The Chubb Corporation Q4 2008 Earnings Call Transcript

| About: Chubb Ltd (CB)

The Chubb Corporation (NYSE:CB)

Q4 2008 Earnings Call

January 29, 2009 5:00 pm ET


John D. Finnegan –President & Chief Executive Officer

John J. Degnan – Chief Operating Officer

Richard G. Spiro – Chief Financial Officer


Joshua Shanker - Citigroup

Jay Gelb – Barclays Capital

Matthew Heimermann - J.P. Morgan

David Small - J.P. Morgan

Ian Gutterman - Adage Capital


Welcome to The Chubb Corporation’s fourth quarter 2008 earnings conference call. Today’s call is being recorded. Before we begin, Chubb has asked me to make the following statements.

In order to help you understand Chubb, its industry, and its results members of Chubb’s management team will include in today’s presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It is possible that actual results might differ from estimates and forecasts that Chubb’s management team might make 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 of Chubb’s fourth quarter 2008 financial results, Chubb’s management may refer to financial measures that are not derived from the Generally Accepted Accounting Principles or GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with the GAAP and related information is provided in the press release and the financial supplement for the fourth quarter 2008 which are available on the Investor Section of Chubb’s website at

Please also note that no portion of this conference call may be reproduced or rebroadcast in any form without the prior written consent of Chubb. Replays of this webcast will be available through February 27, 2009. Those listening after January 29, 2009, should please note that the 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 D. Finnegan

Thank you for joining us. We are pleased with our fourth quarter operating results as all three business units contributed to strong performance by maintaining underwriting discipline in a competitive market. These solid results also benefited from continued favorable loss development and benign cat activity which offset margin compression and current accident year results and lower investment income.

For all of 2008 operating income per share was the third best in Chubb’s history despite unusually high cat activity, primarily hurricane Ike, and the cumulative soft market rate deterioration over the past four years. On a relative basis we significantly outperformed the industry in the first nine months and expect that our full-year results will continue this trend.

Our investment portfolio remains in excellent shape despite unprecedented turmoil in capital markets. The modest level of our first quarter net investment losses, despite the massive decline in worldwide asset values, reflects the successful execution of our conservative investment philosophy.

There were also some important developments in the fourth quarter which may affect results in 2009. Perhaps most important we saw some signs that the insurance rate environment is improving and that the long awaited end to the soft market is in sight. We believe this trend should continue into 2009, especially when higher reinsurance costs are factored into the primary carrier’s pricing.

As we anticipated our third quarter conference remarks, we were also able to capitalize on significant new business opportunity resulting from insurance market dislocation. This was partially offset by a negative impact on the insurance business of the continued deterioration in the economy. We expect these trends to continue in 2009 as well.

Finally, the strengthening of the U.S. dollar adversely affected our fourth quarter results with currency having a negative 2% to 3% impact on net written premium and investment income growth. Assuming the dollar remains at current levels, currency will continue to negatively impact premium growth and investment income in 2009.

I would briefly summarize the net effect of these moving parts on our 2009 outlook as follows: until rates increase significantly and are reflected in earned premiums, combined rations will continue to deteriorate as a result of the impact of cumulative rate reductions experienced over the last four years; in addition, premium growth will be limited by the economic environment; investment income growth will be adversely affected by lower yields; and both will be negatively impacted by the strength of the U.S. dollar.

Accordingly we are forecasting a decline in operating income per share in 2009 to a range of $4.80 to $5.20 per share. I will have more to say on guidance in my closing remarks and John Degnan and Ricky Spiro will talk more about our underlying assumptions.

Longer term, we expect a firming of the market as capital constraints, underwriting results and reinsurance costs lead to rate increases. In addition, market dislocation will provide opportunities to financially strong insurers. And we are well positioned to capitalize on these rate market developments.

And now John Degnan will discuss our operating performance.

John J. Degnan

I’m going to begin with a review of individual business unit results for the fourth quarter. Chubb Personal Insurance net written premiums grew 2% and CPI produced a combined ratio of 80.9%, which was 10.3% better than last year. CPI had negative 1.2% of cats in the fourth quarter of 2008 due to a downward revision of our estimates for losses from hurricane Ike. Excluding cats, CPI’s fourth quarter combined ratio was 82.1% this year and 80.8% last year.

Homeowners premiums were flat with a combined ratio of 77.1%, including a negative 1.8% of cats. Excluding those cats homeowners produced a 78.9% combined ratio in the 2008 fourth quarter compared to 73% in 2007.

Personal auto premiums declined 3% with a combined ratio of 84.8%.

In other personal lines premiums increased 16% and the combined ratio was 89.3%.

As expected, CPI benefitted in the fourth quarter from additional opportunities in the high end homeowners business resulting from market dislocation. This was partially offset by a decline in new housing starts; fewer endorsements covering jewelry, fine arts and other valuable articles; and reduced inflation guard adjustments. We expect all those trends to continue into 2009.

All in all, growth in CPI net written premiums, ex currency, for the fourth quarter ws 5%. However, given the substantial strengthening in the U.S. dollar, the impact of currency was approximately 3% reducing fourth quarter growth to 2%.

At Chubb Commercial Insurance, premiums were down 7% and the combined ratio for the quarter was 88.8% compared to last year’s 85.3%. the fourth quarter included neglible cat losses in 2008 compared with 1.2% in 2007.

CPI’s ratio of new to lost business in the U.S. was 1.0-to-1.0 in the fourth quarter and CPI’s retention rate was 84% with an average renewal rate decrease of 3%. It might be worth digressing here to describe specifically how we measure retention at Chubbs since we have heard that there are questions about how carriers are doing so and our aim is to be transparent.

Generally speaking, we believe that measuring retention only by policy count or by customer is not as meaningful as by premium, so our primary retention metric focuses on expiring premium dollars measured on a policy-by-policy basis and not including changes in rates or renewal exposure. In other words, our retention ratio captures the percentage of the expiring policy premiums that were actually renewed.

We do it this way because a dollar retention measure more directly correlates to written premium growth than does a policy or customer retention measure. And using expiring premiums allows us to track separately the renewal effects of any rate and exposure changes without conflating them with retention itself.

The 7% decline in CCI net written premiums was driven by a 2% negative impact of currency in the quarter, a 3% decline in average renewal rates compared to the fourth quarter of 2007, and the impact of the economic downturn.

Since our underwriting appetite does not overlap with our financially troubled competitors in most of our CCI business, the fourth quarter impact of the market dislocation was primarily attributable to the real estate investment trust segment, where customer demand for carriers with stable, high credit ratings presented us with some very good opportunities.

As Chubb’s Special Insurance net written premiums were down 2% and the combined ratio was 83.8% compared to 74.6% in the fourth quarter last year.

Professional liability premiums declined 2%, all of which was attributable to currency, and it had a combined ratio of 88.4% compared to 78.3% in last year’s fourth quarter.

In the U.S. fourth quarter renewal retention was 87%, the ratio of new to lost business was 1.3-to-1.0 and average renewal rates were essentially flat.

CSI benefited in the fourth quarter from additional opportunities in the profession liability business resulting from market dislocations but rates also firmed, with the year-over-year quarterly rate movement turning slightly positive at the end of the quarter and that’s the first quarter in four-and-a-half years in which rates did not decline. The economic downturn had only a minimal impact on professional liability growth.

For surety net written premiums were down 6% and growth in that business was adversely affected in the fourth quarter, and will continue to be hurt in 2009, by the impact of the weaker economy on the construction business. However, profitability was strong with a combined ratio of 52% for the quarter and 70% for the year.

As you can see, there were a number of major developments which affected the market in the fourth quarter. Let me summarize them and provide you with our market outlook for 2009.

Let’s start with rate. At the time of our third quarter call in October we indicated that there were a number of reasons to suggest that pricing should begin to firm. These included industry-wide trends toward higher combined ratios, reduced levels of excess capital, higher cost of capital, and lower investment returns.

At the same time, we recognized that the P&C industry doesn’t always act rationally so we avoided any definitive predictions on the timing or pace of a market turn. Three months later, there is additional evidence that rates will increase and that selective parts of the market will harden during 2009. But the precise timing and magnitude of those changes are still difficult to predict with certainty.

All of the underlying factors we cited remain in place and have actually made the need for rate more compelling. In addition, the market dislocation opportunities which we saw in the last quarter, and which we expect will play out even more positively for us in 2009. Also our confidence in a market turn in that year. We already see evidence of that in our fourth quarter results.

For example, in our professional liability lines fourth quarter renewal rates were flat, a significant improvement over the negative 2% in the third quarter of 2008, and the negative 5% for all of 2007. They also reflect an improved rate trend throughout 2008 as we began to see the hoped-for migration of rapidly improving financial institution D&O and E&O rates into other segments of the book.

The current market dynamics, and our own insistent on overall rate increases, suggests strongly that we will continue to see improvement in professional liability pricing through 2009.

Also, in CCI, the evidence of improving rates is consistent with our expectations although somewhat less robust. So while commercial rates continued to decline in the fourth quarter, down 3%, that’s the best result in the last several quarters and a continuing improvement over the negative 6% and negative 4% in the second and third quarters respectively. An encouraging trend.

For that reason and others we expect commercial rates to continue to improve slowly, especially as the reported higher cost of reinsurance plays out in primary insurance prices.

Another area we discussed at length in our third quarter conference call was the business opportunities arising from insurance market dislocation. There is a steady, but not yet overwhelming, flow of business opportunities being presented to us as a result of the market dislocations triggered by the weakened financial condition of several of our competitors, particularly in lines such as high net worth personal lines, profession liability, the REITS, and excess umbrella.

The amount of such business we see is a direct function of the perception of the problems with our competitors and as such, is influenced by rating agency action and various other factors. We continue to take advantage of the opportunities and have already benefitted from them. That said, we are not so hungry for market share that we will compete against irresponsible pricing. We are content to await developments and benefit from the heightened flight to quality which we believe will build a momentum through 2009.

On the other side of the coin, turmoil in the overall economy did begin to reduce business opportunities we might otherwise have seen in the fourth quarter. For example, our homeowners growth has been hurt by the slowdown in construction of high-end homes and by reduced inflation guard adjustments and fewer endorsements for jewelry and fine arts.

In CCI higher unemployment and lower economic activity is beginning to affect our workers comp, marine, and builders risk businesses. And in the case of CSI the impact of professional liability premium growth from the downturn has been limited but our surety business is clearly being affected by the reduced level of construction activity.

The final area which bears discussion is currency, since it had a major effect on our fourth quarter results and will continue to impact our results in 2009. About 20% to 25% of our premiums come from outside the U.S. and the dramatic strengthening of the U.S. dollar has adversely affected our net written premium growth and our investment income.

Looking out at 2009 we expect many of these trends to continue although their magnitude is difficult to project but for guidance purposes we have assumed rates to be flat. While many indications would suggest that rates should increase during 2009, and there are reasons to believe they will, we did not think it prudent to incorporate potential perspective rate increases into our guidance.

That should not be misconstrued to conclude that we will not be as aggressive in seeking rate in 2009. Just the opposite is true. We are pushing commercial rate increases across our portfolio and across the globe. While our combined ratios are superior to the industry we still recognize the importance of rate adequacy in the underwriting process and to the long-term stability we offer our clients, producers, and shareholders.

In order to be judicious in our rating tactics, we regularly dissect and track commercial rate change by customer segment and size, by geography, producer, policy type, and most importantly, by individual customer experience and risk exposures.

Recent examples of areas we pushed hardest for rate increase are risk management customers, hospital property accounts, and financial institutions professional liability. Our overall retention is lower in these areas, yet it is a trade-off that we are willing to make.

Until these rate increases materialize, net written premium growth, ex currency, is projected to be flat to low-single-digit in 2009. However, assuming the U.S. dollar remains at current levels, premium growth would be adversely affected by 3% to 4% from currency this year. This would bring overall net premium growth to the negative 1% to the negative 4% range that is incorporated in our guidance.

Switching subjects, we’ve been following with some skepticism the predictions of ultimate insured losses from the credit crisis as well as speculation about our specific share of that number. It is clear that the full dimension of this systemic event is extremely difficult to assess but we acknowledge that it will generate substantial insured and non-insured losses.

So I would like to spend a few minutes on three important points about potential credit crisis losses. First, because of enhanced pleading standards in the D&O arena, the nature of credit crisis E&O claims, and the general volatility of the stock market, credit crisis claims may be quite different from prior events, and as such, present unique difficulties in quantifying an ultimate industry insured loss.

Second, if even one could reasonably estimate an industry loss number, a simple market share allocation of a portion of that loss to Chubb would ignore unique characteristics of our book of business and be potentially misleading.

Third, based on our assessment of the implications of this event for Chubb we are convinced that we are prudently booking appropriate professional liability reserves for accident years 2007 and 2008 in consideration of the exposure.

Now as to that first point, securities class action litigation in 2008 was dominated by litigation against financial services firms, the vast majority of which arose out of the credit crisis. A recent Cornerstone report commented on the lack of increased security class action litigation in the second half of 2008 despite a dramatic drop in stock market value and an unprecedented spike in market volatility, both of which have historically directly correlated to increased litigation. The report suggested a “new dynamic” may be at work here. That observation conforms to our own thinking and finds support in our experience to date.

I have observed in the past that there is an economic lens through which the plaintiff’s securities action bar largely determines whether an action will be brought. It entails an assessment of whether the probability of success and the economic return, usually in the form of a settlement value, warrants a significant investment of time and resources required to pursue a particular action. It’s panamount really to an internal rate of return on investment analysis and I believe the plaintiffs bar triages its opportunities on that basis.

In the context of such an analysis, credit crisis claims have some concerning characteristics for the plaintiffs bar. They are the first group of claims to be filed under both the heightened pleadings standard of [tellout] and the heightened loss causation standards of the [doer] case. On that note by the way, just this month the second and ninth circuit courts of appeals, which are the two bellwether jurisdictions because most securities actions are filed there, affirmed the dismissal with prejudice of two cases, which while they didn’t arise from the credit crisis, they did allow the court to evaluate the pleadings under the heightened [tellout] standards.

These decisions do not bode well for plaintiffs in credit crisis litigation. In fact, we’re already seeing a higher rate of credit crisis security class actions complaints being dismissed on motion that has historically been the case. That is encouraging, of course, although I should that some of the dismissals were without prejudice, the plaintiff’s ability to replead and attempt to meet the [tellout] standards.

Aside from those heightened pleading standards that are applicable to credit crisis D&O claims, there are also factors in the potential E&O claims arising from the credit crisis that mitigate the [egon acupsae] for the plaintiffs bar. It is important to point out in this area, the majority of the claims continue to be individual investor claims although there also some regulatory claims and some attempts to pursue claims on a class basis.

But from a practical standpoint single plaintiff claims often are subject to mandatory arbitration, which tends to reduce settlement values significantly so that they don’t warrant the investment of time and litigation resources made in class action cases. And moreover, individual cases often trigger multiple deductibles, thus reducing an insuror’s exposure to defense expenses and indemnity payments.

In addition, numerous institutions have avoided claims altogether by voluntarily reaching business accommodations with clients. For example, by buying back auction rate securities. And as you may know, several of the largest financial services firms, particularly investment banks, did not or could not even procure E&O insurance over the last several years, as a result of which insurance programs may be small, non-existent, and at the same time the deep pockets of large financial institutions may not be so deep.

In the context of the above observations, E&O claims arising from the credit crisis are less likely to present the economic return desired by the plaintiffs bar.

There is a third reason why it’s difficult to project industry insured losses. We have often stated that there is a correlation between the volatility of the stock market and the frequency of securities class action litigation. I see no reason to alter that observation but the correlation may not hold in this case. Historically, precipitous market cap decline that the magnitude we saw in many sectors of the market in 2008 would have drawn the attention of the plaintiffs bar and quickly spawned the typical class action allegations that management of the effective companies misrepresented or omitted material information that they knew or recklessly disregarded.

However, while we have certainly seen historic market cap declines, in this instance they are so wide-spread and at times so seemingly indiscriminate that they appear to be the function of, or at coincidental with, generic factors driving the entire market rather than the result of company-specific information or developments.

It seems to us that this dynamic should make it more difficult for plaintiffs to overcome the elevated pleading standards that I’ve referred to or to establish loss causation. If so, then frequency may be very well less than expected. In that context the normal expectations were increased claim activity and the estimates of exposure from those cases that are filed may be overstated.

Another danger in projecting frequency would be to assume that a bankruptcy will automatically trigger a securities class action case. We do anticipate that 2009 will see more bankruptcies to both private and listed companies, but not all of those will precipitate D&O claims. We found over the years that sudden bankruptcies generally precipitate immediate claims.

That has been less true of slow deterioration leading to eventual bankruptcy because the general weakened financial condition of such a company would likely be known by the markets and factored into the pricing obviously making it more difficult to sustain an allegation that a failure to make appropriate disclosure caused the loss.

All of those factors may explain why the filing of securities class actions arising out of the credit crisis began to increase in the second half of 2007 but then trailed off dramatically in the second half of 2008, notwithstanding the remarkable stock market volatility during that period. At least one analyst has suggested that that phenomenon is attributable to an interest on the part of the plaintiffs bar to focus on larger financial institutions with deep pockets.

My second point about the credit crisis is that even if it were possible to project an industry loss, there are unique aspects of Chubb’s book, notwithstanding its market share, which would make it particularly difficult to simply allocate on a mathematical formula and accurate portion of that loss to Chubb. In fact, our loss exposure may be very well be considerably less than its simplistic application of market share to estimated loss it would produce.

As I’ve pointed out in the past, Chubb’s exposure is generally in the D&O, E&O, and fiduciary lines and claim activity in each has progressed pretty much as expected. I would point out that on the D&O side, our new arised claims activity was down in the fourth quarter relative to the third quarter and in the second half of 2008 relative to the first half.

The activity we did see in the last six months mostly involved claims against insureds that already have been sued but were subject to additional or amended law suits based on a worsening condition.

In addition, as would be expected, the claims activity we have had to date has tended to focus on the large financial institutions for which, as I have told you in the past, we provide limited coverage. As I have noted in previous calls, we are much better positioned on those financial institutions’ exposures than we were during past events, like the 2002 and prior corporate-abuse scandal, due to a number of D&O underwriting strategies implemented over the past several years, which include moving the focus of our underwriting away from larger to smaller and mid-size financial institutions, managing our limits down, and shifting the larger accounts that we do right more to excess and Side-A-only coverages.

There has been considerable speculation by commentators that D&O credit crisis claims activity will eventually filter down to smaller financial institutions like community banks and that Chubb will be impacted heavily by that. I should note that to date we have not seen any significant level of credit crisis claims activity in that space.

Although we do write this segment, our underwriting criteria inherently restrict our appetite and Chubb has only about a 10% market share of community banks. In that regard we believe that our underwriting strategies over the past few years have effectively reduced our exposure. We have reduced limits and restricted writings in states where the real estate markets have been most dramatically impacted.

So for example, of the 23 community banks that failed in 2008, we insured only one of the, with a $1.0 million limit. Moreover, many of our insured institutions simply do not participate in the types of products and transactions that gave rise to the credit crisis and wrecked such havoc on some of the bigger firms. And given their ownership, they are generally lower market capitalization and the heightened standards for pleadings, many of these institutions may not be viewed as attractive targets for the labor-intensive and expensive class action litigation.

On the E&O front of the credit crisis claims, the number of new claims involving our insureds has remained fairly consistent. Steady but not overwhelming. I have already noted the general observation, which also pertains to the Chubb book, but these are by and large single plaintiff cases with all the hurdles that creates for their pursuit by the plaintiffs bar.

And given our underwriting decisions to move away from writing E&O insurance for major investment banking firms, the largest commercial banks, and mortgage brokers, we have already avoided some of the most significant potential exposures and are in a far better position than we were during the corporate fraud scandal.

Based on all those factors, we continue to perceive less potential exposure for Chubb on the E&O side than the D&O side.

Finally, on the fiduciary side of the credit crisis there are no real developments to report. We saw few new claims in the second half of 2008 and the majority of claims we have are the follow-on variety. That’s where a stop-drop case under ERISA mimics the allegations of its sister’s securities-type action.

From an underwriting perspective over the past few years, we have a much more limited appetite for dual exposure of D&O and fiduciary. When we have accepted them we have often tied the limits of a fiduciary policy to those of the D&O policy in order to avoid the effective stacking of those limits. As a result, we don’t foresee substantial fiduciary exposure.

To sum up, the securities class action litigation environment, as well as the nature of potential E&O claims, suggests that credit crisis events may present a new dynamic which makes it more difficult to project an industry insured loss number.

Beyond that, based primarily on our underwriting strategies over the past several years, we believe that although Chubb will have significant losses, we will have less exposure than a pure market share allocation might suggest.

And finally, based on our actual claims experience, our underwriting strategies, our understanding of the exposed lines of business, and our assessment of coverage potential and litigation developments, we have done our best to ensure that we are reserving the effective lines in prudent fashion during 2007 and 2008.

This is reflected in the fact that we are reserving the overall professional liability business, which is diversified well beyond just the financial institution segment and the specific coverages that so far are most implicated. So an estimated combined ratio of 103% perhaps in year 2008.

Before concluding I also want to share with you some preliminary observations about the insurance claims which may arise from the widely publicized Bernard Madoff Ponzi scheme. While there will be some D&O, fiduciary, and fidelity allegations, we believe that the bulk of the allegations will be directed at the errors and omissions of the so-called feeder funds, funds of funds, investment advisors, family offices and wealth managers.

On this front I would make just three points. First, it’s likely that many of these firms will have relatively small programs of E&O insurance, making them less appealing targets and making this less of an insurance issue than some may think. We have written some business for such entities, for example, but it has generally been at low limits and we tended to stay away from those catering to high net worth individuals.

Second, these types of investor losses often do not lend themselves to class action litigation and pursuing them individually will be more costly for plaintiffs and will invoke more insurance deductibles and retentions.

Third, there are certain to be significant additional issues concerning coverage and applicable exclusions as well as the appropriate measure of damages, the true extent of which may be much less than hypothetical amounts calculated based on what investors thought their investments had grown to.

Turning last to a first party perspective, we do expect to pay some Masterpiece homeowners claims related to this scandal. While our policy does not cover investment losses it does cover theft that will apply in some situations that involve direct transactions with Mr. Madoff. This coverage is generally subject to very low limits, however, typically up to $2,000 for cash and $5,000 for securities. Under those circumstances we don’t the aggregate personal lines paid losses for Chubb to be particularly significant.

At this point I will turn it over to Ricky Spiro.

Richard G. Spiro

As you know, this is my first conference call since I assumed the CFO position. I look forward to working with all of you.

Looking first at our operating results, underwriting income was strong amounting to $443.0 million in the fourth quarter and $1.4 billion for the full year. This was the third best underwriting performance in the company’s history despite the high level of catastrophe losses.

Property and casualty investment income after tax declined by 5% in the quarter to $316.0 million but increase by 2% for the full year to $1.3 billion. Approximately half the decline in the fourth quarter was due to the impact of currency fluctuations on our international investments, in addition growth in investment income was adversely affected by the significant decline of yields on our short-term investments.

Net income was lower than operating income in the quarter due to net realized investment losses before tax of $250.0 million, or $0.45 per share after tax.

Realized losses included impairment charges of $229.0 million. Of the impairments, $192.0 million came from write-downs in our equity portfolio due to the dramatic decline of global equity markets and $37.0 million came from write-downs in our fixed maturity portfolio.

Realized losses in the quarter also included a $125.0 million loss on our alternative investment portfolio. As a reminder, our alternative investments, which totaled $2.0 billion at year end, consist mainly of a well diversified portfolio of private equity and distressed debt partnerships.

As my colleagues have mentioned previously, we account for these holdings on a quarter lag because of the time required to receive updated valuations from the partnership’s investment managers. These valuations are closely linked to the public markets.

As a result of the reporting lag, this quarter’s loss was largely due to third quarter mark to market losses on the underlying assets held by the limited partnerships which reflected the dramatic decline in publicly traded equities and spread widening in the third quarter.

Because of this reporting lag, our results for the first quarter of 2009 will reflect the valuations from our alternative investments at the end of 2008. As we all know, the decline in the worldwide capital markets in the fourth quarter of 2008 were substantially greater than in the third quarter.

As a result, we would expect that realized losses from our alternative investments that we will record in the first quarter will be higher than what we recorded in the fourth quarter. Since we won’t receive all of the year end partnership valuations until well into the first quarter, we do not know at this time what the actual realized losses for the alternative investments will be.

But based on the limited information that we currently have, and what happened in the capital markets in the fourth quarter, we would estimate that our net realized loss from alternative investments in the first quarter would be around $300.0 million before tax.

Unrealized depreciations before taxes as of December 31, 2008, was $220.0 million compared to unrealized depreciation of $443.0 million at the end of the third quarter. This compares to unrealized appreciation before tax of $810.0 million at year end 2007.

The financial turmoil in the global capital markets also impacted the investment performance and funded status of our pension plans which had an adverse impact on our book value.

Book value per share under GAAP at December 31, 2008, was $38.13 compared to $38.56 at year end 2007 and adjusted book value per share, which we calculate with available for sale, fixed maturities at amortized cost, was $38.38 compared to $37.87 at 2007 year end.

Let’s now turn to our investment portfolio. The total carrying value of our consolidated investment portfolio declined to $38.7 billion as of December 31, 2008, from $40.1 billion at year end 2007. This decline was more than accounted for by the impact of unrealized depreciation and the impact of currency fluctuations on our portfolio.

At December 31, 2008, 7% of the portfolio was in short-term investments, 84% in fixed maturity securities, 4% in equities, and 5% in alternative investments.

Our fixed maturity portfolio consists of a well diversified high-quality portfolio of tax exempt securities, Treasuries, corporate bonds, mortgage-backed securities, and international fixed income investments. The average duration of the fixed maturity portfolio is 4.6 years and the average credit rating is double-A-2. You can find more detailed information about the composition of our investment portfolio by asset class in the supplementary investor information on our website.

Our holding company investment portfolio provides us with excellent liquidity. At year end the holding company portfolio included $1.6 billion of short-term investments plus $800.0 million of fixed maturity securities. 97% of these investments are triple-A rated or cash equivalents and our liquidity position is further enhanced by the fact that we do not have any corporate debt maturing until 2011.

We also had some great news last month in terms of our ratings, particularly in the midst of the current economic and financial crisis. Standard & Poor’s upgraded our senior debt rating from single-A to A-plus and affirmed all of our other ratings, including our double-A financial strength rating with a stable outlook.

In addition, both A. M. Best and Fitch recently affirmed all of their Chubb ratings with stable outlooks.

These ratings place Chubb as one of the most highly rated property and casualty companies in the marketplace and we believe a reflection of our overall quality and strong financial condition.

Finally, as we told you told you last quarter, we decided to exit our securities lending program, which had been in place for several years. I am happy to report that as of year end, we are now completely out of the securities lending business.

Turning now to reserves, we estimate that in the fourth quarter of 2008 we had favorable development on prior-year reserves by SBU as follows: in CPI we had about $40.0 million; CCI had about $30.0 million; CSI had about $115.0 million; and reinsurance assumed at about $25.0 million, bringing the total favorable for Chubb to about $210.0 million for the quarter.

For comparison, in the fourth quarter of 2007 we had about $220.0 million of favorable development for the company overall, including about $10.0 million in CPI, $35.0 million in CCI, $125.0 million in CSI, and $50.0 million in reinsurance assumed.

During the fourth quarter our loss reserves decreased by $807.0 million. Reserves in our reinsurance assumed business, which is now in run off, declined by $60.0 million. Reserves in the insurance business decreased by $747.0 million during the quarter.

The impact of currency fluctuations on loss reserves during the fourth quarter resulted in a decrease in reserves of about $400.0 million. The impact of catastrophes decreased reserves by $213.0 million, and another component of the decrease in the reserves of the insurance business was attributable to a $90.0 million payment related to the surety loss that we discussed last year.

The expense ratio for the fourth quarter was 30.4% compared to last year’s 30.5%.

Turning to capital management, we repurchased 3.6 million shares at an aggregate cost of $164.0 million during the fourth quarter of 2008. This completed the 20.0 million share repurchase program we announced in December 2007.

Last month we announced a new 20.0 million share repurchase program. The pace of the new buyback program will depend on the state of the global capital markets and the potential for profitable growth in the property and casualty insurance market.

We began to buy back shares under our new authorization in December but believe that it is prudent to proceed cautiously at the start of the year given the current environment and to continue to maintain our strong capital position.

For purposes of our 2009 earnings guidance, which John Finnegan will share with you shortly, we have assumed a $250.0 million buyback for the full year. depending on market conditions, we may accelerate the pace of the buyback.

We remain committed to an active capital management strategy and will continue to evaluate how to best utilize our excess capital as the year progresses.

Finally, to provide some additional background for the discussion about guidance, let me say a few words about our property and casualty investment income. We expect P&C investment income to decline by 4% to 6% in 2009, half of which is attributable to currency fluctuations on our international investments as a result of the recent strengthening of the U.S. dollar. Our investment income growth will also be adversely affected by the historically low yields on short-term investments.

For purposes of our forecast, we have assumed no change in investment yields or foreign exchange rates from current levels during 2009.

And now I will turn it back to John.

John D. Finnegan

As you all know, 2008 was a tumultuous year for the financial services industry and the insurance business was not immune. CCE industry profitability declined dramatically, investment losses impacted balance sheets and industry capital levels dropped significantly.

Within this environment we believe Chubb performed exceptionally well on all fronts. We had the third best earnings year in our history. Our investment portfolio performed extremely well given the almost unprecedented decline in global asset values.

Our relative stock price performance was excellent. Our total shareholder return of negative 4% in 2008 compares very favorably to a negative 37% total return for the S&P 500 and a negative 29% return for the S&P property and casualty index.

And we completed a 28.0 million repurchase program and raised the dividend by 14%.

Moving into 2009, the financial markets remain in turmoil. The dollar remains strong, yields remain low and the economic downturn is worsening.

On the other hand, a major positive on the horizon is that it looks like the soft market is ending. This is supported by improved rate experienced in the fourth quarter. Although we still have a ways to go for rates to move up to an area where they offset cost escalation.

We believe there are a number of factors which should cause this to happen and we are bullish on rates over the next few years, although the magnitude and timing of such an increase is difficult to predict.

Until significant rate increases actually occur we will continue at a profitability pressure reflecting the cumulative rate declines experienced in the commercial and specialty business over the last four years.

In addition to slow economic environment and continued strength of the dollar will place additional pressure on growth and profitbability.

Finally, lower investment yields and the stronger dollar will limit investment income growth potential.

We have developed our 2009 guidance based on the assumption that 2009 insurance rates will run about flat with 2008. Why? As I noted earlier, we believe that there are a number of factors that should cause rates to turn positive in 2009. We don’t think it’s prudent to build such rate increases into our guidance, since [inaudible] increases are necessarily supported they may or may not materialize in the short term.

For our investment income growth forecast we have also calculated the currency impact based on the current level of the dollar and we assume the continuation of current yield levels. On that basis we expect operating income per share to be in the range of $4.80 to $5.20.

This guidance is based on our expectation that net written premiums for the insurance business will be down 1% to 4%. We will have a combined ratio of 90% to 92%. Property and casualty investment income will decline 4% to 6% and we will have 358.0 million average diluted shares outstanding.

The breakdown on guidance by SBU for CPI, we expect a combined ratio of 89% to 92% for the year, for CCI, 92% to 94%, and for CSI 86% to 89%.

This guidance excludes realized investment gains and losses and assumes 3% to 4% of catastrophe losses. In terms of sensitivity the impact of each percentage point of catastrophe losses on 2009 operating income per share is approximately $0.21.

In summary, 2009 will be a challenging year from an earnings perspective given continued market compression, low yields, a strong dollar, and tumultuous capital market environment. However, we believe our excellent capital position, conservative investment portfolio, and strong credit ratings will allow us to leverage our demonstrated underwriting talent to generate solid returns in an uncertain economic environment and to capital on market opportunities and rate increases as they materialize.

With that, we will open the line for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Joshua Shanker – Citigroup.

Joshua Shanker - Citigroup

Could I find out what the AOCI tally is for the quarter? And can we go into a bit of detail on what is embedded in those unrealized losses, which types securities there are?

And two, with the significant drop in reserves for professional liability, can you give us idea of how that is working by accident year, the moving pieces in that?

John J. Degnan

Most of the favorable loss development on the CSI book is coming from 2004 and 2005 and as I said, we are booking the 2007 and 2008 years appropriately with 103 combined for professional liability all up for 2008.

Joshua Shanker - Citigroup

So I assume the recent ventures the reserves are growing but they are dramatically being offset by the prior vintages?

John D. Finnegan

No, there is no deterioration in the recent vintages. You could say the reserves are growing in the sense that our pick for 2008 is a higher level, actually a combined ration, than it had been previously but we didn’t take any adverse development in 2006 or 2007.

Joshua Shanker - Citigroup

And regarding the securities that are currently unrealized losses, sort of make a [inaudible] there.

Richard G. Spiro

Let me address first your question as it related to the AOCI numbers. The total impact of AOCI that will show up on the balance sheet is negative $735.0 million and it breaks down as follows. There is a negative $669.0 million adjustment to unrealized depreciation of investments. There is a $226.0 million change to foreign currency translation gains. There is going to be a negative $284.0 million to the post-retirement benefit cost relating to the pension plans that I referenced earlier. And at the end of the day the total is a $735.0 million negative adjustment. Year-over-year.

John D. Finnegan

So that $660.0 million is sort of the after-tax movement from the $1.0 billion or so positive unrealized gain that we had at year end 2007 to the $200.0 million unrealized loss we had at year end 2008 tax adjusted.

Richard G. Spiro

Now in terms of the breakdown of the unrealized losses, the total net unrealized depreciation before tax at year end was $220.0 million, by asset class at year end we had unrealized depreciation of $450.0 million in our mortgage-backed securities, largely due to the market value decline of all our CMBS, including ours, in the marketplace. Unrealized depreciation of $84.0 million in equities and unrealized depreciation of about $106.0 million in some of our other taxable fixed maturities. And these unrealized losses were partially offset by unrealized depreciation of $299.0 million in our international bond portfolio. Unrealized appreciation of $46.0 million in our tax exempt securities and unrealized appreciation of $40.0 million in our U.S. government securities.


Your next question comes from Jay Gelb – Barclays Capital.

Jay Gelb – Barclays Capital

Ricky, I don’t know if you can start off and give us a sense of what our key areas of focus will be as the new Chief Financial Officer.

Richard G. Spiro

Sure, be happy to. I guess as you heard from some of the comments that we made during our prepared remarks, I am going to be very focused on I guess two areas, given the environment that we are in. One is our capital and making sure that we maintain the strong capital position that we currently have into the future. And the second obviously given the turmoil in the markets, would be to focus on investments. So I think those will be the two main areas of focus in the near term.

Jay Gelb – Barclays Capital

And on the guidance, what amount of reserve releases are implicit in the guidance for 2009?

John D. Finnegan

I will just broadly cover that. We told you in the past, our guidance is in a range and it includes a range for each of the SBUs so achieving that range can come under a number of alternative scenarios involving different SBU and accident year, calendar year, so there is no specific level of favorable guidance.

Having said that, the achievement of our 2009 guidance under almost all scenarios is like to include some level of favorable development, especially in the professional liability area. Overall however, we would expect to realize a good deal less favorable development in 2009 and the very high level, over 7%, we benefited from in 2008.

Jay Gelb – Barclays Capital

I don’t know if you could narrow that range at all in terms of the benefit to the combined ratio?

John D. Finnegan

No, because you have $0.40 you have it from different contributions, it can come in different accident years. We expect it to still be positive, if favorable loss trends continue in professional liability as we expect. But after a while you can’t sustain. We have had 7% the last two years. I don’t think it’s going to be that high.

Jay Gelb – Barclays Capital

For John Degnan, I believe at the end of your discussion on D&O and E&O, you said that you would have significant losses from the credit crunch. I know it’s difficult to outline that in terms of the impact to the industry overall, for Chubb in particular. If you could narrow that down a bit at all I think it would be really helpful for us.

John J. Degnan

If I could I would give you a number but I am not prepared to do that. What I did say and I would reiterate now is I think we are appropriately reserving in 2008 and did in 2007, for the losses we expect to pay as we assess the situation now.


Your next question comes from Matthew Heimermann - J.P. Morgan.

Matthew Heimermann - J.P. Morgan

Reinsurance purchases, with potentially improving prospects in the market as well as maybe other business coming for bid, is there any contemplation of changing your reinsurance cover?

John J. Degnan

We’re going to go out with our cat trading in April and we will probably have some fine tuning in it but we’re not going to have a philosophical change in our reinsurance position in 2009. Our guidance doesn’t contemplate huge amounts of additional opportunities. It’s pretty flat, currency adjusted.

John D. Finnegan

We’re working on reinsurance now but I wouldn’t expect any material change in the program

Matthew Heimermann - J.P. Morgan

Would that apply also to just where your program attaches relative to the past?

John J. Degnan

If you’re talking the cat program, we’re looking at that now. There could be some modifications in where we take that insurance.

Matthew Heimermann - J.P. Morgan

With respect to pricing, you’ve talked about there are some signs things are getting better. The flip side of that is clearly in professional lines, as an example. I don’t think a 103 is probably where you’re targeting given where interest rates are today. So how much do prices need to go up before you would really be starting the push on the growth pedal?

John D. Finnegan

Two different questions I think. Prices point-to-point will translate into growth. The other point you made, will they offset cost escalation is a little bit different point. Professional liability is a hard business to analyze that way because it is so lumpy. Clearly if the credit crisis conditions of 2007 and 2008 are going to continue you need a lot of price. On the other hand, if conditions revert to more normal, claims revert to normal, you don’t need quite as much price.

But sure, we think we need price and we’re pushing heavily in professional liability and certainly in financial institutions.

Matthew Heimermann - J.P. Morgan

So let me rephrase that then. Before you actually start to push for units.

John D. Finnegan

Prices have to go a ways. We would have four years of prices that probably cumulatively have to climb maybe 10%, 15%, 20% in commercial and specialty. You have seen accident year do a deterioration now. You have seen it in the industry, you have seen it with us. Cost escalation may run anywhere from 0 to 5 a year, depending on which business and it’s lumpy. You are going to need some price here to just normalize accident years and revert profitability, too. You know, a few years ago, before you’re starting to trade off on units.

And we’re not a company that trades up on units that well. We’re going to emphasize profitability more than unit growth, as we always do.


Your next question comes from David Small - J.P. Morgan.

David Small - J.P. Morgan

With the large settlement Merrill Lynch made with regard to some subprime securities lawsuits and then there was the Banco [Sander] settlement as well. Could you let us know if you have any exposure to either of those?

John J. Degnan

We have none.

David Small - J.P. Morgan

We have talked about yields with spreads where they are. Do you have any interest here to perhaps reposition the investment portfolio at all?

Richard G. Spiro

We have not changed our conservative and disciplined investment strategy due to the current market environment. Our core investment strategy was put in place years ago and we believe that it has served us well for all kind of market environments. So I don’t think you will see us deviating dramatically from our strategy. And so at the core of our portfolio is the high-quality, intermediate maturity fixed income portfolio with a mix of some taxable and some tax-exempt securities. And that’s with some higher risk asset classes such as equities and alternative are increased and decreased at the margin, if market opportunities present themselves. And overall the allocation to those areas is conservatively constrained as a percentage of surplus. But we see no need to change our strategy, it has served us so well for so long.

Frankly where we’re seeing real opportunities today, great risk-adjusted return opportunities, are in our core investment areas of tax-exempt bonds and investment grade corporate bonds.

David Small - J.P. Morgan

One of the insurers that I think you were referring to earlier was a large writer of primary D&O. Given that there will probably be more opportunities out there to write primary D&O, would you consider going back to writing more primary D&O?

John J. Degnan

Our public D&O book is about 60% excess and about 40% primary, so it’s not a dramatic disproportionate. Yeah, we would consider writing primary for the right accounts at the right price where we can leverage our expertise from a claims-handling perspective and from the underwriting perspective, but we will do it at our price and on our terms and conditions, which we are not going to broaden.


Your next question comes from Ian Gutterman - Adage Capital.

Ian Gutterman - Adage Capital

Can I get the book value clarified. Why is down from Q3 if you have positive earnings, positive unrealized gains, and the dividends and share repurchase were smaller. Was there a big FX translation hit?

John D. Finnegan

There is a $300.0 million after tax pension hit.

Ian Gutterman - Adage Capital

On the D&O on the pricing side outside of financial institutions, I understand these things take time to move a market, but within D&O I guess two or three of your key competitors are struggling and it seems we’ve seen a lot retailers not just go bankrupt but liquidate, and the auto companies, and some of the energy companies have had issues. It just seems like there is potential for this to be expanding beyond financials where there would be a need to get rate in front of that hopefully rather than wait to see things get worse. I would have thought the combination of those things and given the importance of a strong balance sheet to a buyer of D&O that you would have had a lot of pricing power because you are the really the one strong provider they can go to.

John J. Degnan

Let me make a couple of points, we have had dramatic rate increases in financial institutions, public D&O rates. In the fourth quarter they were up 30%. The full year rate increase for FI public D&O was up 18% with a range of 8 in the first quarter to 30 in the fourth quarter so we are taking real rate on financial institutions and hope to see it migrate into the rest of the book. And we are beginning to.

We are seeing, in the case of AIG much of the same behavior in the marketplace that other companies have talked to in the third quarter. We are stunned by the degree to which they will reduce prices on renewal of their own books to hold on to the business. The chairman has been quoted as saying they will do whatever it takes in price to hold on to the business.

Now we are eager to be a part of the solution rather than part of the problem for insureds who are seeking a high-quality, disciplined player with the expertise to handle their claims. But we are not going to do it by meeting prices that we think are irresponsible. And if the markets are not going to respond to the higher quality services that we deliver, we will wait until that happens.

Ian Gutterman - Adage Capital

In some of the bigger programs have the excess players shown any willingness to say they would rather write behind Chubb so they will give a better price in a tower above Chubb, essentially want to charge more because they are worried about drop-down risks or how those claims will be paid in five years.

John J. Degnan

From your lips to God’s ears. We will not follow the AIG price decrease on the primary. We will leave a program before we do that. What we are seeing though in a lot of renewals is the repositioning of AIG in the program where they are either taking a smaller line as the primary or they are being moved from primary to excess or higher in the excess. Generally people are hedging their bets on renewals and we are trying to take advantage of that opportunity. But unfortunately this market and the players in it don’t yet act as rationally as your questions assumes they should.

Ian Gutterman - Adage Capital

Other industries outside financial, are there ones that you are more hesitant to write now?

John D. Finnegan

You mentioned a few.


Your final question comes from Jay Cohen - BAS-ML.

Jay Cohen - BAS-ML

In the professional liability line, can you talk to the accident year combined ratio is, what to develop to for 2004, 2005, and 2006.

John D. Finnegan

We are in the process of finalizing Schedule P. That will come out in a month. 2003, 2004, 2005 were great years. You have the effect of the huge rate increases and you did have low severity in those years. They were great years. So you’ve got the 2006 and 2007. Rate decreases started to find their way in. They looked like pretty good years. But you also had some events like the credit crisis.

Jay Cohen - BAS-ML

When you look at CCI, what are you seeing relative to claims inflation?

John J. Degnan

We’re not seeing anything dramatic. Across the book it’s about 4% a year and no one line really stands out dramatically. We are pleased with what we’re seeing in claims frequency trends as well, on an ex cat basis, the new rising count for the year was down 3 points. With cats included it’s only up a point. In a lot of our lines we are pleased by the frequency. And we’re not seeing an alarming change in severity.

John D. Finnegan

In homeowners this year we had an unusually number of high non-cat large losses. Presumably it was an unusual thing that won’t repeat itself but it was 2008 we did have some high dollars number losses which were non-cat.

Jay Cohen - BAS-ML

And the negative 3%, what line of business was that?

John J. Degnan

Auto year-to-date was down 7%, workers comp was down 8, specialty was down 8. Overall ex cat the company was down 3.

The only real double-digit increase that we had were in cat exposed property. We were up 10 and commercial property was up 13.

We ran surety at 70 combined with a $90.0 million payment on one loss. We have gotten this book to the size and we price it to the cost of capital in a way that we can incur that kind of loss. That is the only significant loss in surety for the year.


There are no further questions in the queue.

John D. Finnegan

Thank you very much. I realize it was a long session today but I think we need to cover a lot of ground.


This concludes today’s conference call.

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