Chubb Limited
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

Good day, everyone, and welcome to the Chubb Corporation's Third 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 might differ from estimates and forecasts that Chubb's management team makes today. Additional information regarding factors that could cause such differences appear in Chubb's filings with the Securities and Exchange Commission. In the prepared remarks and responses to today's -- 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 supplements for the third 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 November 22, 2013. Those listening after October 24, 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. We're extremely pleased with the results for the third quarter and first 9 months. For the third quarter, operating income per share was $2.06. The second best quarterly operating EPS in the history of Chubb. For the first 9 months, operating income per share was $5.97 and net income was $6.80, both all-time records for Chubb. Our combined ratio for the third quarter was an excellent 85.7, reflecting the impact of higher rates and strong underwriting performance in all of our business units. During the quarter, the market tone in the U.S. remained firm in both our Standard, Commercial and Professional liability lines, where we achieved high single-digit average renewal rate increases and improved retention levels. In personal lines, we continue to secure renewal change increases averaging in the mid-single digits. Third quarter operating income per share increased 4% over last year and resulted in an annualized operating ROE of 14.8%. Net income per share for the third quarter was $2.10 and annualized ROE for the quarter was 13.9%. GAAP book value per share at September 30, 2013, was $62.04, that's a 3% increase since year-end 2012 and a 2% increase since September 30 a year ago. Our capital position is excellent and we continue to make good progress on our share repurchase program. Net written premiums for the third quarter were up 4%, reflecting growth in all 3 business units. In light of our performance in the first 9 months for the year and our outlook for the fourth quarter, we've increased our guidance for the full year 2013 operating income per share to a range of $7.90 to $8, from its $7.30 to $7.50 range we provided on our July 2013 guidance. Ricky will discuss the increased guidance in greater detail. And now, for more details on our operating performance, we'll start with Paul.

[Paul J. Krump:]

Thanks, John. Chubb Commercial Insurance and Chubb Specialty Insurance both had outstanding performance in the third quarter. At CCI, net written premiums were up 4% to $1.3 billion. The combined ratio was 85.2 compared to 87.2 in the third quarter of 2012. The impact of catastrophe losses accounted for 1.4 points of the combined ratio in the third quarter this year, compared to 0.2 points in the corresponding year-ago quarter. Excluding the impact of catastrophes, CCI’s third quarter combined ratio improved 3.2 points to 83.8 from 87 in the third quarter of 2012. CCI secured renewal rate increases on 90% of our U.S. book during the third quarter and it was the 10th consecutive quarter of rate increases. CCI’s average U.S. renewal rates in the third quarter increased 7%, compared to the 8% increase we secured in the second quarter of this year, while retention was up 2 points from 83% to 85% over the same 2 quarters. While this retention and rate movement quarter-to-quarter is relatively minor, it reflects directionally the progress we have made with differentiated rate-taking and calling over the past few years. As indicated on previous calls, this has been done using a performance ranking system that segments customers based on our assessment of rate adequacy. The bottom line is that we now have less premium volume in our lowest performing groups, where rate increases were the highest, and we have more premium volume in our better performing groups, where the rate increases were lower. For example, for the customer segments within CCI in the U.S. with the greatest rate need, the premium volume was 28% lower in the third quarter of 2013 versus the third quarter of 2012. With this bottom group now comprising less than 20% of the portfolio. This dynamic occurred because some of the segments graduated to our better performing groups due to earlier rounds of rate action while others saw their premium volume decline as a result of our aggressive calling actions. The obvious result is an improved book from a loss experience standpoint, but one where somewhat lower average rate increases would be expected. CCI achieved U.S. renewal rate increases in each line of business in the third quarter of 2013. The rate increases were led by general liability, which averaged low double-digit increases followed by workers' compensation, Monoline property, package, auto, Excess/Umbrella, marine and boiler. In CCI markets outside of the U.S., the average renewal rate increases were in the low-single digits in Canada, Europe and Latin America. Average renewal rates in Asia Pacific were flat. These rate increases are very consistent with what we've obtained in recent quarters. As noted earlier, CCI’s third quarter U.S. renewal retention was 85%, a 2-point improvement over the second quarter. Continued strong renewal rate increases and retention contributed to CCI’s premium growth. CCI’s new-to-lost-business ratio in the U.S. was 0.9

[Dino E. Robusto:]

Thanks, Paul. Chubb Personal Insurance had another great quarter. Net written premiums were $1.1 billion, an increase of 4%. The same growth rate as in the second quarter. CPI produced a combined ratio of 88.3 including 7-points of catastrophe losses compared to 82.8 in the corresponding quarter last year, which included an unusually low catastrophe toll of 1.5 points. On an x cat basis, CPI's combined ratio was 81.3 in the third quarter of this year, the same as in the third quarter of 2012 reflecting continued strong underwriting performance across all product lines. Homeowner premiums grew 4% for the quarter and the combined ratio was 84.3 compared to 76 points during the corresponding quarter last year. Cat losses accounted for 11.1 points of the homeowners combined ratio in the third quarter of 2013 compared to only 2.4 points in the third quarter of 2012. Excluding cats, the third quarter homeowners combined ratio improved to 73.2 in 2013 from 73.8 in the same period a year ago. Personal auto premiums increased 9% reflecting strong growth both in the U.S. and outside the US. The combined ratio of 95.8 for personal auto was similar to the 95.3 we had in the second quarter but higher than the particularly strong 92 in the third quarter a year ago. In other personal lines, premiums were flat, reflecting growth in personal excess offset primarily by the loss of a large accident program in Latin America. The combined ratio for other personal improved to 94.9 from 95.5 in the third quarter a year ago. In the third quarter of 2015, we experienced continued growth in U.S. policy count for both homeowners and personal auto, which were up 1% and 3% respectively. Policy retention for homeowners in the U.S. was 90%, which is down less than 1 point from the same period a year ago, and has a strong result given the multiple price increases we have implemented over the past 3 years. U.S. policy retention for personal auto was 89% and has remained consistent over the last 6 quarters. Turning now to claims, corporate-wide. In the third quarter of 2013, the impact of catastrophe losses was $92 million before tax, accounting for 3 points of the combined ratio and evenly split between cat losses in the U.S. and outside U.S. In the third quarter a year ago, we had cat losses of $17 million before tax, accounting for 0.6 percentage points of the combined ratio. For the first 9 months of 2013, catastrophe losses were $347 million before tax or 3.9 points of the combined ratio. This compares with $264 million or 3 points in the first 9 months of 2012. Now, I'll turn it over to Ricky who will review our financial results in more detail.

[Richard G. Spiro:]

Thanks, Dino. Looking first at our operating results, we had strong underwriting income of $443 million in the quarter. Property and casualty investment income after tax was down 6% to $280 million due to lower reinvestment rates in both our domestic and international fixed maturity portfolios. Net income were slightly higher than operating income in the quarter due to net realized investment gains before tax of $18 million or $0.04 per share after-tax. Net realized investment gains included $0.06 per share of net realized gains from our alternative investments. For comparison, in the third quarter of 2012, net income was the same as operating income, as net realized gains from its sale of securities were offset by $0.12 per share of net realized losses from our alternative investments. Unrealized depreciation before tax at September 30, 2013, was $2 billion, which was unchanged from the amount at the end of the second quarter. The total carrying value of our consolidated investment portfolio was $43 billion as of September 30, 2013. The composition of our portfolio remains largely unchanged from the prior quarter and the average duration of our fixed maturity portfolio is 3.9 years and the average credit-rating is Aa3. We continue to have excellent liquidity at the holding company. At September 30, 2013, our holding company portfolio had $1.9 billion of investments, including approximately $660 million of short-term investments. Book value per share under GAAP at September 30, was $62.04 compared to $60.45 at year-end 2012, and $60.99 a year ago. Adjusted book value per share, which we calculate with available-for-sale fixed maturities at amortized cost was $58.52 compared to $53.80 at 2012 year end and $53.96 a year ago. As for loss reserves, we estimate that we had favorable development in the third quarter of 2013, on prior year reserves by SBU as follows

[John D. Finnegan:]

Thanks, Ricky. Let me summarize a few of the key highlights of the third quarter. We have operating income of $529 million at $2.06 per share. Our annualized ROE was 13.9% and annualized operating ROE was 14.8%. We produced an x cat combined ratio of 82.7, a 3-point improvement over the year earlier third quarter. Our x cat exiting year combined ratio was 88.6, a 2 point improvement over the third quarter last year. We continue to secure rate increases in all 3 business units. GAAP book value per share at September 30, 2013, was $62.04, up 2% from a year earlier and up 3% from year-end 2012. And we returned a total of 440 million to shareholders for share repurchases and dividends. For the first 9 months of 2013, operating income totaled $1.6 billion. On a per-share basis, operating income for the first 9 months was $5.97 per share an 18% increase over last year and the highest 9-month operating income per share in Chubb's history. Annualized operating ROE for the first 9 months is 14.7% and annualized ROE was 15%. The combined ratio for the first 9 months was 86.4 and the x cat combined ratio was 82.5. And during the first 9 months, we returned a total of $1.3 billion to shareholders including $975 million in share repurchases plus $342 million in dividends. Our strong performance in the first 9 months of the year has enabled us to increase our 2013 operating income per share guidance to a range of $7.90 to $8. The midpoint of our revised guidance is $0.55 per share higher than the midpoint of our prior guidance of $7.30 to $7.50. In summary, we had a great third quarter and we continue to be encouraged by firm rate trends in the market. Before opening up to your questions, I want to take a moment to discuss the management-related decisions that we announced today. First, our Board has decided to waive Chubb's mandatory retirement policy that would have required that I retire at the end of 2014 and has asked me to remain as Chairman, President and CEO until December 31, 2016. I've agreed to do so. I appreciate the Board's high level of satisfaction with Chubb's performance during my tenure, and I remain committed to working with the board and our strong management team to continue to produce superior results going forward. Second, with respect to my management team, to broaden the experience of the top 3 members namely

[Operator:]

[Operator Instructions] First, we'll go to Amit Kumar with Macquarie Capital.

[Amit Kumar:]

John, congrats on the announcement that you'll be staying until 2016. I think the real reason is that you enjoy these conference calls too much with us. So that's what I believe. But very quickly moving on, the first question is on pricing in CCI, if I understand this correctly, when you talk about the different buckets, all as being equal, as the quality of the book has improved, it is likely that the headline pricing number will directionally move downwards going forward. Is that fair?

[John D. Finnegan:]

I think that's fair, within reason. I mean, the order of magnitude is not going to take it from -- for a book, if you're going to take it from 8 to 0 or anything like that. But certainly, the more you get a little bit higher retention because you have a higher-quality book, you have less rate needs. And you're not getting the big increases in the lower-quality book, where you are losing a lot of business and that -- therefore, you see that we have lower volume in that book. It's not a bad thing. A higher-quality book is, obviously, a good thing. You can expect some creep downwards, though.

[Amit Kumar:]

Do you have some sense of an early view as to what you might have seen in October?

[John D. Finnegan:]

I'll let Paul answer that.

[Paul J. Krump:]

Sure. Amit. I would say that in October, the data is not yet conclusive, obviously, because we're only -- we haven't ended the month yet. But we do get the preliminary data and we, obviously, get a lot of anecdotal input from our field staff. At this point, I would say that most of the lines are quite firm. We have sensed that the Monoline property is coming under a little bit more of competition in the month of October. That said, I don't want to give you any impression that it is falling off the cliff. It's clearly still running comfortably above loss-cost trend, but we did sense a little bit more competition on the Monoline property book.

[Amit Kumar:]

Got it. The only other question I will stop is, in terms of loss-cost trends, specifically, could you just broadly address, has there been any change in the loss-cost trends in either professional liability or in workers comp over the past few months?

[John D. Finnegan:]

Are you talking longer-term loss-cost trends? Or you're talking...

[Amit Kumar:]

Yes.

[Paul J. Krump:]

The answer -- the short answer, Amit, is no. There has been no change there. We've -- you can think broadly across all the professional liability lines around 4%, 4.5% for their loss cost. Workers' Compensation, obviously, varies a bit by state but we haven't changed any of our loss cost trends over the last couple of months. And clearly, we take a longer-term view whenever we think about loss cost trends.

[John D. Finnegan:]

I would say that while trends with severity and frequency we can make many which are macroeconomic or change that quickly, I mean, we have obviously been actual losses below trends and actual losses below expectation. And some of it has to do with luck -- we've talked in the past about large fire losses and non-cat-related weather. Some of it has to do with all of the underwriting and the calling we've done, where we have much more -- much better new business book and a much better book overall. So trends are one part of costs, as you look forward, but you also have to take into account underwriting strategies and initiatives too.

[Operator:]

We now go to Mike Zaremski with Crédit Suisse.

[Michael Zaremski:]

First question is regards to Chubb's international operations, which I could say aren't about as much. Any areas with particular focus for rates, maybe an adequate or scale hasn't been achieved, and maybe can also touch on quickly, the competitive environment within Accident and Health?

[Paul J. Krump:]

Sure, I'm going to take a stab at that. Taking the latter part, Accident and Health are -- globally, our 2 main competitors are AIG and Ace. We've been growing our book of business overseas very nicely. This past quarter, we did lose 1 large account due to an acquisition done in Latin America that Dino mentioned but aside from that, it's been growing quite nicely and that market is growing nicely. As respects, the rates overseas, they've been very consistent for the last couple of quarters in the Commercial space. I think the U.K. is probably -- and Canada are the more firm marketplaces. Australia came down a little bit in this past quarter, but you have to recognize, after the number catastrophes they had the past couple of years, we've got a lot of cumulative rate increase there. Our book in Asia and Latin America, frankly, is so different because it is so specialized. I don't think we're a great bellwether to look at those markets in their entirety, but the type of rate increase that we've been getting, the low single-digit numbers are very consistent with what's been running in the last couple of quarters.

[Michael Zaremski:]

Okay. That's helpful. Lastly, this $433 million left under the current repurchase authorization. Should we expect a new announcement in January within an 8-K?

[John D. Finnegan:]

As always, we expect that our board will review our future buyback plans in January. So beyond that, I really can't comment.

[Operator:]

Next we'll go to Jay Gelb with Barclays.

[Jay Gelb:]

John, shareholders have been well served with you serving as CEO for over the past decade, and my question with today's announcement is, why did you agree to extend your tenure?

[John D. Finnegan:]

Well, I think, I like the job and I think I've been able to contribute in the job. And there was every reason to continue to work at it. So, I'm more than happy.

[Jay Gelb:]

All right, I mean, I guess what I'm getting at is, it's been pretty clear who the potential internal frontrunners are for the CEO succession position and I'm just trying to -- given that there's 3 individuals that have been in place for quite some time, I'm just trying to understand why extend it out another 2 years as opposed to -- as opposed to making that change at the end of 2014?

[John D. Finnegan:]

I don't think the executive committee members have been in their job an untoward long period of time. As you remember, John Degnan was Chief Operating Officer only 3 years ago. But I don't think you'd be asking the question if we happen to be -- we didn't happen to be one of the very rare companies that have a mandatory retirement age. I think the Board took a clean sheet approach and they decided that we -- that they have the discretion to waive it or not, what was in the best interest of shareholders. And they believed that the continuity of the current leadership team, with me as CEO, was in the best interest of shareholders. It's not a referendum on the capabilities of the executive committee members.

[Jay Gelb:]

Of course not, okay. Has there been any changes in Chubb's reinsurance buying strategy?

[Richard G. Spiro:]

No, again, it's Ricky. We don't buy all that much reinsurance. We tend to be more of a gross line underwriter. Our cat program and most of our other major property programs don't come up for renewal until April 1, and so no changes to speak of.

[Jay Gelb:]

Okay. And then last issue, with Chubb on track this year in terms of share buybacks plus dividends to turn around $1.3 billion in capital and the company also on track to generate probably at least $1.7 billion in retained earnings. I'm just wondering why the share buyback pace isn't a little more significant compared to, say, $2 billion that Chubb is doing back in 2010?

[Richard G. Spiro:]

Again, we -- when we announced our program back in January, we did say that as a guide, the size of the program is roughly equal to, at the time, when we thought our projected 2013 operating income less shareholder dividends was going to be. However, the size of the program is not intended to simply adjust automatically based on our quarterly results or if our earnings expectations change. In fact, our expectation for earnings is only one of the factors that we take into consideration when we set the size of the share buyback at the beginning of the year. Other things we think about include our capital position, our valuation, prevailing insurance market environment and portfolio investment opportunity cost. And so, for example, as you know, the recent rise in interest rates, although they come off a little bit recently, has negatively impacted our excess capital position by reducing the size of the unrealized depreciation of our bond portfolio, although this is partially offset by the positive impact of higher rates on our reserve discount. So putting all those pieces together as a result, we believe that our current program is a sizable program, which appropriately balances all these considerations, including the economic opportunities we see in the market with the retention of a strong capital position and, as I mentioned earlier, we would expect that our board will review our future buyback plans again in January.

[Operator:]

Next we'll go to Vinay Misquith with Evercore Partners.

[Vinay Misquith:]

First questions on the competitive environment, just curious as to what that is on the commercial line side. And curious about whether you think you have achieved adequate rate based upon your entire book, and so will you be pushing for rate in excess of loss-cost trends next year?

[Paul J. Krump:]

As I mentioned, Vinay, this is Paul. Why don't I talk a little bit about rate adequacy and touch on the competitive environment a little bit, but as I mentioned earlier, we've been working very hard to improve the overall quality of our book of business and moving closer to be in rate adequate. This has entailed all that differentiated renewal rate increases, disproportionately non-renewing the worst performers, trying to retain more the better performers and finally writing the bulk of new business in the segments in areas where we believe the rates are at or close to being adequate. However, given the current catastrophe loads, we're not just talking about the third quarter. You got to really look at the last 5, 6 years on what's going on out there with respect to the weather. I would suggest that, given those cat loads as well as today's low reinvestment yield, it really shouldn't be surprising to anyone that the overall book is still not currently at the adequate rate levels to achieve our long-run ROE targets, again, using new money yields. And even when we achieved our long-run target, Vinay, we've touched on this before, we've got that loss-cost trend out there, so we're going to be pushing very hard. So we feel good about all the improvements in the overall book of business. We think the market environment has certainly helped us a lot in the last couple of years. We think the market environment continues to be quite good. It's certainly very good in the professional liability lines, but we're going to keep driving for rate increases and across the board. But we're going to differentiate them and do them on a granular account-by-account basis.

[Vinay Misquith:]

Sure. Fair enough. That's helpful. The second question is on the personal auto side. You guys had a very strong growth this quarter on the personal auto side. Could you help me understand what's happening there, please?

[Dino E. Robusto:]

It's Dino. We're obviously quite pleased with our progress in growing auto and more specifically, really cross-selling to our homeowners customer in the U.S, which has been a strategy of ours. So that now we're getting both growth internationally, which we haven't been getting for several years and also domestically. It's really -- it's a function of the continued investment we make in our sophisticated segmented auto pricing tool that I'd referenced before called Panorama. It's really allowing us to bring a high-quality product and service offering at a competitive and enough price level that's attractive to our targeted niche, which is the high net worth, a very specific niche. And given that today, we only have roughly 1/3 of our Chubb homeowner customers have auto coverage with us, we have a lot more opportunity. And so we're going to continue to push that strategy going forward and continue to invest in our sophisticated analytics.

[Operator:]

We'll go to Michael Nannizzi with Goldman Sachs.

[Michael Nannizzi:]

So just kind of running some quick numbers, and please let me know if these are wrong, but it looks like if you don't include development, the ROE is probably somewhere in the 11-ish percent range. And then, if we adjust for new money yields, we're probably closer to the high single digits, maybe very low double digits. I'm just wondering like in terms of now being an opportunity to grow, is it that you see the ability to -- as maybe Paul was mentioning before, to adjust the profitability of the book from here, so that on the forward that ROE starts to gradually improve? Or how should we think about lining those up? And again, let me know if my math is wrong because it certainly could be.

[Richard G. Spiro:]

It's Ricky. Let me put the math in perspective. If you take the x cat accident year ROE that we had in the quarter of 88.6, add on top of that a normalized cat load, whatever that is, and you know what we've generally assumed per cats as we put out our guidance at the beginning of the year as an example. You do get to an accident year ROE on the business we're writing today that is high single digit, low double digit. And to put that in perspective, we have an ROE target of 10% plus the cost of inflation over time. So generally, we think of that ROE target as been higher than that number and that's the reason, as Paul mentioned earlier, that we're still pushing hard on the rate side because we are not at rate adequacy.

[Michael Nannizzi:]

Got it. And then -- so as far as your professional liability book is concerned particularly, I mean, I think that one is one where, I think, you've done a great job getting rate and certainly the profile of the book has improved significantly. But that one in particular, you're growing now and it looks like if all that development in that segment is in professional liability, you're still right at around 100%. So is that -- I mean, now, I'm guessing that the good business that you're writing and keeping, and then the bad business that you're -- or the less good business, I should say, that you're taking a lot of rate on and maybe losing some of, is going to allow you to bring that number down more rapidly than it's come down so far. Is that fair?

[John D. Finnegan:]

Let me talk. This is a little nuance. I mean, the fact is that we did have some positive development in surety, to begin with. So we're probably running high 90s accident year combined ratio right now. But you shouldn't compare that to the first 2 quarters. It's a little bit better, but a lot of that is seasonal in expenses, and it's a point here, point there. But it's not going to improve during the current year because we don't get enough feedback. We establish it based on what we think rate will be, what we think loss trends will be. We get very little data on the current accident year. So it's kind of what it is. It's running 98 now. Now if I look at it compared to last year, our loss ratio is about 4 points better than the same quarter last year. So that's an improvement. I looked at the rates we're getting and what we see is very manageable all of a sudden, much more manageable loss-cost trends. And I think that we're talking about -- we're hoping that by next year, we'll be in the mid-90s on an accident year based in professional liability. Now time will tell if we get the kind of the rate increases we're getting this year, we should definitely be there. That's a pretty significant improvement. And while we'd like to be in the low 90s, this is a line that we try to reserve appropriately for and precisely for. But it is a line, 7 years, we've run pretty substantial favorable development in this line. So one could argue we do end up -- we're a pretty conservative company. In terms of growth, I wouldn't get overwhelmed. Growth was 4% in the third quarter. It's been 2% year-to-date. That's hardly a heck of a lot of growth. What you're talking about is that we're getting 8 points a rate. So 8 points of rate and 2 points of growth is not growing a lot. Now to be fair, we're not getting 8 points of rate worldwide. We're probably getting 6. But it's still a lot more than the 4% growth even. And so we're not really -- and this business isn't growing that much. And we've gone through a number of years, it was a negative growth. So the answer is we hope to grow it a little bit more. We think that this business will perform better than maybe we're booking it at. You won't see that in the current accident year. You're seeing some improvement in the current versus last accident year. And I think you'll see some fairly significant improvement going forward next year in our accident year combined ratios in professional liability.

[Operator:]

We'll now go to Josh Stirling with Sanford Bernstein.

[Josh Stirling:]

The question is, if you would explain more sort of the transition, I think from -- it sounds like it has been through a particularly notable sort of profit take -- sorry, rate taking at the expense of volume over the past couple of years. You're starting to shift -- obviously, you're still shrinking units, though the new business ratio is coming back up. It sounds like maybe you're going to be a bit more balanced in the rate taking. Should we think about you guys actually maintaining flat units or actually having a chance to grow in CCI and CSI next year for 2014?

[Paul J. Krump:]

This is Paul, Josh. Why don't I take a stab at that. First of all, when we talk about the improvement in the new-to-loss ratios, I want to be fair and point out, being candid here, that some of that improvement is definitely coming from the increase in retention. Clearly as the renewal book has improved, and we've done all of that calling, we see a need -- a desire to be able to hang on to a lot more business. So that certainly is something that we're mindful of. That said, I don't want to put too much emphasis on that, because on any given month or even a quarter when you start talking about professional liability or CCI lines, you could lose a deal or a couple of large deals, and that can move your number around a little bit. But clearly, as the markets continue to improve, and they are, there are more opportunities for us to be able to find good business. When you look at Worker's Compensation as an example within CCI, half of the new business that we wrote came from accounts that we already have the package in auto and comp on. So we're able to round out as Workers' Compensation rates move up. The other half, obviously, is coming from rate increases on the rentals. But clearly the mark in some lines is coming closer to what we think is good pricing, solid pricing. We'll take advantage of that whenever we can.

[Josh Stirling:]

It's helpful. I wonder if we could also just follow up on the point, I think, John made earlier about pricing isn't going to go from 8% to 0. One of the dynamics I've been interested in is just simply just the fourth quarter is the first time that customers who started getting rate increases of any material size in the third quarter -- or the fourth quarter of 2011. So it's the third time that you have to ask for rate increase. And I'm wondering how you're communicating around that issue with your underwriters, and then conversation to brokers, how you're sort of -- how to keep everybody focused on driving pricing while at these sort of mid-to high single-digit levels that have been down for some time.

[John D. Finnegan:]

Let me clarify my comment. I didn't mean rates gone from 8% to 0, I don't think they are. But I think, the answer to the question as would we expect to see lower rate increases plus the improved quality of our book? And I'd say, yes, we would expect directionally to see them. I said, but the quality of the book only is going to bear a certain burden in that area. You're not going to see rates go from 8% to 0 just because you have an improved quality of the book. That would take a significant swing in the market. And I'll turn it over to Paul for the second part of the question.

[Paul J. Krump:]

Yes, Josh, I spent a lot of time with clients and brokers out there, and clearly, this is the topic, "OMG, well now we're going into whatever the third round of rate increase or something." Not to sound glib, but I don't remember that conversation ever happening after 7 rounds of rate decreases in the past. So that's the first thing that I kind of toss out there. But again, the better underwriters are really doing a lot of segmentation of their book of business, and they're looking back at the history of the account. You walk into a client and an agent, and you explain to them what the history of their customer has been, where their price decreases have been over the years, where the price increases have been, what has actually happened. Then you start talking to people honestly about loss-cost trend. And maybe you'd be in California and talking to people about their Workers' Comp and pointing out to them that the loss-cost trend there is in the high single digits. So they know what's happening in the marketplace. They know what's happening with the weather. They know about low interest rates. So you try to build on the fact that you're being logical and you're trying to be fair in what you're asking for. I would say overwhelmingly, our producers and agents support us, a lot of the clients obviously, support us, but you don't win them all.

[Operator:]

We'll now go to Greg Locraft with Morgan Stanley.

[Gregory Locraft:]

Wanted to just ask about the guidance today relative to January. As I look at it, you guys are in the midpoint of your current range of $1.35, above the midpoint of the January range, maybe $0.30-something is due to catastrophes coming in lower than you thought. So perhaps that's some degree of luck. But really there's a $1 or so where you guys are just beating numbers and it doesn't seem to be in share count net investment income, it's just underwriting. And so my question is, what -- relative to what you thought the world will be in January, what has broken so demonstrably better in the projection versus today? And then obviously, what does that mean to '14, how do we think about '14 as well?

[John D. Finnegan:]

I think in broad terms, we've got a benefit from cats, you're right. We achieved rate, which we weren't as certain going into the year we would get the kind of rate we got, and that was an improvement, so margin expansion continued. Also as we said on a number of calls, we've benefited from some good fortune in the terms of losses being below trend lines, whether it be non-cat-related weather, fire losses especially -- you see it in homeowners, to some degree you've seen a terrific year in terms of large losses in the property line. We just had a substantial benefit. So some of that is luck. And also you've seen a lot of development, development at last year's level, which you probably wouldn't have -- we definitely didn't anticipate coming into the year. I mean, in 2014, I think you got you make your own judgments. I mean, you guys can project out margin expansion, although you only have half of the puzzle. You have this year's rates, half of which will go into 2014. You have to anticipate what 2014 rates will be to come up with a margin expansion idea. You probably have to believe that there's going to be some reversion to the norm in terms of large losses and good fortune. And you can make your own judgment on where favorable development should be. I assume 2014 will be a good year, but I can't -- other than directionally, I really -- we've got a lot of good things happen this year. Don't know if they'll all happen again next year. But the baseline trend, the longer-term trend is positive, at least in today's mark with the rate we're getting.

[Gregory Locraft:]

Right, right. The biggest thing, John, I'm trying to get is just the sizing of the non-cat large losses that you mentioned. Any kind of sense year-to-date, how much better that's been in terms of combined ratio points?

[John D. Finnegan:]

No, it hasn't been inconsequential. I mean, it depends if you add homeowners and things like that. But probably a point, I'd say, I mean, I'm just -- maybe a point.

[Gregory Locraft:]

Okay. So yes, again, so you have your normal cat load, you have your point there, and then you start to build it off of that for next year, okay. That makes sense. Next would be maybe for Ricky, just on that investment income. It's kind of coming into where you said it was going to be. At what point can we actually see the net investment income declines begin to abate? Just how does the role work from what's coming off versus what's going in?

[Richard G. Spiro:]

Yes, it's obviously -- it's a little complicated because there are a lot of other pieces to the puzzle than just the reinvestment yields. You have cash flows. We had the buyback and things impact that. And without giving you specifics, I think, as we've looked out, I think certainly we would expect that over the next year and maybe the next 2 years, you will see a decline still in investment income, but it will be at a much smaller percentage decline than it was this year as the portfolio has been rolling over the last few years and the overall book yield has been coming down as it relates to the fact we've been reinvesting for 2 or 3 years now at lower rates. So you will still see a bit of a decline but it should be a smaller decline than what we've seen this year.

[Gregory Locraft:]

Okay. Very clear. And then last is just on the buyback. Is there any level at which you wouldn't buy back your stock? I mean, the shares look to be about 1.5x book or so and the valuation keeps rising?

[Richard G. Spiro:]

Always a good thing that the valuation keep rising. We have no bright lines regarding valuation and there's no single price or multiple that currently makes us uncomfortable. In our view, the intrinsic value of our shares, which ultimately impacts our share repurchase decisions, is a moving target as macroeconomic industry and certainly company-specific dynamics continue to evolve, and it's good stewards of our balance sheet. We constantly review our alternative investment opportunities and other uses for excess capital. And we understand that at some share price level, it may theoretically make more sense to pursue other capital management options. At this time, however, we remain committed to returning excess capital to our shareholders. And we still perceive attractive economic opportunities in repurchasing our shares at the current stock price. So the answer is we don't see that point where we sit today.

[Gregory Locraft:]

Okay. So steady as she goes there. But you mentioned other things you can d,o, sort of, to my mind there's a special dividend. What are some of the other things you could do with excess capital if the valuation went to some insane level?

[Richard G. Spiro:]

Well, obviously, you mentioned that. I mean, clearly the #1 priority for us, and anyone running a business, would be to reinvest in the business if we saw significant growth opportunities. We happen to be in a position today where we think we have enough excess capital to support any growth in the business, as well as continue our buyback programs. But should we find ourselves in a period where we see significant growth opportunities, we would certainly be willing to reinvest. Now bear in mind, we went through the whole rate adequacy discussion earlier. So where we are today, there's certainly -- while there may be some growth opportunities on the margin, we certainly don't see that significant growth opportunity. And then lastly, one that John has talked about in the past, mergers and acquisitions, that's not something that's high on our priority list. So our priorities would be to invest in the business and then return any excess capital to shareholders.

[Operator:]

Moving on to Paul Newsome with Sandler O'Neill.

[J. Paul Newsome:]

The way your competitors mentioned new competition in surety, and I want to know if you had seen the same thing. They were complaining about some levels of competition, maybe a couple of crazy competitors. Are you seeing that with your business?

[Paul J. Krump:]

People always love to complain about the competition. This is Paul. We certainly know that there's some new entrants into the marketplace in surety. We really -- we're not into the homebuilders market. We're not into the smaller guys. Our surety book is really a pristine list of contractors at the high end. There's really only a handful of players that the specialty surety brokers go to, and we're one of them. So no, we really -- we know they're out there, but we really don't bump into them. And they're not used as stalking horses for the major contractors -- the major contractors don't look to them.

[J. Paul Newsome:]

Terrific. And then I want to ask on the new accounting system that the FASB and the IASB has proposed. Do you have any thoughts and will you be writing a comment letter?

[Richard G. Spiro:]

Yes, and yes. We've obviously filed the project over the years, and we've been very actively engaged with it. Like many other companies in our industry, we previously indicated to FASB that we believe the U.S. GAAP accounting and reporting model for P&C companies works well and is understandable for both preparers and users of the financial statements of insurance companies, and we continue to hold that same position. And we are concerned about the possible loss of usability and transparency that may result from this proposed guidance, and we'll continue to share our concerns on this proposal with FASB. And hopefully that addresses your question.

[John D. Finnegan:]

How about 2 more questions?

[Operator:]

Next, we'll go to Jay Cohen with Bank of America Merrill Lynch.

[Jay Adam Cohen:]

A couple of questions. John, you had talked about for the 9 months that, obviously, it was a bit of luck with non-cat weather or large fire losses. Did that aid this quarter's results at all? Or was this quarter more in line with what you have thought?

[John D. Finnegan:]

I would say in the homeowners business, the gap closed a little bit in the third quarter, so it wasn't unusually low either in non-cat-related weather or fire. It's a little bit better year-to-date. But property and marine still benefited from low large losses. We want to take credit for some of it. We've got some good underwriting action, but you can't take credit for all of it.

[Jay Adam Cohen:]

Fair enough. And then the other question was, on the favorable reserve development, I'm wondering if you could give us a bit more color as far as what lines of business and what accident years that was coming from?

[John D. Finnegan:]

Yes, our overall favorable development, it's pretty easy, it was broadly favorable across all the accident years this quarter and actually for the -- and for the 9 months, too, including the 9 months, with strong contribution for accident year 2012 driven by much-better-than-expected results in commercial property.

[Richard G. Spiro:]

And, Jay, if you want a little more color behind each of the business units. In CPI, all 3 of our lines were favorable in the quarter. In CCI, all 4 lines contributed some favorable development, and most of the favorable development was in the property, marine and package area, including some favorable cat development. In CSI, both professional liability and surety were favorable. And the favorable development in professional liability was driven by D&O and fiduciary. And as I mentioned, in our reinsurance assumed business, it was an insignificant amount this quarter.

[Operator:]

Now we'll go to Brian Meredith with UBS.

[Brian Meredith:]

Just 1 or 2 quick ones here. First Paul, just wondering the casualty combined ratio kind of ticking up the last couple of quarters and is at kind of highest level it's been in looks like a couple of years. Anything going on there?

[Paul J. Krump:]

Yes, let me start by pointing out that the year-ago third quarter result of 89.2 in casualty was unusually good compared to the surrounding quarters. So we've got a tough comp there. And that was good due to substantial amount of favorable development in the Excess/Umbrella flask. We saw some continued favorable development in Excess/Umbrella in this year's third quarter but just not as much. In addition, in this quarter, we did see some largely offsetting adverse development in the other portions of casualty, and that was really driven particularly by the general lability class, where we had 1 claim with some large unexpected development on it. So that's really what's behind all that.

[Brian Meredith:]

Great. And just want to go over to the personal lines. On homeowners insurance, I'm just curious, are we getting close to where we're kind of rate adequacy and are we -- have we seen any kind of policy in-force growth there, or that kind of been flattish declining? Are we in a position where we might start to see that grow again?

[Dino E. Robusto:]

Yes, so as I indicated, our policy in-force count growth continued. It was up on homeowners and up on 3 points. And in terms of our rate adequacy, we're going to continue to fly [ph] on average about mid-single-digit increases for homeowners, but low single digits for auto. And obviously, these vary granularly by geography. And that's really just a function of the fact that we've had a lot of increased weather and catastrophe activity. And as Paul indicated earlier every year you've got your loss-cost trend above 4 points running on homeowners. So we're going to continue to push that forward. Our retention, as I indicated in our opening comments, holding up really well in auto, and even on the homeowners, really over the course of multiple years of price increases. It's really only moved down less than a point. So we think in the face of our rate increases, we're holding our own really effectively and we'll keep pushing it.

[Brian Meredith:]

Has the competitive landscape increased at all in that area, I'm curious, out there, and there's a bunch of guys?

[Dino E. Robusto:]

Yes, there's been a couple of new entrants in the high-net worth space over the last few years. And clearly it's generating a little bit more competition. Having said that, I think it's important to realize that the high net worth business is really -- the majority of it is not with the small number of high net worth specialists including us, Chubb. Rather it's with a lot of even direct writers, more likely simply driven by the fact of their sheer size. So we focus on delivering our superior products and service really across this broader competitive landscape rather than focusing on any one competitor. We've been very pleased with our strong performance. Notwithstanding really any change in the competitive landscape. So steady as she goes.

[John D. Finnegan:]

Thank you, everyone. Thanks for joining us tonight, and have a good evening.

[Operator:]

This does conclude today's conference. We do thank you all for your participation.