Chubb Limited
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Good day, everyone, and welcome to The Chubb Corporation's fourth quarter 2014 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 industries, and its results, members of Chubb's management team will include in today's presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It is possible that actual results might differ from estimates and forecasts that Chubb's management team makes today. Additional information regarding factors that could cause such differences appears in Chubb's filings with the Securities and Exchange Commission. In the prepared remarks and responses to questions during today's presentation, Chubb's management may refer to financial measures that are not derived from generally accepted accounting principles, or GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and related information are provided in the press release and the financial supplement for the fourth quarter 2014, which are available on the Investors section of Chubb's website at www.chubb.com. Please 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 Friday, February 27, 2015. Those listening after January 29, 2015 should please note that information and forecasts 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 Finnegan:]

Thank you for joining us. In the fourth quarter of 2014, Chubb had record operating income per share of $2.29. Net income per share was $2.35. This capped off another great year, with operating income per share of $7.63 for the full year and net income per share of $8.62, each of these being the second best results in Chubb history. As you’ll recall, 2013 earnings per share were the best in our history, so great back to back performance, reflecting superior underwriting execution. Our combined ratio for the fourth quarter was 84.3, the best combined ratio for any quarter in the past six years and a 1.2 point improvement over the year earlier fourth quarter. The impact of catastrophe losses in the 2014 fourth quarter was 0.8 of a point compared to 2.1 points in the fourth quarter of 2013. On an ex-cat basis, our combined ratio was 83.5, essentially the same as in the fourth quarter of 2013. Premiums worldwide were up 3% in the fourth quarter or 4% excluding the impact of currency. As in recent quarters, we saw higher retention levels, continued rate increases, and new business. GAAP book value per share at year-end was $70.12, up 8% for the year. Our capital position remains very strong, and we just completed our existing share repurchase program. Today, we announced a new $1.3 billion buyback program. As you saw in our press release, we have provided 2015 operating income per share guidance of $7.35 to $7.65, and Ricky will have more to say about guidance as well as our capital management activities. And now Dino will provide detail on commercial and specialty lines, and then Paul will discuss personal lines and claims. Dino?

[Dino Robusto:]

Thanks, John. In a marketplace that was competitive but still behaving rationally regarding price and terms and conditions, commercial and specialty both had strong performance in the fourth quarter. This was characterized most importantly by excellent underwriting profitability and by executing our stated plans of emphasizing the retention of our profitable portfolio while pushing for rate increases on those accounts that still require it. We also leveraged our distinct underwriting and claims advantages to write new business in our targeted niches. Beginning CCI, the fourth quarter combined ratio was 88.5 compared to 89 in the fourth quarter of 2013 and 89.5 in the third quarter of 2014. The fourth quarter impact of catastrophe losses accounted for 1.8 points of the combined ratio in 2014 and 0.6 points in 2013. Excluding the impact of catastrophes, CCI’s fourth quarter combined ratio improved to 86.7 in 2014 from 88.4 in the prior year. Drilling down into the CCI lines, we had another strong performance in the Multiple Peril, where the combined ratio was 85.4 compared to the unusually low 73.5 in the fourth quarter of 2013. The casualty combined ratio for the fourth quarter of 2014 was 99.8 compared to the 102.9 we posted in the fourth quarter of 2013. Our worker’s compensation combined ratio of 80.2 was outstanding, more than an 11 point improvement over the 91.5 that we posted in the fourth quarter of 2013 and well below our 10-year average of 88. Property and marine produced a fourth quarter combined ratio of 84.4 compared to 83.1 in the year ago quarter. In recent conference calls, we told you that in light of rate increases over the past several years, we were increasingly focused on retention, while at the same time taking advantage of better priced new business in market segments we target. This focus is contributing to our positive growth. In CCI, fourth quarter net written premiums grew to 5% or $1.3 billion. Worker’s comp grew 16%, but as you would see if you looked back at results in previous quarters, this line can fluctuate substantially from quarter to quarter due to the presence or absence of a larger premium account. For example, our workers comp growth rate for the third quarter of 2014 was down 1% while for the full year we grew the line by 6%, a little less than the 8% we grew it in 2013. Notwithstanding these fluctuations, we were able to achieve several points better retention in the fourth quarter versus the third quarter, along with a slight increase in rate, and we were able to cross-sell a few large policies to existing customers. Overall retention for CCI in the fourth quarter was 88% in the U.S., high by historical standards and a 1 point improvement over the third quarter. Please note that in our press release, the retention and renewal rate changes for CCI and CSI that are stated to be for our third quarter are in fact those for our fourth quarter. We apologize for any inconvenience. A corrected release is in the process of being issued. Now, even with this higher retention, we achieved an overall written renewal rate increase of 2% for the U.S. booked. This was the sixteenth consecutive quarter we obtained rate increases and the earned premium impact continues to keep pace with our long term loss cost trends. Outside the U.S., CCI’s average renewal rate increases in the fourth quarter were marginally positive. As we noted last quarter, the successful execution of our rate retention strategy resulted in there being fewer accounts in our portfolio that need substantial rate increases or that need to be culled from the book entirely. Of course, in those instances where we cannot secure appropriate rates and terms, the culling will persist. With respect to new business, we continue to take advantage of our unique expertise and products and services to target the market segments in which we specialize. In the fourth quarter, we were able to secure new business opportunities that we believe will meet our required return targets in many of these segments. In the U.S., our new to lost business ratio was 1.4

[Paul Krump:]

Thanks, Dino. Chubb Personal Insurance performed very well in the fourth quarter of 2014. CPI net written premiums increased a healthy 4% to $1.1 billion. CPI delivered a terrific combined ratio of 83.9 in the fourth quarter, which is in line with the 83.5 produced in the corresponding quarter of 2013. Catastrophes had only a 0.1 percentage point impact on CPI’s fourth quarter combined ratio, compared to a 5.3 point impact in the fourth quarter of 2013. CPI’s ex-cat combined ratio for the fourth quarter of 2014 was 83.8 versus 78.2 in the fourth quarter of 2013. Homeowners premiums increased 3% for the quarter. The homeowners combined ratio was 76.5 compared to 75.8 in the corresponding quarter of 2013. Catastrophes had a 0.1 percentage points impact on the homeowners combined ratio in the fourth quarter of 2014, compared to 8.5 percentage points in the corresponding quarter of 2013. Excluding catastrophes, the homeowners combined ratio in the fourth quarter was 76.4 versus 67.3 in the fourth quarter of 2013. As you might recall, we pointed out last year at this time that the 76.3 ex-cat combined ratio for homeowners was an unusually good result. The average homeowners renewal premium increase totaled 6% in the U.S. compared to 7% in the third quarter. In the fourth quarter, net written premiums for personal auto grew 4%. The personal auto combined ratio was 95.2 compared to 93.9 in the corresponding quarter of 2013. CPI policy retention in the U.S. in the fourth quarter of 2014 was 89% for both homeowners and personal auto. Homeowners policy retention was down slightly while personal auto was unchanged from the third quarter of 2014. In other personal, which includes our accident, personal excess liability, and yacht lines, we had strong growth of 6% in the fourth quarter of 2014 and the combined ratio was 95.1 compared to 96.8 in the corresponding quarter of 2013. Looking now at our full year revenue, CPI’s net written premiums increased 4% to $4.5 billion. CPI produced a combined ratio of 90.9, including 5.5 percentage points of catastrophe losses compared to a combined ratio of 87 for 2013, including a 7.2 impact from catastrophes. Excluding catastrophes, CPI’s combined ratio for the full year was 85.4 in 2014 versus 79.8 for 2013. For all of 2014, homeowners premiums increased by 4% to $2.8 billion. The homeowners combined ratio was 88.3, including an 8.9 percentage point impact from catastrophes compared to a combined ratio of 82.3 in 2013 including an 11.5 impact from catastrophes. Excluding the impact of catastrophes, the homeowners combined ratio for the full year was 79.4 in 2014 versus 70.8 in 2013. Personal auto premiums increased 1% in 2014 to $740 million and the combined ratio was 96.8 compared to 94.8 in 2013. Other personal lines’ premiums increased 8% for the full year to $1 billion and the combined ratio was 94 versus 94.8 in 2013. Turning now to claims for Chubb overall, it was a fairly benign quarter from a loss perspective. On an ex-cat basis, new [unintelligible] claim counts increased only 3% from the fourth quarter of 2013, which is in line with our premium growth. Regarding catastrophes, their impact in the fourth quarter of 2014 was 0.8 percentage points of the combined ratio, or $25 million before tax. This includes $35 million of favorable development from cat events earlier in 2014, which was partially offset by $11 million of unfavorable development from cat events in 2013 and prior years. Losses from catastrophe events that occurred in the fourth quarter of 2014 totaled $49 million and were dominated by two hail and wind storms, one in Brisbane, Australia and another that impacted Texas and Kansas. The impact of catastrophes for the full year 2014 was 3.6 percentage points or $444 million before tax, reflecting $11 million of unfavorable development from events that occurred in 2013 and prior years. And now, I will turn it over to Ricky, who will review our financial results in more detail.

[Richard Spiro:]

Thanks, Paul. Looking first at our operating results, we had strong underwriting income of $477 million in the quarter. For the full year, underwriting income was $1.4 billion. Our combined ratio for the fourth quarter was 84.3 compared to 85.5 in the same quarter a year earlier. Our expense ratio for the quarter was 30.5 in 2014 versus 30.8 in 2013. For the full year, our combined ratio was 88.3 in 2014 compared to 86.1 in 2013, and our expense ratio for the full year was 31.4 in 2014 and 31.9 in 2013. Please note that over the past few years, our expense ratio in the fourth quarter has been lower than for other quarters in the full year due to seasonality. The expense ratio varies from quarter to quarter due to mix of business and other variables. Property and casualty investment income after tax was down 6% in the fourth quarter to $267 million, due once again to lower reinvestment rates in our fixed maturity portfolios and to a lesser extent the impact of foreign currency translations. Net income was higher than operating income in the quarter due to net realized investment gains before tax of $18 million or $0.06 per share after tax, including a $0.01 per share loss from alternative investments. For comparison, in the fourth quarter of 2013, we had net realized investment gains before tax of $67 million or $0.17 per share after tax, including a gain of $0.09 per share from alternative investments. Unrealized appreciation before tax at December 31, 2014 was $2.7 billion. For comparison, at year-end 2013, unrealized appreciation before tax was $1.9 billion. The increase in unrealized appreciation in 2014 largely reflects the decrease in interest rates and the increase in equity markets that occurred during the year. The total carrying value of our consolidated investment portfolio was $43.5 billion as of December 31, 2014. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is four years and the average credit rating is Aa3. We continue to have excellent liquidity at the holding company. At December 31, our holding company portfolio had $1.8 billion of investments, including approximately $585 million of short-term investments. Book value per share under GAAP at December 31, 2014 was $70.12 compared to $64.83 at year-end 2013, an increase of 8%. Adjusted book value per share, which we calculate as available for sale fixed maturities at amortized cost were $65.03 compared to $61.86 at 2013 year-end, an increase of 5%. With regard to book value, as you may know, companies like Chubb that have defined benefit pension and post-retirement benefit plans are required to prepare an annual revaluation of the plan’s assets and benefit liabilities. As a result of our revaluation at the end of 2014, the estimate of our planned liabilities increased and our change in book value for the fourth quarter was adversely impacted by approximately $350 million after tax. The increase in our plan’s liabilities was primarily due to the decrease in our discount rate assumption that resulted from the decrease in interest rates at December 31, 2014 compared to the prior year end rates, and to a lesser extent, a change in our mortality assumption. The change in our mortality assumption reflects the impact of the October 2014 revision of the Society of Actuaries’ mortality tables, which many companies, including Chubb, take into account in the measurement of their benefit plan liabilities. In addition, the change in book value during the quarter was negatively affected by about $75 million due to the impact of foreign currency translation. As for loss reserves, we estimate that we had favorable development in the fourth quarter of 2014 on prior year reserves by [SBU] as follows. In CPI, we had about $15 million, CCI had about $50 million, CSI had about $90 million, and the runoff reinsurance assumed business had none, bringing our total favorable development to about $155 million for the quarter. This represents the favorable impact on the fourth quarter combined ratio of 5 points overall, including an adverse impact from prior year catastrophes of $11 million. For comparison, in the fourth quarter of 2013, we had about $115 million of favorable development for the company overall, including $25 million in CPI, $35 million in CCI, $55 million in CSI, and none in reinsurance assumed. The favorable impact on the combined ratio in the fourth quarter of 2013 was about 4 points overall, including a favorable impact from prior year catastrophes of $6 million. Favorable development for the full year 2014 totaled about $635 million. It had a favorable impact on the combined ratio of approximately 5 points, compared to $710 million in 2013 and a favorable impact on the combined ratio of approximately 6 points. For the fourth quarter of 2014, our ex-cat accident year combined ratio was 88.8 compared to 87 in last year’s fourth quarter and for the full year 2014, our ex-cat accident year combined ratio was 90, compared to 88.4 in 2013. During the fourth quarter of 2014, our loss reserves decreased by $350 million, including a decrease of $344 million for the insurance business and a decrease of $6 million for the reinsurance assumed business, which is in runoff. The overall decrease in reserves reflects the decrease of $53 million related to catastrophes. The impact of currency translation on loss reserves during the quarter, resulted in a decrease in reserves of about $155 million. Turning now to capital management, during the fourth quarter, we repurchased approximately 3.4 million shares at an aggregate cost of $346 million. The average cost of our repurchases in the quarter was $100.58 per share. For the full year 2014, we repurchased 16.9 million shares at an aggregate cost of $1.6 billion and an average cost of $92.05 per share. As of December 31, 2014, there was approximately $52 million remaining under our January 2014 repurchase program, which we completed this month. As we announced today, our board of directors has authorized a new $1.3 billion share repurchase program. The size of the share buyback program is essentially in line with the 2015 operating income reflected in our guidance, less shareholder dividends. We intend to complete this program by the end of January 2016, subject to market conditions and other factors. Finally, let me make a few additional comments regarding our guidance. We expect operating income per share for 2015 to be in the range of $7.35 to $7.65, with a midpoint of $7.50. Before reviewing the key assumptions underlying our 2015 operating income per share guidance, I would like to highlight a couple of external factors that will impact our financial results this year. First, interest rates have continued to decline on a global basis, which will once again put pressure on investment income. In addition, the impact of lower interest rates on our discount rate assumption will increase our pension and post-retirement benefit costs in 2015, which will be reflected in the slightly higher expense ratio for the full year, compared to the 31.4% expense ratio in 2014. Second, since roughly a quarter of our business is generated outside the United States, the recent strengthening of the U.S. dollar against most major currencies will have a negative impact on both premium growth and investment income. As we said in our press release, we are assuming for the full year a negative 2 percentage point impact of foreign currency translation on written premium growth and a negative 1 percentage point impact on the growth of property and casualty investment income after tax. Our operating income per share guidance assumes, for the full year 2015, an increase of 1% to 3% in net written premiums or 3% to 5%, excluding the negative impact of foreign currency translation, a combined ratio of 89 to 90, a decline of 6% to 8% in property and casualty investment income after taxes, or down 5% to 7%, excluding the negative impact of foreign currency translation, and our guidance assumes 230 million average diluted shares outstanding. Our guidance also assumes 4 percentage points of catastrophe losses, in line with our median annual catastrophe impact over the last 10 years. In terms of sensitivity, the impact of each percentage point of catastrophe losses on 2015 operating income per share is approximately $0.36. And now, I will turn it back to John.

[John Finnegan:]

Thanks, Ricky. Chubb had an excellent fourth quarter, posting record operating income per share of $2.29, which generated annualized GAAP ROE of 13.6% and annualized operating ROE of 14.8%. These first quarter results top off a terrific year in which we achieved excellent operating and net income per share. Renewal rates improved in all three SBUs, with average U.S. rate increases for the full year of 3% for [unintelligible] commercial, 5% for professional liability, and we also achieved average U.S. renewal increases of 6% for personal lines. The growing rate adequacy of our overall book has increased our focus on retaining more of our profitable portfolio, as evidenced by our high renewal retention rates. And in light of broader industry rate increases in the last few years, we were able to secure some additional new business that was attractively priced within the market segment we targeted. We continued to actively manage our capital in 2014 by returning more than $2 billion to our shareholders through a combination of share repurchases and dividends. Our ongoing commitment to capital management is demonstrated by the new $1.3 billion share repurchase program we announced today. As you can tell from our 2015 guidance, we are expecting another overall strong year, despite the dual headwinds of continued low interest rates and the strong dollar. And with that, I’ll open the lines for your questions.

[Operator:]

[Operator instructions.] And we’ll take our first question from Amit Kumar with Macquarie.

[Amit Kumar:]

Two quick questions on the guidance. The first is on the NPW guidance for 1% to 3%. And even if I exclude the foreign exchange impact and factor in the comments on retention, why wouldn’t the top line move directionally in the opposite direction more, versus what we have seen previously? Is it simply a function of new business, or are you factoring in some maybe rate momentum going forward?

[Richard Spiro:]

I think it’s a combination of things. I’ll start by putting our 2014 premium growth in perspective. So for the full year 2014, net premiums written increased 3% or 4%, excluding the effect of foreign currency translation. So we’re expecting next year that ex-currency premium growth will be consistent with our 2014 growth, and we believe that it’s reasonable, based on the current market environment. In terms of assumptions, I can’t go through each of the individual pieces, but obviously, retention is strong. You heard the commentary on rates and what we’re seeing in the near term, and then there’s some new business, of course, as well. And I’d highlight also, just think about the relationship between premium growth and renewal rate increases. And not necessarily correlated. So for example, if you look back in 2013, we actually had lower ex-currency premium growth of 3%, but average renewal rates were actually higher than they were in 2014. So hopefully that gives you some idea of what we’re thinking.

[Amit Kumar:]

The only other question I had was on the discussion on the combined ratio guidance. The ex-cat guidance is 85 to 86. Can you talk about how you’re thinking about the underlying accident year going forward? Does that still improve based on how earned rates come in exceeding loss cost trends? Or does it sort of flat line? Can you just expand on that?

[John Finnegan:]

A variety of things could happen, obviously. It depends to some degree on where rates do go. But you know, when you look at the 2015 accident year, let’s start with what most of the analysts talk about as margin expansion, meaning earned rate versus long term loss cost trends. Remember that the 2015 accident year is based on earned rate, which means it’s 50% driven by rate increases in the year 2014 and 50% by rate increases in the year 2015. In the year 2014, our rate increases exceeded loss cost trends and even our shorter term loss costs. So we go in with some tailwinds, a point or two from 2014, but 50% 2015 accident year. Now, as we move in toward 2015, right now our earned rate is still a little bit in excess of our loss cost trends in the fourth quarter, but our written rate is about neutral to loss cost trends. I don’t know where rate’s going but I expect, as we run a variety of scenarios, there’s more bias in the scenarios to rate increases not being as high as they currently are. But there could be some pressure on margins related to the 50% of accident year performance related to 2015. But then you’ve got to combine that with the 2014 tailwind, and it’s hard to call whether you’re going to see, overall for the 2015 accident year, contraction or margin expansion. The second thing is that, we’ve talked about this ad nauseam in the past, is that margin expansion analysis, even correct, doesn’t necessarily correlate into year over year move in combined ratios. The other big factor is how do actual losses compare to loss cost trends? And as we saw this year, our actual losses, especially in the property lines, or I’d say homeowners, were significantly higher than what we’ve experienced in recent years. And you know, we’d hoped to see some reversion to the mean in that line of business. There’s no guarantee that you can’t be higher than the mean two years in a row, so we’re conservative when we look at that, but again, we’re hoping for some reversion to the mean, actual losses. In some of the lines, we had an unfavorable experience in this year, which largely related to luck factors such as fire and non-cat water.

[Richard Spiro:]

And if I can add one thing, apart from the loss ratio side, as I mentioned in my remarks, on the expense ratio side, given the higher pension costs that we expect to incur in 2015, that the expense ratio also will be higher than what we experienced in 2014.

[John Finnegan:]

And finally, when you’re looking at our guidance, you asked specifically about accident year, but when you look at our guidance for combined ratio, that’s obviously a calendar year number. The big missing factor is development, and development is a major contributor to results. It was 5 points this year. Don’t know if you can run that forever, so we have a variety of scenarios about development. But you’d have to take that into account when you formulate your own projections.

[Operator:]

Our next question comes from Jay Gelb with Barclays.

[Jay Gelb:]

First, I had a question on the casualty combined ratio. In Q4 that was running a little high. I was hoping you could discuss that.

[Dino Robusto:]

The casualty ratio was the 99.8 in the fourth quarter, when you compare it to the third quarter of 2014, which is 95.3. It was 102.9 in the fourth quarter of 2013. The primary reason for the deterioration relative to the third quarter of 2014 is the impact of asbestos and environmental claims, which was heavier in the fourth quarter, although partially offset by more favorable development in excess liability. One other thing to point out, if you look at the full year 2014, our casualty combined ratio was 92.5, a 5 point improvement over 2013. So we remain pleased with the progress and the improvement in this line of business.

[Jay Gelb:]

So there was a Q4 impact of asbestos and environmental, and what was the dollar amount of that?

[Dino Robusto:]

About $60 million, or about 15 points to our casualty combined ratio in the fourth quarter compared to only $24 million, or 6 points, in the third quarter of 2014.

[Jay Gelb:]

And then my second and unrelated question is on the high net worth personal lines business, of which Chubb has a major presence. ACE announced it’s buying the Fireman’s Fund high net worth business. I’d be interested in your thoughts in terms of what that means for the competitive dynamic for a pretty important market for Chubb.

[Paul Krump:]

Obviously, we don’t know for certain how or if this will impact us, but over the decades, I think you well know there’s been several firms which have entered the high net worth space to compete against us. Obviously, some of those players have exited over the years as well. We kind of look at it this way

[Jay Gelb:]

So no real shift anticipated as a result of that acquisition?

[Paul Krump:]

We have our strategies, and we’ll compete against the new entity, or the combined entity.

[Operator:]

Our next question comes from Vinay Misquith from Evercore ISI.

[Vinay Misquith:]

The first question is on loss trend. I believe you mentioned in your comments that written rate was in line with loss trend. So just curious as to what you’re assuming for loss trend.

[John Finnegan:]

Let me talk about that for a second, and I’ll reiterate something I said last quarter. When we talk about loss trend, we use 4%, but let me define that for you. Our loss trend is largely macroeconomic factors such as in workers comp it’s healthcare inflation. Loss cost trends are used by different firms in different ways. What it doesn’t take into account is the impact of proactive underwriting initiatives. So the kind of culling of the book that we’ve been talking about doing over the past two years reduces our loss cost in the short term. When you take into account the underwriting initiatives we have underway, we’d expect our short term loss cost trends to be about a point or two lower than long term loss cost trends. So when we budget and look at profitability, we do this granularly, by line. But you know, we probably look at our short term loss cost trends at 2 to 3 points rather than the 4 point long term loss cost trend. But when I say we’re about even in the fourth quarter, I was comparing written to long term. We’re still a point or so above what we envision to be the short term loss cost trends.

[Vinay Misquith:]

Right, but if I understand it correctly, that’s purely because you’ve taken some underwriting actions, correct?

[John Finnegan:]

Exactly, and I’m sure all other firms do too. Yes.

[Vinay Misquith:]

The second question, I’m looking at the accident year combined ex-cat for this quarter. That was about 88.5% for the company as a whole. Last year, it was about 87.2. So it went up year over year. Just curious as to why it rose year over year.

[John Finnegan:]

What number are you using? Are you looking at the fourth quarter ex-cat accident year?

[Vinay Misquith:]

Yes, correct.

[John Finnegan:]

88.8?

[Vinay Misquith:]

My math says about 88.5 this year versus about 87.2. So it went up by around 130 basis points year over year.

[John Finnegan:]

Year over year? Yeah, well, it was all due to CPI. Last year, we had an unusually good quarter. This year, we had a decent quarter. There was about an 8 point deterioration in homeowners, and that was basically all attributable to somewhat higher than normal non-cat and fire losses in the fourth quarter this year and extremely low fire losses in non-cat weather in the fourth quarter of last year. The rest of the units, CCI and CSI, were pretty much flat.

[Operator:]

Our next question comes from Josh Stirling with Sanford Bernstein.

[Josh Stirling:]

I wondered if I could follow on with a question on your personal lines business. I think I noticed you guys started advertising on television recently. And I was kind of surprised to see that. Just you’re an agency company, you’ve got a longstanding brand, and I’m wondering how this kind of fits with your positioning of the personal lines business, how you are looking to be competitive as that business presumably gets more competitive. And can we read this into you guys thinking that somehow you’ve been measuring the brand value, or consumer awareness, and we’ve been seeing it slipping? Or is this sort of just something you guys felt like would be nice to do?

[Paul Krump:]

I’ll take a stab at it. First of all, thanks for noticing the ad. No regrets is the theme of the ad, and it pretty much tags onto what we’ve had in the past, about expect the unexpected and insurance doesn’t matter until it matters, and that kind of a thing. It’s not just a personal lines ad. It is a Chubb Corporate ad, so we have people in there from a business, we have a couple of personal lines customers. It’s really just trying to make certain that our name is out there in the marketplace. We do see, though, that there were some customers that, during the economic downturn, whether they be commercial or personal, that decided to save some money by going to less expensive insurance. And now that the economy’s improving, we want to make certain that they know we’re still out here and they don’t have any regrets when they come to us. So that’s really what it’s all about. We’re getting great feedback, though, from our agents, and a number of customers have called up and said that it’s a nice use of a little bit of humor. So we’re excited about it.

[John Finnegan:]

You don’t have worry about any line item on our financial statement from an increase in the advertising budget. [laughter]

[Josh Stirling:]

Good. Well, I always think of you guys as a humorous company. [laughter] So listen, I wonder if I could ask another question. We spend a lot of time talking about your guys’ segments, but I was looking at your numbers, and it made me realize that the international business, it looks like it hasn’t - I know FX makes this more complicated and harder to do with the way you present your numbers, but it doesn’t look like it’s had that much growth, but it also seems to have lower margins than your franchise in the U.S. And I’m kind of wondering what you think your priorities are for those businesses and do you have opportunities to accelerate the growth rates or alternatively, to drive some greater profitability so they could look more like the United States?

[John Finnegan:]

We look at that. It’s always discussed, currently, at the board level, overseas business and growth. It’s very hard. You mentioned one thing. You know have exchange in here, so it’s very hard. I think overseas used to be 25% or 26%. We think that maybe it’s 23% or so today. But exchange is a big driver in that. And then the other driver of relative growth is rates. And you know, rates in the U.S. over the last three years have been significantly higher than rates overseas. Growth has been hurt overseas by rates directly, and also because the lack of increase in rates has made new opportunities less attractive. We still look at overseas as an area which should grow somewhat better than the U.S., constant change and similar rate increases. But you know, we’ve also suffered over the last few years from an economic downturn in Europe, from Brazil turning down. So there are a lot of things that have happened in the last few years in the overseas economies in general, to exchange rates, and then the insurance industry just rate increases have not been as attractive as they’ve been in the U.S.

[Operator:]

Our next question comes from Michael Nannizzi with Goldman Sachs.

[Michael Nannizzi:]

Ricky, would it be possible to know what you were booking that comp business at, at an accident year basis? I know it was 80 combined on a calendar year basis, but I was just curious if we could understand kind of where you’re booking that business.

[Richard Spiro:]

Yeah, that’s not a number that we normally would give out. So, sorry about that.

[John Finnegan:]

Probably not one we have here right now, either. [laughter]

[Michael Nannizzi:]

Got it. Because obviously, you’re growing a lot. It seems like there’s maybe some bundling, some big accounts that you’re bringing into the fold. I’m just curious, is it possible directionally just to understand whether or not that’s meeting your hurdle rates of return on an accident year basis? Can I ask you that one?

[John Finnegan:]

Absolutely, it is. And you know, again, the growth was great in the quarter. I think Dino pointed out in his remarks, we had seven or eight points for the year, eight last year. So you know, we were flat in the third and we were very good in the fourth. A lot of that’s just timing. It’s not a 16% growth business.

[Michael Nannizzi:]

And then I guess just looking at commercial overall, taking into consideration some of the non-cat weather, I felt like that was more in CPI during 2014, it looks like the underlying loss ratio didn’t really change all that much, but you got rate throughout the year in CCI, and it seemed like comp was probably a bigger part of that growth and maybe got more rate than the rest of the book. Just trying to square that. Was it the non-cat losses that maybe masked some of that margin expansion, or should we see some of that start to trickle through next year?

[John Finnegan:]

We pointed out in the second quarter we had some very high large losses in the second quarter. They weren’t non-cat weather, necessarily. But for the full year, our property marine kind of ran in line with our five year average, so I don’t think that was an issue. I’d say that first of all, when you look at CCI, we basically went from, what, five, four, three, and two were our rate increases over the course of the year? So we really didn’t exceed long term loss cost trends by any significant amount, if at all, over the course of the year. Then second, you have these anomalies in actual versus loss trends. You know, for a point, we’re talking about, 2013 was a very good year. So if you look at the analysis, 2013 through 2014, on an accident year basis, just on margin expansion, maybe it should have been a point better off. A point gets lost in [unintelligible], 2013 was a good starting base. So nothing really there to see.

[Michael Nannizzi:]

And just on the other personal lines of business, it’s been running consistently in that sort of mid-90s range, and it’s been growing more than the others. So how are you thinking about that? Is it low-hanging fruit, just from a bundling perspective? Does it provide retention benefits that more than offset the fact that the profitability is less than some of the other lines of business that you’re maybe not growing as fast? Or is it the accident business that’s not anywhere near the bundling of the other personal lines of business. Just trying to get some context there.

[Paul Krump:]

Just shy of about 70% of our other personal business is made up of accident, and accident has been what’s helping fuel the growth in the other personal category there. It gets a little bit lumpy. You’re right, when you look at it, basically running in the high single-digits for the year. The absence or presence of a large accident program is pretty much what will drive and make some of the swings there. But we hired some people a couple of years back, and we’re doing very well in the accident space. Obviously, we’re doing very well also in the personal excess liability space. We’ve been writing a lot more umbrellas on individuals as well as on groups. The yacht business is slowly coming out of the doldrums from the economic downturn, and that’s really what’s going on in that category.

[John Finnegan:]

I’d say that accident, obviously being the lion’s share of the category, it’s a growth business, so right now the combines aren’t exactly where we want it to be, which is quite often the case when you have a growth business. If your overall performance in that category is 95 and accident health is 70%, you could conclude that accident health is not running significantly below that. We hope, over the shorter term, that we actually see a substantial improvement in accident health. But we’re not unhappy. We’re getting good growth and with growth comes a little bit higher expenses, and [you’re not] earning through the income as fast, so over time, hopefully not too far, not too much time, I think it will improve.

[Operator:]

Next we’ll go to Kai Pan with Morgan Stanley.

[Kai Pan:]

First question is that if you look back to 2013 and 2014, your operating results are pretty strong. You have record earnings. But [ROE] stayed roughly around between 11% to 13%. Going forward, the combined ratio could potentially deteriorate because the pricing is no longer rising as fast as in the past two years and the investment income continues under pressure. Or you can actually return this great return, 100%, of earnings to shareholders. Is there anything you can do to improve that ROE or that’s what we’re looking at for the next few years?

[Richard Spiro:]

Obviously, we’re doing a number of things. One, you’ve heard on the business side, on this call and others, some of the underwriting actions we’ve been taking to try to continue to improve the profitability of some of the books of business, where they’re maybe not performing at the level we want. On the investment income side, I can tell you unequivocally, we are not going to change our investment strategy. We are not going to reach for yield in this environment. We simply do not see those opportunities. So the way we’re going to try to continue to grow the earnings line as well as potentially ROE is continue to do what we’ve been doing. We’ll continue to be active in managing our capital. And there really aren’t a whole lot of silver bullets out there. In the environment where we are today, where interest rates are, we think the ROEs that we are generating are actually quite attractive. And our target ROE of 10% plus inflation over time has not changed. It’s still what we’re pushing in our pricing and in our rate discussions, and so the reality is, the only way you can get better than that, with investment income where it is, you’ve got to get a better loss ratio. So we continue to push on that.

[John Finnegan:]

We’re talking 12.5% to 14.5% over the last two years, return on equity, in a 1% to 2% interest rate environment. That’s a reasonably good return on equity when your investment income goes down 5% or 6% a year. And we’re also carrying around, we think, some strong excess capital position. So I think those are pretty good returns. We gave you guidance for next year, so you know what we expect in our earnings, so you come up with some sort of assessment of where ROE will be. But in this environment, this interest rate environment, this investment income environment, you’re not going to be running 16%, 17%, and 18% return on equity.

[Kai Pan:]

That’s great. My second question is a little bit different. Google recently announced that they’re getting into the auto insurance business. I just wonder, do you see yourselves as a participant in any sort of an online marketplace for your personal products?

[Paul Krump:]

This approach is really focused on providing a price comparison driven distribution option for potential customers. I think it’s really too early to know, based on our experience, if these types of distribution platforms actually work or not. I think I would direct you to look at what’s happening in the U.K. in the last couple of years. There’s been a couple of those platforms operating there, and what I can tell you is they’ve had little to no impact on our automobile writings in the United Kingdom.

[Kai Pan:]

Lastly, very quickly, do you have any early indication from the winter storm this week?

[John Finnegan:]

Juno? [laughter] As of now, we have an insignificant number of claims reported, and our initial investigations have not revealed any very large claims. But I want to just put out a little word of caution there. It isn’t unusual with a Juno type snowstorm to have customers report claims to us over a period of weeks. You know, a water stain will appear in a closet they hadn’t opened up for a few weeks, or they’ll get to their secondary home and inspect it and see that there’s been some damage there. So we’re really encouraged by the paucity of claim activity that we’ve had to date, but we’re going to have to continue to monitor this. It’s just too early to tell.

[Operator:]

Next we’ll go to Josh Shanker with Deutsche Bank.

[Josh Shanker:]

Ricky, I’d like to know how you think about forecasting investment yield decline, or the extent to which the last three months of, you know, interest rates have come into that, what percent of the portfolio comes up for reinvestment during the year. It looks like your forecast accelerated in terms of decline from where it was a year ago. What are the ingredients that make that happen?

[Richard Spiro:]

You touched on a lot of them. So obviously, the way we do the forecasting is we take a look at the maturity profile of our portfolio, the upcoming year. We have to make, obviously, some assumptions related to what our cash flows are going to look like. We have our buyback and other things that impact all that. And we buy securities over time, which can impact some of the maturities and when they actually occur. And we start by looking at that, and we have an estimate and a projection, if you will, of what we think our cash flows are going to look like, with the maturities. We have an estimate of what we think reinvestment rates are going to look like, and we project down over time. And obviously, as I mentioned, we also, this time around, given what’s happened in the currency markets, also needed to take a look at what we’re seeing, both in the U.S. and outside the U.S. to make some guestimate about what we think the impact of currency will be. So that’s how we do it. We look at our actual maturities and project out. It’s sort of a moving target, because things change over time, but we have a pretty good idea of what we think the maturity schedule is going to look like. And as you know, we actually publish a maturity schedule in our 10-K every year, where we highlight the next few years of what the expected maturities are. So you can get a pretty good feel from that.

[John Finnegan:]

Interest rates have deteriorated in recent months, and the dollar has gotten stronger, so the outlook has deteriorated from real world factors. Whether that’s permanent…

[Josh Shanker:]

Is it reasonable to look at what’s happened to the [10 year] in the last six months, and say the degree of the move is similar to the new money yield change at Chubb?

[Richard Spiro:]

You know, I don’t have the comparison of what the new money yields were at year and last year. I can tell you what our current new money rates are and maybe you can get a sense from that, but basically, where we’re reinvesting today, and obviously I’ve said this before, it depends on asset class, but they run pretty close together these days. So outside the U.S., I’d say our current reinvestment rates are about 2.25. Our reinvestment rate in tax exempt in the U.S. is probably around 2.4 or thereabouts. And our reinvestment rate for our taxable securities in the U.S. is probably around 2.5%. And I’ll go one step further. Given that, I can try to at least give you some idea of when we think about the maturity schedule and what’s maturing over the next call it few years, on the U.S. tax exempt side, those reinvestment rates are probably 175 to 200 basis points below our maturing book yields on average over the next few years. For our domestic taxable fixed income maturities, it’s probably 75 to 125 basis points. And there is some variability in this, because obviously, depending on when you bought a security, if you bought something five years ago, it may have had a higher coupon in the financial crisis period, and now it’s going to be maturing. And then outside the U.S., it’s about 25 to 75 basis points

[Operator:]

We’ll next go to Jay Cohen with Bank of America Merrill Lynch.

[Jay Cohen:]

I was hoping to get a bit more color on the continued favorable development in professional lines. I’m wondering if you can maybe talk about what accident years it’s coming from. Is it driven more by the frequency of claims or the severity of claims that you’re seeing?

[John Finnegan:]

Let me say that your first question, professional liability reserves, the favorable development came from accident years 2010 and prior. 2011 and 2013 were roughly flat. 2012 slight adverse. Obviously, the later years, you don’t have as much development. Overall reserve position really was all accident years were favorable, except pre-2004, they aggregated that period because of the A&E charge. But everything was favorable, so overall, all the years stood up pretty good.

[Jay Cohen:]

And what are the claims trends you’re seeing in professional lines that’s allowing the ongoing significant favorable development?

[John Finnegan:]

I think when you talk about development, you’re talking about kind of, largely, especially if you’re going back three or four years, claims you know about. So you’re talking about severity. You’re not talking that much about frequency. In terms of frequency in current periods, they look fine, but when we talk about development, you’re talking largely about the severity on claims you know about. Obviously, there can be some you don’t, but for the most part, that’s not the contributing factor. The loss experienced on claims that you have, you know about.

[Paul Krump:]

Maybe I can throw a little bit of color in here. You know, the claim trends, as John was saying, the patterns vary considerably, depending on the line of business, the types of claims. For example, EPL claims historically have tended to have a shorter lifespan than, say, public D&O claims. But with the economic downturn, we saw some lengthening in the duration of those EPL claims, while the notable segment of public D&O claims, those really involving the merger and acquisition activity, tend to resolve faster than the other types of D&O claims.

[John Finnegan:]

So it is favorable loss experience, largely related to severity, on prior accident years.

[Operator:]

Our next question comes from Meyer Shields with Keefe, Bruyette & Woods.

[Meyer Shields:]

Looking at your guidance, it looks like, whether at the upper or the lower end of the range, your operating income expectations for this year are down about 3% than your original forecast for 2014, and the share repurchase program is down about 13%. I was hoping you could talk to the difference there.

[John Finnegan:]

I think last year we decided to round up the number for a little bit bigger share repurchase program, and we identified that at the time. This year, we came in closer to the formula, which we were about $50 million above, I think, operating income less dividends, Ricky, aren’t we?

[Richard Spiro:]

At the midpoint, depending on the assumptions.

[John Finnegan:]

So last year, we were a little bit higher than that formula would have given you.

[Meyer Shields:]

So the valuation of the stock isn’t something that is affecting this decision?

[John Finnegan:]

I’d say this about valuation of stock. It’s certainly not stopping us from doing buybacks, but in the past, we’ve occasionally upped the amount on the buyback above this sort of framework, when we thought it was opportune based on valuation. That’s been an occasional thing. At today’s valuation, we don’t think that there’s any good reason to do that, but we still like the value, and we’re willing to buy back $1.3 billion of shares.

[Richard Spiro:]

And from an excess capital position, we continue to believe that we are in a very strong excess capital position based on both our internal assessment, as well as external. So the difference in the size of the buybacks year over year has nothing to do with that as well.

[Meyer Shields:]

And this may be rounding also, but if 4% is sort of like the long term median [cat] provision, you’ve got reinsurance that’s, I don’t know, much, much cheaper now than it has been, wouldn’t it make sense to buy reinsurance differently, to suppress the cat provision?

[John Finnegan:]

To suppress cat exposure?

[Meyer Shields:]

Your net cat exposure, yeah.

[John Finnegan:]

You mean to buy more reinsurance?

[Meyer Shields:]

Yes.

[John Finnegan:]

Well, just because it’s cheaper doesn’t necessarily make it economic. It’s cheaper than it was, but we think we’ve balanced it pretty well. When we buy cat exposure, when we buy cat reinsurance, that has a few factors in it. One is sort of our balance sheet position and what we’re willing to subject it to. The second is economics. It’s still not cheap. And no, I don’t think you’ll go out and see us adding all sorts of layers of cat reinsurance.

[Richard Spiro:]

We are obviously looking at the opportunities in the market, and on an opportunistic basis, we think that we can take advantage of the opportunities in the market, either to promote our growth or manage our volatility. We will certainly think about that, but as I said I think on the last quarter call, we’re not going to change our longstanding strategy of focusing on underwriting and pricing of [each risk], just because reinsurance may be a little bit cheaper.

[John Finnegan:]

We found some opportunities in deals in the commercial markets. I’ll let Dino talk about that a second.

[Dino Robusto:]

Yeah, clearly, with the broadening appetite and capacity, and some of the lower pricing that you’re referring to, you’re going to get individual situations where we’re able now to get accounts that require larger limits of insurance than we would be comfortable with. So today’s facultative reinsurance dynamics helps support those larger limits while we still effectively manage our overall net exposure. Now, occasionally, we’ve also used [fac] reinsurance, where maybe one of our insurers has moved to an area and expanded in an area where there’s too much catastrophe exposure there for us and we can use some of the facultative reinsurance to cover us there. In this way, we get to be able to keep that account. So, on individual account levels, we’re clearly taking advantage of the facultative reinsurance marketplace, but as Ricky and John point out, we don’t see it as influencing any wholesale change in our underwriting strategy.

[Operator:]

And our last question today comes from Ian Gutterman with Balyasny.

[Ian Gutterman:]

First, Ricky, on the pension, can you just give us a sense of how much, in dollars, the cost has gone up?

[Richard Spiro:]

I’ll give you a range, because it could be a moving target. It’s sort of in the $30 million to $40 million range, a few tenths of a point or so on the expense ratio.

[Ian Gutterman:]

And then on FX, overall, international is about a quarter of your premiums it looks like. Is it similar by segment? Or are some segments much higher or lower than that, out of the three main segments?

[John Finnegan:]

It is about the same in total for each of the segments. CCI, right around the 25/75 split, 25 overseas. Same within the professional line. Personal is a little bit heavier in the U.S. That said, when you look at the other personal, and we talked about the accident piece here, that business is dominated outside the United States. It’s about 70% outside the United States and 30% in the U.S.

[Richard Spiro:]

The 75/25 split is on a premium basis. If you actually look at, say, for example, investment income, it’s actually a smaller percentage of our after tax investment income, because obviously, in the U.S., we have the tax exempt securities, which have a higher coupon as well as a tax benefit. So while it’s 25% of premiums outside the U.S., it’s closer to 15% of our investment income.

[Ian Gutterman:]

And then the A&E, I thought I heard earlier that it was a $60 million impact. I’m looking at the PDF that you put on the website, and it shows incurred loss for 2014 of $25 million versus $51 million in 2013. So can you explain the difference there?

[John Finnegan:]

That’s just asbestos.

[Ian Gutterman:]

And on the surety business, do you do much business in the energy sector? And if so, can you sort of describe what kind of exposures, and what your outlook is for them?

[Dino Robusto:]

You know, we do do business in the energy sector, and we have very long term, long tenured customers. Manage their business very effectively. Our underwriting’s very carefully done with them. So we’re pretty comfortable with our exposure, and we think with the improving economy that we’re seeing, that should help us out going forward.

[Ian Gutterman:]

Is it sort of general well construction, or is it like offshore drillers? Just trying to get a sense of what types of activities, I guess.

[Dino Robusto:]

It’s just a little bit all over. Mining, construction, etc. It’s a wide cross section.

[Operator:]

And that does conclude our question and answer session for today. I will now turn the call back over to our speakers for any additional or closing remarks.

[John Finnegan:]

Thank you for joining us and have a good evening.