, we have a rate need to get our new business to an acceptable return. And if we have that rate need running 80s and 82s on our x cats accident year, you can imagine the industry has a significant higher rate need. They're probably in the mid-single digits, that's not everyone. But as an average, it couldn't be better than that. So the industry has a need for rate adequacy, still. And again, that's doing the calc on new money rates, as it should be done, what you can earn on new business.

[Richard G. Spiro:]

And also don't forget, as John pointed out in his remarks, the combination of the interest rate environment plus the higher level of catastrophe losses that we, in the industry, have experienced over the last number of years that continue to push for rate.

[Paul J. Krump:]

Loss cost trend is always a pressure.

[Operator:]

And we currently have no further questions in the queue. I'd like to turn the conference back over today's speakers.

[John D. Finnegan:]

Thank you very much, and have a good evening.

[Operator:]

Again, this does conclude today's conference. We thank you, all, for your participation.