Chubb Limited
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good day, everyone, and welcome to The Chubb Corporation's Third Quarter 2014 Earnings Conference Call. Today's call is being recorded. Before we begin, Chubb has asked me to make the following statements

[John D. Finnegan:]

Thank you. Thank you for joining us. We're especially pleased with our results for the third quarter. We posted record operating income per share of $2.17 and outstanding net income per share of $2.47. For the first 9 months, operating income per share was $5.35 and net income per share was $6.28, both of which were the second highest in the company's history. Our results in the third quarter reflected strong premium growth of 5% and continued high levels of retention in all of our business units. I'm also happy to say that we continue to achieve mid single-digit increases in our U.S. rate change metrics. Our combined ratio for the third quarter was an excellent 85.8%, reflecting strong underwriting performance in all of our business units as well as relatively low catastrophe losses. Dino and Paul will provide more detail later. Annualized operating ROE for the third quarter was 14.1%, while annualized GAAP ROE was 14.4%. GAAP book value per share at September 30, 2014, was $70, that's an 8% increase in share in 2013 and a 13% increase since September 30 a year ago. Our capital position is excellent, and we continue to make good progress on our share repurchase program. In light of our excellent performance in the third quarter and our outlook for the fourth quarter, we've increased our guidance for full year 2014 operating income per share to a range of $7.35 to $7.45 from the $6.75 to $6.95 range we provided in our July 2014 guidance. Ricky will discuss our increased guidance in greater detail. Before turning it over to Dino, I want to take a moment to let you know about a Form 8-K filing we expect to make in December, related to my previously announced retirement from Chubb at the end of 2016. Under my employment agreement, Chubb is required to deliver me a notice of nonrenewal 2 years ahead of my retirement, in other words by December 31, 2014. This notice will be delivered sometime in December with an effective date as of December 31, and a copy of the notice will be included in the Form 8-K that we will file shortly thereafter. As a result of the delivery of my -- of the notice, my employment will terminate on December 31, 2016, consistent with my previously announced scheduled retirement on that date. I just wanted to make you aware that this filing will not be new news, but merely fulfill the technical requirement under my agreement related to my previously announced retirement date. Chubb's Board of Directors' CEO succession planning is ongoing. There is nothing new to report at this time as my retirement is still more than 2 years off. And now for more details on our operating performance, we'll start with Dino who will discuss Chubb's Commercial and Specialty operations.

[Dino E. Robusto:]

Thanks, John. Chubb Commercial Insurance and Chubb Specialty Insurance both had strong performance in the third quarter characterized by excellent underwriting results and good growth, reflecting high levels of premium retention and increased new business. We continued to successfully execute our stated plans of emphasizing the retention of our very profitable portfolio, while continuing to push for rate on those accounts that still require it. Starting with CCI. Third quarter written premiums grew at 4% to $1.3 billion. CCI's third quarter combined ratio was 89.5% compared to 93.3% in the second quarter of 2014 and 85.2% in the third quarter of 2013. The third quarter impact of catastrophe losses accounted for 2.6 points of the combined ratio in 2014 and 1.4 points in 2013. Excluding the impact of catastrophes, CCI's third quarter combined ratio was 86.9% this year compared to 83.8% last year, the latter being a particularly strong result from an historical perspective. But this year's third quarter improved from this year's second quarter and the x cat combined ratio was 88.4%. The Casualty combined ratio for the third quarter was 95.3%. This compares favorably to the 98.5% posted in the same quarter last year. Our Workers' Compensation combined ratio of 83.9% was outstanding, a little more than a 7-point improvement over a very good 91.2% that we posted in the third quarter of 2013. And we had another strong performance in the third quarter from Multiple Peril where the combined ratio of 81.9% was essentially the same as in the prior year period. For the Property and Marine lines, you'll recall that on our last earnings call, we indicated that we had experienced abnormally high levels of non-cat large losses in the second quarter, which adversely impacted the combined ratio. Also we suggested that we expected a reversion to a more normal level, which we are happy to report was, indeed, the case as the Property and Marine x cat combined ratio improved to 86.7% in the third quarter. While this is somewhat higher than our 5-year average, it represents a 10.7-point improvement over the second quarter's 97.4%. Notwithstanding this meaningful improvement, this year's third quarter result is higher than the extremely low 67% in the same period last year. On the conference call last quarter, we also stated that in light of the rate increases over the past several years, we were focusing on retaining profitable business and taking advantage of better-priced new business. This focus is contributing to our positive growth rate. While we will never shy away from culling accounts where we cannot secure appropriate rates and terms and conditions, our underwriting and pricing actions over the past few years have resulted in there being fewer accounts that needed to be culled. Indeed, CCI's third quarter retention of 87% in the U.S. was the same as the high level we achieved in the second quarter. Even with this high retention, we achieved an overall rate increase of 3% for the book. This is the 14th consecutive quarter we obtained rate increases and the earned premium impact continued to exceed our long-run loss cost trends. Outside the U.S., CCI's average renewal rate increases in the third quarter remained in the low single digits. With respect to new business, our new-to-lost ratio was 1.0

[Paul J. Krump:]

Thanks, Dino. Chubb Personal Insurance performed very well in the third quarter. CPI net written premiums increased 6% to $1.2 billion, and CPI produced a combined ratio of 85.9% compared to 88.3% in the corresponding quarter last year. The impact of catastrophes on CPI's third quarter combined ratio was 3.5 percentage points in 2014. In the third quarter a year ago, the cat impact on CPI's combined ratio was 7 points. On an x cat basis, CPI's combined ratio in the third quarter of this year was 82.4% versus 81.3% in the corresponding quarter last year. Homeowners premiums grew 4% in the quarter, and the combined ratio was 80.3% compared to 84.3% in the corresponding quarter last year. Cat losses accounted for 5.6 points of the Homeowners combined ratio in the third quarter of 2014 compared to 11.1 points in the third quarter of 2013. Excluding the impact of catastrophes, the 2014 third quarter Homeowners combined ratio was 74.7% compared to 73.2% in the same period a year ago. You may recall that, during last quarter's conference call, we talked about the elevated level of U.S. homeowners fire and x cat weather losses we experienced in the first half of this year. We discussed the randomness of these types of losses, and that in the short term, good or bad fortune can play a meaningful role part in the loss ratio performance. We went on to say that we believed our book was well underwritten and that the losses should average out over time. The third quarter bore this out, and in fact, the impact from fire and x cat weather losses was consistent with our 5-year average for such losses. As a result, and including a small benefit from typical third quarter seasonality, the fire and x cat weather impact in the third quarter was 9 points lower than the average impact in the first and second quarters of this year. Homeowners rate and exposure renewal premium increases totaled 7% in the U.S. in the third quarter, the same as in the second quarter. As we have noted in the past, our Panorama analytics give us the ability to very accurately pinpoint the right price for each risk in our portfolio. This enhances the retention of our best-performing accounts while enabling us to secure equitable rate increases for the others, thus, making the entire portfolio stronger. In Personal Auto, written premium growth was 3% for the quarter. The Personal Auto combined ratio was 95.2% compared to 95.8% in the corresponding quarter a year ago. CPI policy retention in the U.S. in the third quarter was 90% for Homeowners and 89% for Personal Auto, both were unchanged from the second quarter of this year. In Other Personal, which includes our accident, Personal Excess Liability and yacht lines, premiums increased 13% and the combined ratio was 95.4% compared to 94.9% in the third quarter a year ago. Growth in Other Personal was driven by accident and Personal Excess. Turning now to corporate-wide claims. Catastrophe activity for the third quarter was relatively quiet with losses totaling $74 million before tax. There were 6 cat events in the U.S., 2 in Canada and 1 in Mexico. The events included wind, hail, flood and earthquake and no single event was individually significant. The cat claim dollars were about evenly split between Personal and Commercial. And now I will turn it over to Ricky who will review our financial results in more detail.

[Richard G. Spiro:]

Thanks, Paul. Looking first at our operating results. We had strong underwriting income of $439 million in the quarter. Property & Casualty investment income after-tax was down 4% to $270 million, due once again to lower reinvestment rates in our fixed maturity portfolio. Net income was higher than operating income in the quarter due to net realized investment gains before tax of $110 million or $0.30 per share after-tax, of which $0.12 per share came from alternative investments. For comparison, in the third quarter of 2013, we had net realized investment gains before tax of $18 million or $0.04 per share after-tax, including $0.06 per share of net realized gains from alternative investments. As a reminder, unlike some of our competitors, we do not include our share of the change in the net equity of our alternative investments in Property & Casualty investment income, we include it in net realized investment gains and losses. Unrealized depreciation before tax at September 30 was $2.5 billion compared to $2.6 billion at the end of the second quarter. The total carrying value of our consolidated investment portfolio was $44.1 billion as of September 30, 2014. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 4 years and the average credit rating is Aa3. We continue to have excellent liquidity at the holding company. At September 30, our holding company portfolio had $1.8 billion of investments, including approximately $425 million of short-term investments. Book value per share under GAAP at September 30, 2014, was $70 compared to $64.83 at year-end 2013 and $62.04 a year ago. Adjusted book value per share, which we calculate with available-for-sale fixed maturities at amortized cost, was $65.17 compared to $61.86 at 2013 year-end and $58.52 a year ago. As for loss reserves, we estimate that we had favorable development in the third quarter of 2014 on prior year reserves by SBU, as follows

[John D. Finnegan:]

Thanks, Ricky. We had an excellent third quarter and the numbers speak for themselves. Let me summarize a few of the key highlights. We had record operating income per share of $2.17 and net income per share of $2.47, our second best quarterly result. With respect to the U.S. market, we continue to enjoy mid single-digit rate increases while maintaining our overall high retention levels. The was upshot was x currency premium growth of 5% in the quarter consistent with the second quarter and up from 3% in the first half of this year. All 3 SBUs contributed to our profitability for the quarter. We're particularly pleased by the results of our Professional Liability business, which reflected rate increases and our ongoing underwriting initiatives. Our third quarter combined ratio in Professional Liability of 81.3% represented almost a 6.5-point improvement from the third quarter of 2013 and about a 15-point improvement from the third quarter of 2012. In fact, the 81.3% posted in the third quarter is better than our Professional Liability performance in any quarter over the past 7 years. We had an excellent overall combined ratio of 85.8% with an x cat combined ratio of 83.4%. Our annualized GAAP ROE was 14.4% and our annualized operating ROE was 14.1%. GAAP book value per share at September 30 was $70, up 13% from a year earlier and 8% from year-end 2013. For the first 9 months of 2014, on a per-share basis, both the operating income of $5.35 and net income of $6.28 were our second best 9-month results ever. We returned a total of $1.6 billion to shareholders through share repurchases and dividends through 9 months, including $544 million in the third quarter. Our strong performance in the third quarter and outlook for the fourth quarter have enabled us to increase our 2014 operating income per share guidance to a range of $7.35 to $7.45. The midpoint of our revised guidance is $0.55 per share higher than the midpoint of our July guidance of $6.75 to $6.95 and $0.15 per share higher than the midpoint of our initial January guidance. Achievement of this updated guidance would result in the second-highest full year operating income per share in the company's history. In summary, we had a great third quarter and we continue to be pleased with our underwriting performance with respect to both risk selection and pricing. With that, I'll open the lines to your questions.

[Operator:]

[Operator Instructions] And your first question comes from Mike Nanzini (sic) [ Nannizzi ] with Goldman Sachs.

[Michael Steven Nannizzi:]

To start off here. So growth was clearly better, I mean, that we had in all of the segments. That was fantastic. But just trying to understand, the combined ratios excluding development and cats look like they will were a bit light, again in all of the segments. Just trying to understand, was there some underlying or unusual weather or anything else that was going on and maybe something in Specialty as well? Or is there any relationship between kind of accelerated growth and the deterioration in underlying?

[John D. Finnegan:]

Mike, you need to elaborate. What are you looking at in terms -- I guess, you're looking at our -- you kind of focus on x cat accident year combined ratio, is that what you're trying to...

[Michael Steven Nannizzi:]

So if I peel out development and cats?

[John D. Finnegan:]

Right.

[Michael Steven Nannizzi:]

So we were assuming with pricing that was coming through that there would be some margin improvement year-over-year. And you grew a lot more, but it didn't seem like there was a lot of margin improvement year-over-year. So I was just trying to square sort of why that might be. And is it maybe that you're pursuing growth more actively? Or at your profitability hurdles? Just trying to get some understanding there.

[John D. Finnegan:]

So I think that what you're really talking about is, first of all, our accident year this third quarter this year versus third quarter last year was about flat. And this year, while we've been talking, and Dino and Paul both talked about the fact that our third quarter losses in the area of Homeowners non-cat-related weather and fire losses as well as Property and Marine in Commercial represented a good deal of improvement from the second quarter. It was still somewhat higher than our average in those areas over time and certainly higher than the third quarter of last year, which was a pretty low quarter. So the headwind was again sort of unusual losses, which were better, better than the first half and not so bad that we couldn't generate record results. But the comparison is difficult because of the unusual low level last year of these type of losses. And in Specialty, Specialty was a record and I think our loss ratio was about 3 points higher in accident year than it was last year at this time so...

[Michael Steven Nannizzi:]

Right, great. Okay, that makes sense. And then just, Comp, it looks like it was one of the few lines in the Commercial segment where premiums didn't grow and it's been a big grower here recently. It seems like that's an area that's still getting a lot of rate. Can you talk about kind of the dynamic there? Is it just other areas are more attractive maybe? Or from a concentration standpoint maybe?

[Dino E. Robusto:]

Yes. Mike, thanks. This is Dino. In general, the Work Comp growth has been decelerating from prior years when we were achieving large double-digit rate increases. Also in the third quarter, the growth was impacted by a little bit of less new business, which, frankly, can fluctuate quarter-by-quarter because we don't target monoline Work Comp, so it depends more on the number of multiline opportunities we see in that quarter. Additionally, there were some policies that renewed this quarter with policy revisions that changed the structure from guaranteed costs to large deductible and this has the impact of lowering premiums as insurers assume more of the losses. But clearly, we're very pleased with our work comp results. We have great results and we continue to be very optimistic about it.

[Operator:]

And next, we'll take a question from Jay Gelb with Barclays.

[Jay Gelb:]

I also had a question about top line growth. How much of this is being driven by exposure growth versus new business?

[Dino E. Robusto:]

Actually, in Commercial, the exposure growth was minus 1% in the third quarter of 2014, which is an improvement, about 1 point from the second quarter, and it's roughly comparable to what it was in the third quarter. So slightly down.

[Paul J. Krump:]

And in the Homeowners side, Jay, we had rate and exposure increases that totaled 7% and that was pretty evenly split between rate and exposure.

[Jay Gelb:]

That's helpful. Also I'm trying to get a perspective on what benefit to Chubb there could be from the big decline in reinsurance rates. Can you give us some perspective on that? How you're thinking about it this year and also for 2015?

[Richard G. Spiro:]

Sure. I mean, the benefit, I guess, would be several fold. The obvious one being that we've been able to enjoy lower reinsurance costs based on the renewal of our major cat treaties back in April, so that obviously will be helpful and that we use other reinsurance as well. So although we're not a big buyer, we do have some other reinsurance programs in place, so that's always helpful. We obviously are paying close attention to the developments in the marketplace and looking at all the different things that are going on and all the different structures. And we have an open mind about it. We're monitoring whether some of these alternatives would help improve our overall performance of our portfolio, either by promoting growth or by managing some of our volatility, and we'll continue to look at some of these. We haven't found any of these big new structures that make sense for us at the time being, but we are looking at -- our individual businesses are looking at the lower reinsurance costs to see if there's ways that it can benefit their business. So we're keeping an open mind, and it's kind of hard to pinpoint exactly how the lower reinsurance costs will impact us. But clearly, in the near term, we're going to enjoy the benefit of lower costs.

[Operator:]

Our next question will come from Josh Stirling with Bernstein.

[Josh Stirling:]

So first, a question on Commercial and Professional lines for Dino. So year-to-date, you guys have had really strong improvement in Casualty results. Being broadly defined, your Casualty, I think, has improved 5 points year-over-year; Workers' Comp, similar; Professional Liability, something like 7. And so all of these long-tailed lines are running between like 83 and maybe a 90, combined, and that's really, really impressive results. But I'm wondering if -- how sustainable you guys really think this is going to be? Should be we be thinking about you as running in the 80s in Casualty lines, which seems like a very, very good result for long term? And I'm wondering if maybe you can give us some color around sort of what target combined ratios you actually price to and how you think about the underlying sort of run rate profitability in these businesses that's realistic for the future?

[Dino E. Robusto:]

Josh, it's Dino. I mean, we're not going to be able to speculate about what it's going to be in the future. I mean, clearly, if you look at our historical results, we've generated strong performance. We're obviously very disciplined underwriters. We continue to do that. We also continue to get some good rate increases. So we're going to continue to do what we do, be very cautious, look for the opportunities and we think there are good opportunities out there for the long-tail lines, Casualty, Professional Liability. We have very diversified portfolios, diversified also around the globe by geography, so that gives us some opportunity. As you know, we're niche underwriters, we focus on a couple of dozen very specialized segments and we've generated enormous amount of expertise, specialized products and services, specialized claims handling. And those are the areas we focus on. Those are the things we're going to continue to focus on. So we continue to be very optimistic about the opportunities, but hard to say how it's going to play out and particularly in long-tail lines over time.

[John D. Finnegan:]

Josh, we'll accept the kudos, and directionally, we understand the question. But Casualty didn't have a particularly great quarter. I mean, it was 95 so we weren't running in the low 80s. And for the first 9 months, I mean, 90 is a great number for Casualty, but we aren't running in the low 80s or anything in that line of business.

[Josh Stirling:]

Okay. We'll stay tuned. Paul, I wonder if I could ask you just a question. We don't spend as much time with you guys because this is sort of our one chance each quarter. Big picture, when you think about the high net worth business, your Homeowners business might be the best property business in the country. But it's attracted a lot of competition in recent years and I was wondering, and sort of build on Jay's question, thinking about all the new capital flowing into the industry and just given how hard it is to get a coastal home insured these days and sort of how much potential premiums there are in the market for that, whether you're thinking about this as something that you guys have to respond to because, ultimately, there may be some pressure from others trying to take -- smaller firms using more alternative capital to be much more competitive in what really has historically been a sweet spot of your business.

[Paul J. Krump:]

Sure, Josh. Let me kind of back and just give you our perspective on this. I mean, there has been an awful lot of chatter, I guess, about a couple of new entrants into the marketplace over the last 4, 5 years, and that is true. But we've also seen recently one of the longer-term players that has specialized in this area look to be exiting the business. So new entrants come, new entrants go. I'd say all of the competition in my mind really not that much greater than it has been for decades. The bulk of the ultrahigh net worth and high net worth business really resides with the direct writers. When you look at the handful of players that specialize in the high net worth space with us, we probably make up about 20%, 23% of what we define as the high net worth and ultrahigh net worth marketplace. So we occasionally are trading accounts. We have certainly stepped up and used some reinsurance, maybe more aggressively in the last 12 months with the pricing of that. We've been trying to get that on longer-term basis so that we can offer our clients some stability, but we're not immune to slugging it out with a couple of these players on some business. But ultimately, we're trying to take market share from the direct writers and a lot of the regional players because that's where the bulk of the business is. So there's plenty of room for everybody to grow in this business.

[Operator:]

And next question will come from Josh Shanker with Deutsche Bank.

[Joshua D. Shanker:]

I wanted to get a sense of your house fueled weather. I know that you said that compared to 3Q '13, 3Q '14, had a lot more non-cat weather. Was this a bad quarter? Was 3Q '13 a good quarter? And when I hear non-cat weather, my gut tells me you're talking just about the weather. It's difficult for me to -- I can't believe that things didn't seem aggressively difficult for insurers over the past 3 months and maybe I'm wrong about that. Maybe you have decade worth of thought about where we are. Is this worse than we've seen over the past decade? Is this a normal quarter? What's the house for you?

[John D. Finnegan:]

I'd say this. If you just compare to a 5-year average, the third quarter was a little -- but we're talking -- we look at a couple of things. In the Homeowners line, we're looking at non-cat weather and fire losses, which may be more significant this time of year than non-cat weather. In Commercial Property and Marine, we're looking at large losses. But as a proxy for it, we look at the movement in the combined ratio, especially since any negative move in Property and Marine is probably due to large losses because we've been getting rate in that line of business, so it's not due to deteriorating margins, it's a rough proxy. I'd say that the -- what you have to start with is last year, let's take commercial property, we're in something like a 63 in the third quarter. It's an unprecedented, sort of a third best and third -- second best in 10 years. This third quarter was worse than last year. It was a little bit worse in all of the -- as you combine all these areas, it's a little bit worse than the 5-year average, not much. And the 5-year average may be distorted a little bit, but extremely low years. We had great experience, we used to talk about it. Back 2 or 3 years, we had some great experience. So we're not unhappy with where we came out in terms of these unusual loss areas, but they weren't unusually low. They were a little bit higher than the norm, much, much better than the second quarter, worse than what was an unusually good third quarter last year.

[Joshua D. Shanker:]

That sounds perfect. And I don't mean to make any difficulties. I'm curious when you did talk about the announcement of your retirement coming soon, is there any thoughts about when we'll learn about succession planning and whatnot?

[John D. Finnegan:]

It's an ongoing process and it is ongoing. The board is working hard at it, but I have no idea when we'll be making any announcements or any disclosure. We're a long ways away. I've still got almost 2.5 years to go.

[Operator:]

[Operator Instructions] Our next question will come from Vinay Misquith from Evercore.

[Vinay Misquith:]

I was wondering if you could touch on loss cost trends. And also looking at pricing, it's about 3% right now in the Commercial. I mean, are you comfortable with seeing margins decline in the future especially considering that the yield on the investment portfolio is still declining for maybe the next couple of years?

[John D. Finnegan:]

I think, right now, CCI earned premium rate increases are about 5%, so a little bit higher than the written. I think the basis of the question is that if earned rates went down to 2% or 3% like written rates, is margin contraction inevitable. And in answer to your question, would I like higher rates, yes. But I think the answer to the question about margin contraction being inevitable or combined ratio is increasing is that it's not. But like most things, it's complicated and can go a number of ways. I think some of it is definitional. Let's take -- when we talk about long-term long run loss cost trends, we generally mean -- well, let me just take what we call longer-term loss cost trends and expect the short-term loss cost increases. So when we talk about long-term loss cost trends at Chubb, we generally mean the economic forces our portfolios face before consideration of any underwriting strategy. So let's take Workers' Compensation. The trends we're talking about simply mean the expected long-term upward trend and average severity over time due to increasing cost of medical care, as well as higher wage replacement cost and higher statutory indemnification of various types of injuries. Given the nature of these, these type of longer-term costs generally affect industry participants with similar business mix in a similar way. I mean, they can't do anything else. So what we call longer-term loss trends are based on macroeconomic factors and implicitly assume a passive underwriting approach. But in reality, we're constantly seeking to improve our business through focused underwriting initiatives. So let's go back to Workers' Compensation. These initiatives include the ongoing reprofiling of a book and the success we've had in reducing the cost of fraud through our predictive analytics and case management practices. We don't adjust downward. Importantly, we don't adjust downward what we call longer-term loss cost trends for the positive impacts to these underwriting initiatives, but they're obviously factored into our expected loss cost increases, the basis on which we and you should assess the future profitability of our products. Bottom line, if we're successful in our underwriting initiatives, our costs should be 1 to 2 points less in the short term than the long-term loss cost trends itself. But let's put the number together, that while we might have a 4% longer-term trend from a macroeconomic factor, expect a short-term loss increase that's closer 2 to 3 points. And that's a range, which is often cited by other carriers as their loss trend rate. Again, though, since we believe the longer-term macroeconomic trends similarly affect carriers in similar lines of business, I think this probably just represents sort of a definitional difference. As we develop our forecast for the coming year, we were comparing forecast rate changes to our expected short-term loss increases. These vary by line and by the success of various underwriting initiatives, but are, in the aggregate, close to the 2- to 3-point range than the 4-point longer-term loss trend. But then I -- that also another caveat that even then, combined ratio projections based solely on this margin analysis will rarely be accurate because actual losses in any given period are often a good deal above or below longer-term loss trends and that's what we've been talking about in this quarter. Since predicting variances a year out is virtually impossible to focus, we've got to be determining whether or not the base period from which you're extrapolating, which is today, is representative of longer-term trends so you need to adjust to this unusually high or low. So I worked up an example to see how distorted this analysis could be at Chubb. If we go to last year, we ran a CPI at an usually low combined ratio x cat of about 80% in the first 9 months of 2013. Since earned rates have exceeded long-term loss trends by about 3 points over the ensuing 12 months and the time in between, you would have projected our simple margin analysis that we'd have run a 77% in the first 9 months of 2014. Well, in actuality, our x cat combined ratio for CPI for the first 9 months of 2014 was 86%, so 6 points worse than last year and about 9 points worse than what had been implied by margin expansion analysis. Now what's the reason? It's simple. Actual year-over-year loss experience deviated significantly from longer-term loss trends. And I actually picked the period in which the deviation was large. For example, our Homeowners non-cat weather and fire losses, which fluctuates significantly from quarter-to-quarter, were extremely low in the first 9 months of 2013. That's the base period that would be used for the projection and unusually high in the first 9 months of 2014, the end point of the projection. So in this confluence of unusually deviant loss experience greatly subsumed the impact of rates being higher than theoretical long-term loss trends. And you find a similar example if you look in CCI over this period, although to about half the extent. You would have greatly overestimated our 2014 CCI profitability because it would have been based on a historically low base period for Property losses. Going forward, I just warn that to project CCI combined ratio next year simply based on this sort of margin expansion or contraction analysis is probably flawed. I don't know what the real answer is going to be, but the fact is that our Property losses in the first 9 months of this year were far higher than not only last year, but our average experience -- but somewhat higher than our average experience over the last 5 years. So I guess, when we look at it, we don't know and we could be wrong. But we -- as a starting point, we expect some reversion to loss levels closer to historical norms when we develop a forecast. And we saw some of that in the third quarter, although, in this area, these things aren't linear and third quarter improvement has nothing to do with what will happen next year. But just for basic projection analysis, we assume a little bit of a reversion to the more normal levels. And this is the type of thing -- if you may remember, we were talking about last year from the other end when we said don't extrapolate based on 3-points of margin expansion to our current combined ratio because this thing is done well and it isn't representative of -- it isn't representative of the base period from which to extrapolate. I think the 9 months this year is similar, but not to such a great magnitude. On the other side, it's somewhat high. So like most things, complicated and probably more than you ever wanted to know about it. But I think the answer is I wouldn't -- if earn rates are 2% to 3%, for a variety of reasons, I wouldn't necessarily assume we're going to have margin contraction next year. We'll offset some of that with underwriting initiatives and then it could go either way based upon actual loss experience. But I think the base period has to be adjusted for something that's a little bit more normal, if not totally the norm. So that's it.

[Vinay Misquith:]

Yes, that's very helpful. Just as a follow-up, the expense ratios in Personal Insurance and Professional Liability declined about a point each. Just curious what's happening there?

[John D. Finnegan:]

I think the expense ratio was down at about 0.5 point, wasn't it, overall? And a lot depends on relative growth between the SBUs in the period, that drives it, and so there's nothing significant there. Overall, our expense ratio was down somewhat because of growth and also because of the fact that our comp expense is a little bit down from last year, especially in the pension area where we've benefited from terrific performance in 2013 and also a very low year-end 2013 interest rate from which we reevaluated our liabilities and we got a reasonably significant positive impact that will reverse partially going into 2014 if interest rates continue at the current levels.

[Operator:]

Our next question will come from Kai Pan with Morgan Stanley.

[Kai Pan:]

The first question is on the growth really from the acquisition perspective. So if you look at the platform, is there any lines of business or a geography you would like to grow faster and potentially through acquisitions?

[John D. Finnegan:]

Probably, a lot of areas we'd like to grow. We certainly like to grow overseas, although the economics and currency haven't helped us in here. We recently diversified, but haven't helped us recently. We have 25% of that business. There are niche areas like, for example, a big growing area for us is Accident & Health and been an outstanding success. But I can't say that we're looking to grow through acquisitions, that hasn't been in our DNA and we have no reason to -- you should have no reason to believe that we're looking at it any differently now.

[Kai Pan:]

Okay, that's good. And then secondly, on reserve side, it looks like the CCI have a big drop from year ago period. I understand that each quarter probably have some sort of big variations like quarter-from-quarter. So anything behind that? And also some of your peers have been reporting higher reserves additions for the asbestos and environmental charges and just wonder if you have seen similar trends in your reserve book?

[Richard G. Spiro:]

Sure. Kai, It's Ricky. I'll address this. The question, I think, you're asking is the change in prior period development from the year ago third quarter. So in CCI, it was 100; this quarter, it was 55.

[Kai Pan:]

Yes.

[Richard G. Spiro:]

Okay, terrific. I guess, a couple of thoughts. So one thing, it was driven -- the drop was driven in large part by Property and Marine in the third quarter '13, given some of the comments you heard John talked about where we had very favorable Property experience last year. So Property and Marine was significantly favorable in the third quarter of '13, but it was flat as in this quarter. In addition, on the A&E side, we did have some adverse development in A&E, but it wasn't a huge amount of money, but there was some adverse development. And Paul could give you some color on that, if you'd like.

[Paul J. Krump:]

Yes, sure. Sure. Yes, we incurred $11 million of asbestos losses in the third quarter. We had $15 million incurred on environmental losses in the quarter. There really was no -- there's nothing really behind it. There's no new asbestos loss theories or trends going on. These changes were really just from developments on a handful of accounts, in particular they were from a couple of Excess Liability layers that we wrote in the past that we didn't think that would hit our layer, but they did.

[Operator:]

And next, we'll take a question from Cliff Gallant with Nomura Securities.

[Clifford H. Gallant:]

Wanted to ask about cyber insurance, whether or not it's a product line that you expect could be meaningful. And two, as follow-up to that, is there any risk to your D&O professional lines from cyber risk exposures?

[Dino E. Robusto:]

It's Dino. We have been thoughtfully underwriting cyber for several years and we have a small book that has performed well so far and it's really based on our disciplined underwriting that is often informed incidentally by consultation with one of the leading cyber breach consulting firms. We also offer extensive risk mitigation support to our customers. We have a good team of cyber specialists that know how to -- that understands the cyber threats and know how to underwrite it. Of course, this is always -- it's very dynamic so they're always actively monitoring the cyber threats, the landscape and they balance the portfolio across industry segments and they avoid exposure to high-risk industries such as large retailers and payment card processing firms. So we have a balanced portfolio, it's balanced by size of accounts, limits of insurance. We focus on companies that understand the threat and are prepared to respond appropriately. And so it's a conservative approach and we're comfortable for now with our methodical approach to it. We also have a quota share reinsurance that protects us on cyber. So small book, conservative underwriting and that's how we'll continue to move it forward. Cliff, does that answer your question?

[Clifford H. Gallant:]

Yes. And is there a potential exposure in the professional lines?

[Dino E. Robusto:]

There could technically be a D&O exposure to the extent that there are situations where you could have large breaches and the directors and officers are viewed as having managed it effectively. Now again, as I was just indicating, right, we tend to avoid the larger exposure type so -- relative to our book. But in general, if you're asking, I mean, you end up having some D&O exposure if you've got a large cyber breach.

[Operator:]

Your next question will come from Meyer Shields with KBW.

[Meyer Shields:]

You mentioned when you were talking about Surety that there was a slowdown in construction activity. Does that look like something systemic to you? Or just sort of randomness?

[Dino E. Robusto:]

No. More just randomness, right? I mean, we have a very, very high-quality portfolio of Surety contracting firms and engineering firms. And really in any one quarter, as I said, it's lumpy and the prior period we compared it to had growth. And it's just a question of they didn't have -- they didn't get the sort of contracts that we saw in the same period last year, but we believe our customers and the prospects they have because they are clearly the highest-quality companies, we continue to think that they're going to win in the market and so we remain very optimistic about the growth potential for our Surety business. It's just some lumpiness.

[Meyer Shields:]

Okay. And then when we look at the various, I guess, I'm thinking Workers' Compensation and Professional Liability, has there been any change in the claim frequency regardless of whether those claims are ultimately successful? Have you seen that over the past few years?

[Dino E. Robusto:]

Yes, I'll turn over to Paul, let him talk about some of the claim trends.

[Paul J. Krump:]

Yes. Meyer, I'll tell you the claim trends overall are fine. It's actually been very, very benign. The claim counts on the book all up -- are up about 1% Q3 over Q3 2013. So if you think about the premium growth over that period of time, that's next to nothing. And even more impressive, I think, is if you look at the first 9 months of 2013 and compare it to the first 9 months of this year, you have a 1% increase in the overall claim counts. So it's been a very steady, stable number.

[Meyer Shields:]

Does that pull through to Workers' Comp also?

[Paul J. Krump:]

Yes, they obviously vary a little bit by line. They think the -- they're really -- I don't have that exact number right in front of me, but they're all kind of clumped in there. There's not a lot going on there on any one of many big changes. Probably, one of the numbers that sticks out the most or we're in the watch is like EPL claim activity. And from a frequency standpoint there, there's been a real nice decrease in the notification, new rise of claim activity over the past couple of years. So we've been excited to see that because, obviously, we've been working on that book of business pretty hard. The other area that we've seen some decent movement in is the merger and acquisition objection claims. We brought a couple of underwriting tools to bear there. One was just the propensity to see those kind of suits and another was just an all-out effort to raise the deductibles, specifically for merger and acquisition objection claims. In the past, let's say, we had 18% to 20% of the market. We'd have a catch rate on those M&A claims of say, 18% to 20%, so pretty much matched up with our market share today. That catch rate is cut in half and then you add on the impact of deductibles and you really see what Dino was talking about before about the importance of applying underwriting tools that keeps to the book.

[Dino E. Robusto:]

Just to pick up on a point that John made clearly, then back to your point about Work Comp. I mean, one thing that's a little bit structural is the sort of predictive modeling and the analytics that we've now applied on the claim side, and in particular, related to its ability to mitigate fraud clearly a lot more effectively. And so we're seeing some benefit from, clearly, our investments in predictive analytics on the claim front in Workers' Comp specifically to your point.

[Operator:]

And our next question will come from Ian Gutterman with Balyasny.

[Ian Gutterman:]

So I guess a couple of things. First, on CCI, you talked about pricing's down to 3% and where that is versus last year and so forth. But I was sort of curious about the bigger picture question. Do you use 3% here as sort of approaching the floor? Or are you concerned that just given what you're seeing competitively from others that next quarter might be 2% and the quarter after that is 1% and so forth?

[John D. Finnegan:]

Ian, I guess, the simple answer is I don't know. We do know a few things. The industry had 3 years of pretty reasonable rate increases and we also know this year rates have continued to increase, but at incrementally at lower levels. It's hard to deny that the environment for rate increases is less favorable than it's been in the last few years. I guess, there's some obvious factors why. We're going after fourth year of rate increases. The carriers all have -- they're growing price adequacy in their books. This overall increases the competition. The good news today is the decline in rate increases has been incremental, in our case, about a point a quarter in Commercial and professional Liability lines. Going forward, barring some extraordinary event, I guess that likely that the recent pressure on rates will continue. It'd be hard to argue with a thesis that rate increases will be less next year than they were in the past year. Having said all that, I'll refer to my initial response, which that I don't know where rates will eventually go. We talked about the factors driving the market down. They're likely to persist on the other. [Audio Gap] Finally, interest rates remain incredibly low so that places great pressure on maintaining a low combined ratio and that can only be sustained with adequately priced business. So I guess, like the 2-handed economist, on one hand, I expect recent downward pressure and rates to continue, but I also expect any market softening to be less precipitous than it was in past cycles. And I don't know whether that means that the level of rate increases stabilize at inflation or even at 0. And in each line could be different. All I can say at Chubb, we'll react to these circumstances by doing what we do best, selecting the best risk, underwriting carefully, leveraging our superior expertise in claims and cultivating strong relationships with the producers and we'll see where it goes. So the pressure is there, but it's not clear how much more it will grow.

[Ian Gutterman:]

Got it. And are there any places where you're seeing, whether it be large accounts or excess layers or any type of business where it's more below the 3 than above the 3?

[Dino E. Robusto:]

Yes, I can give you a little bit of color. I mean, think, in general, clearly, a market, it's competitive, but I think the pricing dynamics are rational. What you see is usually the most profitable account is where you're going to see pricing pressure and that makes sense. But to your point, it terms of lines of business, Property, a little bit more competitive and especially in the larger premium account. Professional Liability, you actually see the similar dynamic in the industry with better business being more aggressively priced, larger premium tends to attract much more interest. And then, across our lines of business, a little bit above that average and couple of lines of business below that average and it's usually also pretty rational if you look at, for example, in Professional Liability, certain lines like EPL that had been less profitable in the industry and also for us still getting rate increases that are higher than the overall 5 points that we're getting in Professional Liability. And so there is clearly variation. And then, just in general, right, this is a business of our aggregate number is really a function of all of the individual account decisions that we make and there's still a considerable amount of variation on an account basis if you look at it on our book of business so...

[Ian Gutterman:]

Okay. No, that's great. If I could just ask one more on professional lines. I was just looking at the year-to-date reserve releases. It's the best in about 4 or 5 years, I was just curious if you can give any color by accident year or by line of business. And especially I think, in the beginning of the year, there were some concerns that, that might tail off. Just doing the sort of crude analysis, the triangles and ups have been proven out, So I'm just sort of curious where the upside come from?

[John D. Finnegan:]

Well, going into the year, being conservative, we thought that we've been running at pretty high levels overall, favorable development and that we certainly might be prudent to suggest that favorable development could decline this year. And I guess it has really in the third quarter. It was down a significant amount, half in Professional Liability went the other way. Our loss experience continues to prove very good in that area and I couldn't be happier with it. So in terms of where it comes from, I think it comes from, like, 2010 and prior. And 2011 to '13, we're each close to flat in the third quarter so...

[Operator:]

Our next question will come from Jay Cohen with Bank of America Merrill Lynch.

[Jay Adam Cohen:]

Ricky, you may have given this number and I apologize if you did. The new money yield where you're investing in new assets, can you give us a sense of where that is?

[Richard G. Spiro:]

Sure. Not where we'd like it to be, but I'll tell you where it is. Obviously, it does vary as we've talked about in the past by asset class. But broadly speaking today, in our muni portfolio in the U.S., tax-exempt portfolio, we're reinvesting at roughly 140 basis points lower than the maturing book yields on the weighted average of the portfolio, 35 basis points lower in our domestic taxable securities and roughly 70 points lower outside the U.S. in our non-U.S. fixed income investments.

[Operator:]

And at this time, I show no further questions in the queue.

[John D. Finnegan:]

Thank you very much for joining us, and have a good evening.

[Operator:]

That does conclude our conference for today. Thank you for your participation.