The Chubb Corporation Q1 2009 Earnings Call Transcript

Apr.23.09 | About: The Chubb (CB)

The Chubb Corporation (NYSE:CB)

Q1 2009 Earnings Call

April 23, 2009 5:00 pm ET

Executives

John D. Finnegan –President & Chief Executive Officer

John J. Degnan – Chief Operating Officer– Chief Financial Officer

Richard G. Spiro – Chief Financial Officer

Analysts

Jay Gelb – Barclays Capital

Mike Grasher – Piper Jaffray

Paul Newsome – Sander O'Neal, and Partners

Matthew Heimermann – JP Morgan

Brian Meredith – UBS

Jay Cohen - Bank of America

Sean Timonen – Advantus Capital Management

Vinay Misquith - Credit Suisse

[Mark Duwell] – RBC Capital Markets

Mark Serafin – Citadel

[Yuron Kinar] - Citigroup

Operator

Welcome to the Chubb Corporation's first quarter 2009 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 first quarter 2009 financial results, 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 financial measures calculated and presented in accordance with GAAP and related information is provided in the press release and in the financial supplement for the first quarter 2009, which are available on the investors section of Chubb's website at www.chubb.com.

Please also note that no portion of this conference call may be reproduced or rebroadcast in any form without the prior written consent of Chubb. Replays of this webcast will be available through May 22, 2009. Those listening after April 23, 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

As you all know, in the first quarter we continued to operate in an extremely difficult global economic and market environment. Accordingly, we are very pleased with our underwriting results and investment portfolio performance. Just as important, we are encouraged by the continuing firming of our premium rates. The first quarter was not without its challenges. Given our significant international operations, the stronger dollar continued to adversely affect us accounting for five of the seven point decline in net written premiums, compared with the year ago quarter.

In addition, we were impacted by reduced insurance demand due to the effect of the worldwide economic downturn. Consistent with the calendar year guidance we provided you in January, operating earnings also declined in the first quarter. On the underwriting side, combined ratios increased due to margin compression from the cumulative effect of rate decline over the 2004 to 2008 period.

Investment income continued to be adversely affected by currency, as well as lower yields, especially on short-term investments. Notwithstanding these headwinds, Chubb produced solid operating income of $1.43 per share, which translated into an excellent annualized operating ROE of 15%. In addition, our investment portfolio continued to weather the storm with realized losses largely limited to the impact of fourth quarter 2008 market movements on our alternative investment portfolio.

During the quarter, our investment portfolio experienced an unrealized gain before tax of over $500 million compared to year end. The upshot of these investment and operating results was a $1.07 increase in our book value per share to $39.20 per share at the end of the first quarter compared to December 31, 2008.

And now John Degnan and Ricky Spiro will discuss our performance in more detail.

John J. Degnan

I'm going to begin with a review of individual business unit results for the first quarter. While we don't normally break out currency impact by SBU, since it has an unusually large impact this quarter, I'm going to highlight it where appropriate.

Chubb Personal Insurance debt-written premiums declined 4%. Excluding currency, CPI premiums actually grew 1%. CPI produced a combined ratio of 90 compared to 84.8 last year, and CAT had a similar impact on CPI's results in each period, 1.5 in the first quarter this year compared to 1.7 points a year earlier.

It should also be noted that last year's combined ratio benefited from two points of favorable development, while this year's had none. Homeowner's premiums were down 5% almost entirely due to currency, and the combined ratio was 88.2, including 2.4 points at CATs. Homeowner's results were affected by significantly higher losses in the quarter, due in large measure to losses from winter freezes in the U.S. and Canada and the U.K., which were not classified as CATs.

Personal auto premiums declined 8% with a combined ratio of 89.8, and in other personal lines premiums increased 1%, and the combined ratio was 97.4. As expected, CPI benefited in the first quarter from additional opportunities in the high end homeowners business resulting from market dislocation, but that benefit was probably more than offset by the impact of the economic downturn, which has resulted in, among other things, fewer housing starts and fewer endorsements for jewelry and fine arts.

At Chubb Commercial Insurance, premiums were down 6%, or down 2% excluding currency, and the combined ratio was 90.2 compared to last year's 87.2. The first quarter this year included CAT losses of 1 point, compared with 3 points in 2008, and last year's first quarter combined ratio benefited from 5 points of favorable development compared to 3 points this year.

CPI's ratio of new-to-lost business in the U.S. was 1:1 in the first quarter. Its retention rate remained steady at 85%, and it had an average renewal rate increase of 1%. That was the first rate increase in 18 quarters, confirmation we think that the market is turning. Since the second quarter last year, CCI rate change percentages have improved each quarter, actually moving into positive territory in February and again improving in March.

At Chubb Specialty Insurance, net written premiums were down 10%, or down 7% excluding currency. The combined ratio was 85.1 compared to 78.1 in the first quarter of 2008. Professional Liability Premiums declined 8%, about half of which was attributable to currency, and Professional Liability's growth in the first quarter was adversely affected by reduced levels of IPO and M&A, or Merger and Acquisition activity. The combined ratio was 91.3 compared to 83.7 in last year's first quarter, due substantially to a lower amount of favorable development.

In the U.S., first quarter renewal retention was 85% and the ratio of new-to-lost business was 1.2:1. Average U.S. renewal rates for Professional Liability were up 1%. This was the first quarter in five years in which Professional Liability rates increased.

As you probably know, we are seeing large rate increases in financial institutions, but the important takeaway this quarter is that we are beginning to see improved rate movement in nearly all of the U.S. Professional Liability classes. The retention rate was down about 4 points from the first quarter last year, as we gave up some accounts where we just couldn't get the appropriate rate for exposure.

For surety, net written premiums were down 22% reflecting weaker economic conditions. It's probably safe to assume that growth in the surety business will continue to be hurt this year by the impact of the weaker economy on the construction business. However, we are seeing a migration to Chubb of good accounts, based on our financial strength. Profitability was strong with a healthy combined ratio of 38.3 for the quarter.

As we indicated in our year end call in January, there were four major developments which affected the markets in the fourth quarter and which we thought would continue to have an impact through 2009. They were currency, market dislocation, the weakening economy, and rate trend. Let me start with currency. About 25% of our premiums in the first quarter of 2009 came from outside the U.S. As a result, our net written premium growth in dollars is significantly affected by the movement in exchange rates.

For a number of years during the middle of this decade, the dollar was weakening against most major currencies resulting in a positive currency benefit on our net written premiums, investment income, and earnings. However, this situation started to reverse itself in the latter part of 2008 and the dollar has strengthened considerably since then. This has resulted in a negative effect on our growth and profitability in the last two quarters.

As an example, in the first quarter this year, the dollar was stronger than it was in the first quarter last year by 13% against the euro, 27% against the pound, and 20% against the Canadian dollar. The affect of the year-over-year strengthening of the U.S. dollar was to reduce our overall premium growth by 5 points that is of our 7 point decline in net written premium growth in the first quarter of 2009, 5 points were attributable to currency.

Assuming exchange rates remain constant, we would expect the negative currency impact to continue at roughly comparable levels over the next two quarters. By the fourth quarter, however, this year-over-year negative currency effect will be considerably less since the dollar strengthened significantly in the fourth quarter 2008. And as a reminder the guidance for the year that we provided in January assumed that currency would adversely affect premium growth for all of 2009 by 3 to 4 points.

The second major factor affecting 2009 markets are business opportunities resulting from insurance market dislocations. Our experience in the first quarter has been similar to that in the fourth quarter last year, in that, we are seeing a steady but not yet overwhelming flow of business opportunities being presented to Chubb as a result of the weakened financial condition of several of our competitors.

This is particularly true in lines such as high net worth, personal line, professional liability, REITs excess umbrella and surety. The amount of business that we see varies with changes in the perception of problems of our competitors and is therefore influenced by rating agency actions and other negative news.

We continue to take advantage of those opportunities when the business can be priced appropriately and when it fits within our underwriting parameters. We expect these additional business opportunities to continue through the year. On the other side the coin, the third factor, a significantly weaker economy has had an offsetting and negative impact on the business opportunities we otherwise would have seen in the first quarter.

In some cases this has reflected in lower exposure, a metric which compares the relative exposure we are undertaking on contract renewals. We're seeing customers experience slower growth in sales and in payroll and in investments and insurable assets. While lower economic activity and higher unemployment affect most lines their influence is most evident in such CCI businesses as worker's comp, general liability, marine, commercial auto as well as in CSI as a result of lower limits and higher deductibles.

As a result, renewal exposure is down about one point in both CCI and CSI. The same phenomenon is efferent in CPI in the form of fewer endorsements for jewelry and fine art, and this economic downturn will likely put continuing downward pressure on the exposure rating basis this year.

Depressed economic activity reduces the potential insurance opportunities in other ways which aren't characterized as renewal exposure deceases because they are not strictly related to lower levels of coverage on contract renewals. For example, a drop in construction activity has resulted in the decline in premium written in the surety business and in CCIs Builders' Risk business. And in CPI the slowdown in construction of high net worth homes and declining housing prices has affected our ability to grow our homeowners business.

In the case of CSI our professional liability growth has been hurt by fewer ITOs and reduced M&A transactions, areas of meaningful premium contributions for us in the past. All of these lost business opportunities result from a significantly weaker economy. But they are over and above exposure decreases on contract renewals. These opportunity costs are harder to quantify, but probably had a greater adverse effect on first quarter growth than the more readily quantifiable declines in renewal exposures.

Going forward the weaker economy is likely to continue to adversely impact premium growth potential throughout 2009 due to both lower exposures and less business opportunities, despite what we see as a continued positive rate environment. This segues nicely to the fourth and most positive factor affecting the market the trend in rates. Simply stated we have seen our rates in both CCI and CSI continue to incrementally improve over the last several quarters.

The commercial lines year-over-year rate declines improved consistently from negative 6 in the second quarter last year to negative 3 in the fourth quarter. But as I mentioned earlier, in the first quarter of this year commercial lines' rates in the U.S. turned positive by 1%, the first year-over-year rate increase since 2004.

In our professional liability line year-over-year rates in the U.S. moved from a negative 5 for all of 2007 to flat in the fourth quarter of 2008, and a positive 1% in the first quarter this year. The current market dynamics and our own aggressiveness in seeking rate increases, suggests strongly that we will continue to see improvement in professional liability pricing through 2009.

In summary, we believe the firming market that we began anticipating last year's third quarter conference call is underway. It is more incremental than we might have hoped. But so far, it is a steadily improving trend. We believe that rates will continue to improve as we move forward and suspect that incremental improvements will be replaced by a more significant change in market tone at some point. However, such an inflection point is difficult to predict so for now we will limit our forecast to an overall improving rate trend over the balance of the year.

Finally, let me comment briefly on credit crisis and Madoff related claims. I spent a fair amount of time during our last call sharing our perspective on credit crisis claims suggesting that the unique aspect of such claims in the context of the current legal environment make it particularly difficult to project a total industry insured loss and even more difficult to allocate shares of such losses to particular carriers.

I was gratified to read that both Cornerstone and Nera have agreed with our view over the past several weeks that the broad-based market cap declined may make the plaintiffs cases more difficult to plead and to win.

Our perspective has changed very little since the January call. While we continued to see new claims in the first quarter, most of the related to insured's and policies for which we had already received prior claims, most of them also continue to be ENO rather than DNO claims based on the mix of credit crisis ENO claims, in particular the predominance of individual claims, which tend to be less severe, our limits and our attachment profiles and the underwriting strategy in these lines that I've mentioned in past calls, we continue to believe that we have less potential exposure in the ENO line than in the DNO arena.

So in sum we continue to monitor the situation closely and are prudently booking professional liability reserves for accident years 2007 and 20098 and now 2009 to reflect our exposure. As for claims arising out of the Madoff situation, we told you last quarter that we expected the impact of our homeowner's exposure to Madoff would be minimal and we're even more convinced of that now. In the aggregate we don’t think it will exceed $2.5 million.

With respect to specialty lines, I'd have to characterize the current situation as something of a holding pattern. A number of insured's have sought to preserve rights to coverage by providing notice of potential claims but we are relatively few actual claims to date. At this point, however, we're still unable to predict the ultimate shape or scope of Madoff litigation or the coverage exposure it will present.

From our perspective it appears that the initial focus of the investigation and litigation to date, after Madoff himself of course, has been on the so called Madoff feeder funds. That is those fund that had a direct investment relationship with Madoff and this is an area in which we have limited potential exposure.

With that, I'll turn it over to Ricky.

Richard G. Spiro

Looking first at our operating results, underwriting income continues to be strong amounting to $376 million in the quarter. This was a result of both solid current accident year performance and favorable development from prior accident year reserves. Property and casualty investment income after tax in the first quarter declined by 6% to $306 million compared to the first quarter of 2008. This decline was due primarily to currency fluctuations on our international investments and lower yields on short-term investments.

Net income was lower than operating income in the quarter due to net realized investment losses before tax of $266 million or $0.40 per share after tax, sorry $0.48 per share after tax. Our net realized investment losses before tax included a $248 million loss on our alternative investment portfolio and impairment charges of $59 million almost exclusively from write-downs in our equity portfolio, partially offset by $41 million of realized gains from the sale of securities.

As a reminder, we account for our alternative investment on a quarter lag because of the time required to receive updated evaluations from the partnerships investment managers. Therefore, this quarter's loss, which was lower than we previously estimated, was largely due to fourth quarter mark-to-market losses on the underlying assets held by the limited partnerships and reflected the dramatic decline in equities and spread widening that occurred late last year.

Because of this reporting lag, our results for the second quarter of 2009 will reflect valuations from our alternative investments at the end of the first quarter. Since we haven't received all of our first quarter 2009 partnership valuations, we do not know at this time what the actual losses for the alternative investments will be.

However, based on the limited information that we currently have and what happened in the capital markets in the first quarter, we believe our net realized loss from alternative investments in the second quarter is not likely to be more than $50 million before tax. This would be a significant improvement over the previous two quarters.

Our unrealized position also improved substantially in the first quarter. Unrealized appreciation before tax at March 31, 2009 was $283 million compared to unrealized depreciation of $220 million at year end, a positive change of $503 million. This was due largely to credit spread improvements in our fixed maturity portfolio. We should point out that we have not yet adopted the two recent FASB staff positions on fair value measurement and other than temporary impairments. We will implement these changes in the second quarter. However, we do not expect their adoption to have a material effect on our financial position.

The total carrying value of our consolidated investment portfolio increased to $39.1 billion as of March 31, 2009 from $38.7 billion at year end 2008. The composition of our portfolio remains largely unchanged from year end with 7% of the portfolio in short-term investments, 85% in fixed maturity securities, 3% in equities, and 5% in alternative investment.

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 4.5 years and the average credit rating is double 8 2. We also continue to have excellent liquidity at the holding company and March 31, 2009 our $2.8 billion holding company portfolio included $1.3 billion of short-term investment.

Book value per share under GAAP at March 31, 2009 was $39.20 a share compared to $38.13 at year end 2008 and $39.25 a year ago. Adjusted book value per share, which we calculate with available for sale fixed maturities at amortized costs, was $38.43 a share compared to $38.38 at 2008 year end and $38.47 a year ago.

As for reserves, we estimate that favorable development in the first quarter of 2009 on prior year reserves by SBU was approximately as follows. CPI had none, CCI had $35 million, CSI had $80 million, and reinsurance assumed had $15 million bringing our total favorable development to about $130 million for the quarter. For comparison, in the first quarter of 2008, we had an estimated $215 million of favorable development for the company overall, including $20 million in CPI, $65 million in CCI, $120 million in CSI, and $10 million in reinsurance assumed.

In summary, the impact of favorable development on the first quarter combined ratio was about 4.5 points overall compared to approximately 7 points in the first quarter of 2008. During the first quarter, our loss reserves decreased by $83 million, reserves in our reinsurance assumed business, which is in runoff, declined by $50 million, reserves in the insurance business decreased by $33 million during the quarter. Excluding the $189 million impact of currency fluctuation, our reserves would have increased by $106 million during the quarter. The expense ratio for the first quarter was 30.8 compared to last year's 30.5.

Turning to capital management, during the first quarter of 2009, we repurchased 1.8 million shares at an aggregate cost of $74 million or an average cost of $40.87 per share. In February, our board raised the quarterly common stock dividend by 6% to $0.35 per share. This was Chubb's 27 consecutive annual dividend increase, and as a further indication of our financial strength in the face of a difficult environment.

Finally, let me say a few words about our reinsurance program. On April 1 we renewed our major property treaties, including our North American CAT treaty, our non-U.S. CAT treaty, and our commercial property per risk treaty. All of these programs provide coverage similar to 2008 although we made changes in some of the layers to help us better manage our exposures and costs.

For example, we modestly increased our retention in the first layer of both our North American and our non-U.S. CAT treaties and we converted the fourth layer of our North American CAT treaty from northeast only to a layer that covers all states and all perils.

In addition, we successfully completed our third catastrophe bond in March. Under this arrangement, we purchased $150 million of fully collateralized three-year coverage in place of traditional reinsurance to supplement the coverage of our Florida homeowners business for hurricane losses. Similar to our previous CAT bonds, our right to collect is based on our actual incurred losses as opposed to industry or index-based losses.

The CAT bond offering was very well received in the marketplace. We like the diversification that these CAT bond arrangements bring to our overall reinsurance program. Importantly, they provide us with a cost effective alternative to traditional reinsurance with pricing locked in for three years and we have fully collateralized protection.

In summary, we are very pleased with our financial results in the first quarter. Each of our businesses continues to operate very profitably, resulting in over $500 million of operating income. In addition, our investment portfolio performed well in a very difficult market environment.

During the quarter, we also successfully renewed our major property reinsurance treaty and helped to reopen the CAT bond market with the successful completion of our third catastrophe bond. Finally, in the current industry environment, we believe that our strong capital position and financial rating differentiate us more than ever.

And now, I'll turn it back to John Finnegan.

John D. Finnegan

Two thousand nine is off to a good start in a very challenging environment. The highlights of our first quarter results were as follows, operating income per share of $1.43 and an operating ROE of 15%, excellent performance after the five years of a soft market, strong performance of our investment portfolio despite continued weakness in the value of assets worldwide, an increase in book value per share of $1.07 since the end of 2008, the 27th consecutive annual increase in our dividend and the continued improvement of premium rates as evidenced by CCI and CSI, first positive year-over-year rate comparisons in five years.

Going forward, we expect the overall economic and investment environment to remain challenging. Major headwinds include the strength of the dollar, lower investment yields, and a global economic downturn. However, we remain committed to exercising underwriting discipline expect to be able to produce solid financial results in a difficult market.

Longer term, we believe that the rate environment will continue to improve and that financially strong insurers will increasingly benefit from our fight to quality. Our excellent capital position, conservative investment portfolio, and strong credit ratings should allow us to capitalize on market opportunities and rate increases as they materialize.

And with that, we'll open it up to your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jay Gelb – Barclays Capital.

Jay Gelb – Barclays Capital

John, on the guidance you provided on the call three months ago, are you not updating that or affirming it or no change?

John D. Finnegan

Jay, we're going to follow our usual practice of waiting to revisit guidance until after second quarter results are in. I'm happy we're off to a good start but it's still early in the year, so we'll follow the traditional pattern and we'll do an update at the second quarter end.

Jay Gelb – Barclays Capital

Can you talk a bit about the 103% combined ratio in casualty for the quarter, what was driving that?

John D. Finnegan

We had one big loss in casualty that actually drove that number.

Jay Gelb – Barclays Capital

And then, with the news reports that Hartford may look at opportunities to sell its property casualty insurance business, in light of that, can you talk about your view on M&A?

John D. Finnegan

I think you ought to hold those questions on Hartford until next week at this time, but we said in the past that we're more look at organic growth than M&A and I think we'll at this point stick to that view.

Jay Gelb – Barclays Capital

Any particular reason why you say to hold off on waiting to hear?

John D. Finnegan

Because Hartford's call is next week, so I'm not going to comment on whatever they're doing.

Operator

Your next question comes from Mike Grasher – Piper Jaffray.

Mike Grasher – Piper Jaffray.

A couple of questions, just to follow up on the retention, excluding those insured's that dropped coverage altogether, does the change in coverage levels on those that continued to be in your book lead you to believe that you had a more profitable book of business or can you really assess that at this point?

John D. Finnegan

You mean from economic activity or economic downturn?

Mike Grasher – Piper Jaffray

Yes.

John D. Finnegan

No, I don't think we could say that. You've got a variety of things that are happening. You're not getting as much surety business because construction's down. Homeowner sales are down at the top end. So I mean we don't view it as a positive. I mean, the economic downturn is affecting our ability to write premium and that hurts growth. So I think the economic downturn is a negative to the industry as a whole.

John J. Degnan

Yes, I'd just add that generally renewable performs a little better than new business performs. It's more mature and we understand the accounts better. We have a better fix on it. But other than that, I agree with John's observation.

Mike Grasher – Piper Jaffray

Okay, but it sounds like then on the renewal book though, from a risk adjusted basis, it very well may perform better.

John Finnegan

I don't know that that is true. I mean, I think sometimes in places like financial institutions and CSI, if we're not getting the rate increases we think we're warranted in that business, we're walking away from that business and that may help profitability. But the fact that high end home starts have decreased and we therefore are writing less top end homeowners insurance certainly isn't a positive, or the fact that people aren’t rolling over endorsements on jewelry isn't a positive. I think you'd have to view that as a negative to growth and somewhat of a negative to profitability.

Mike Grasher – Piper Jaffray

Can you clarify the impact or what's your outlook in terms of the administration's tax policy from the international business, how it may impact that one way or the other?

John D. Finnegan

I don't think we've done an assessment. I don't know what the exact proposal is now so I really can't quantify it. Come back and take a look at it by the time the second quarter call if there's some sort of stressed specifics.

Richard G. Spiro

We would be delighted to see them eliminate the Bermuda and offshore tax advantages for those insurers onshore who reinsured with affiliates offshore. We believe that would create a level playing field and create some opportunities for us.

Mike Grasher – Piper Jaffray

Can you clarify then just to follow this, do you actually defer your taxes internationally or in terms of repatriating that money at opportunistic times or does it flow regularly?

John D. Finnegan

Well, I mean, it's a function of capital requirements and on oversea subsidiaries, growth potential overseas growth potential here. But remember, it's a complicated issue because you could be talking about earnings or you could be talking about taxes. Taxes are paid internationally locally on profitability. You get a credit, I guess, your U.S. taxes for taxes paid to local jurisdictions.

The companies that will have the greatest cost from these kind of proposals are companies that are in very low-taxed, overseas jurisdictions and therefore don't have a credit that offsets their U.S. income taxes. So the idea that people are not paying 34% or are getting away with a 34% benefit by not repatriating income is just not true.

People that are repatriating come get a significant benefit against their U.S. taxes the benefit related to how much they pay local jurisdiction. How much that offset is depends on where they make the money. So it's a pretty complicated area and you need the specifics of the proposal.

Operator

(Operator Instructions) Your next question comes from Paul Newsome – Sander O'Neal, and Partners.

Paul Newsome – Sander O'Neal and Partners

Could you give me a little color on where the reserve releases were coming from, from an accident year perspective? Are they sooner or later from most recent years?

John D. Finnegan

Big reserve releases were in professional liability, which was in the 2004 to 2006 accident years.

Paul Newsome – Sander O'Neal and Partners

If you could talk a little bit about the flight to quality and why it may or may not be coming as quickly as some would have thought. We've had actually a lot of downgrades and it doesn't seem to be having that much of an effect broadly, although it's certainly having something of an affect. Is there something specific behind it or is it ratings just not that important anymore? Do you have any thoughts?

John J. Degnan

I think the reality is that the economic downturn is affecting decisions that would otherwise be made in our direction with respect to credit quality. As long as some companies in the marketplace continue to dramatically reduce their prices on renewals, as we believe continues to be the case, the insured is faced with a dilemma.

Do they go to a higher quality, better rated insurer who's asking for a little more premium and if it's shoved is willing to walk away if it can't get that premium, or do they stay with an insurer who's not as highly rated who has been downgraded but who is offering a 20% to 30% decline?

Well, in short-tail liability business the answer I think more generally is to stay with the weaker competitor. In the long-tail liability business or where credit ratings are important like DNO and REITs, that's where we're seeing, and high net worth homeowners where sophisticated people realize the risk they're taking by a lower rated insurer, that's where we're seeing the flow. If it were normal economic times, it would be a flood. In this economy, it's a flow. That can improve.

Operator

Your next question comes from Matthew Heimermann – JP Morgan

Matthew Heimermann – JP Morgan

I was just wondering if you could run through kind of the limits in retention on your reinsurance programs but I was going to caveat that with, if you're planning on putting it in the queue, I would withdraw the question and wait for it then.

Richard G. Spiro

Yes, we'll update that sort of information in the queue. So if you don't mind waiting that would be preferable.

Matthew Heimermann – JP Morgan

And then I guess, with respect to the professional lines business, I mean you're seeing some increases in not just the FI anymore more broadly spread I guess. In your mind, how much more do you want to see prices go up before more, how much would you have to see prices go before more business starts to hit your screen. And I guess I'm asking new business because obviously you still feel pretty good about your renewal book.

John J. Degnan

Well, we're not putting a cap on how much we'd like to see prices go up. In our book, as you know, in the first quarter, we moved into positive territory for the first time year-over-year in about five years. But that's modest at one point. It's important to us though because it's migrating outside financial institutions where we're seeing an upward trend of 15%. In U.S. public DNO rates we saw a significant improvement with a plus 4%.

But let's recognize, we're a leader in the marketplace, we believe, in an effort to get price. We'd be gratified if, not only some of the market, but the rest of the market realized that they have losses that justify getting prices, but that's up to them obviously to follow. We're going to do what's smart for us and price through exposure and walk away from those risks where we can't get the price that we think we require, and we're going to continue to do that aggressively. We have something to sell at this point, which is higher quality credit ratings than almost any other carrier in this marketplace, and we're prepared to sell it.

Matthew Heimermann – JP Morgan

So, I guess if I'm hearing you right, your view with respect to pricing is still one where you'd be more than happy to write expand your exposure, if people are willing to take your price?

John J. Degnan

Absolutely. We've got the capacity and we've got the credit ratings and we've got the skill level in this line of business that no one can match, certainly no one exceeds, and yes, we want to sell it.

Matthew Heimermann – JP Morgan

That's fair, I just wanted to clarify because there are some who while it's turning want x% more before their appetite really expands and I realize you could be coming from completely different places. The other question was just sequentially the loss ratio looked like an improvement from fourth quarter and I guess, you said you didn't really see a change in flow. Should we read anything into that or is just if you look at the last two quarters of last year, which seem to be elevated relative to the first two, should we just chalk that up to kind of the height of the economic pressure?

John D. Finnegan

Define that. What are you comparing?

Matthew Heimermann – JP Morgan

I'm looking at your professional liability, loss ratio ex-development.

John D. Finnegan

Our professional liability loss ratio ex-development in the first quarter of 2009…

Matthew Heimermann – JP Morgan

Versus the last, versus kind of the second half of '08.

John D. Finnegan

Our accident year professional liability in the first quarter of 2009 is about 102. In the last two quarters of 2008 it was higher than that. It ended the year at 103 so it was somewhat higher than that, I'm sorry, combined ratio.

Matthew Heimermann – JP Morgan

I was just curious if, I didn't know if there was anything unusual because it looked like it was particularly the fourth quarter that that increased vis-à-vis prior quarters in '08, so I just was curious if there was anything you could point to on the loss ratio side, not necessarily the combined ratio side?

John D. Finnegan

In this line of business, we're talking about a business that has very little loss experience in its first accident year in the first year. So we're really talking about projecting losses on very limited data. As the year 2008 went on, I think that, while we believe the credit crisis claims were manageable, they did deteriorate. We had Madoff in the fourth quarter.

So we're just projecting and over the course of a year we increased our reserves. We thought that was prudent. We started the year at about 100 in the first quarter, ended the year at 103 for the year, probably about 104 in the fourth quarter and, again, that's combined ratio. We started this year, we believe this year will be a better year in the Professional Liability arena, but at the same time, clearly it's a good size economic downturn out there.

We wanted to be conservative, and we're picking 102 at this point in time. Now, there's no data, there's no loss experience. It's simply the best guesstimate we can come up with and we're trying to be conservative. So there's no real, there's certainly no loss trends out there, no data that support much of that movement.

Matthew Heimermann – JP Morgan

Okay. No, that's fair. I guess if I spread the 4Q over the full year, then actually it's not as dramatic and your comments make sense.

John D. Finnegan

It's 103 for the year versus 102.

Operator

Your next question comes from Brian Meredith - UBS.

Brian Meredith – UBS

A couple quick questions here for you. The first one, another one of the hot button lines out there right now is political risk, and I was wondering, John, if you kind of characterized and that the size of your political risks business, what are the exposures there? And what are the outlook for losses there given the economic downturn that we're seeing right now globally?

John J. Degnan

Political risk is a line of business where the rates are firming pretty dramatically, because it's so credit-sensitive. We have a relatively small book of political risk business that's combined of both traditional and political risk, which would cover expropriation and nationalization and confiscation. And we have some trade credit, roughly 50% of one and 50% of the other. They're performing pretty well for us at a very low loss ratio.

We have significant quota share reinsurance support for the political risk portfolio. We just went out and renewed it, and we have more reinsured capability and capacity than we needed or wanted. But I don't know that we disclosed the total amount of gross written premium in that particular line. It's fairly modest, but running at a very good loss ratio. But we're getting more business inquiries than we're willing to write at the moment, given the increased risk profile out there.

Brian Meredith – UBS

And then the second question. I wonder if you could give us your thoughts on the rate lift we're seeing in commercial lines? How much of that do you think is actually due to just a lower interest rate environment right now?

John D. Finnegan

Well, I think that what we know is that we've gotten some rate lift in commercial lines, and that we've moved from negative 6 in the second quarter of last year to positive 1 in the first quarter of this year. I haven't seen industry data. I don't know what the rates are in the industry. One would think that, given lower interest rates, that people would be looking at the return on their capital and would be increasing rates.

We certainly are attempting to do that, and so far reasonably successfully, although incrementally. I haven't seen any industry data. We're about one of the first big companies to go, haven't seen any reports from the other guys, so don't really know. They should be doing it. Whether or not they're doing it and successfully achieving it, that's another question. Don't know.

Operator

Your next question comes from Jay Cohen - Bank of America.

Jay Cohen - Bank of America

Yes, several questions. I guess the first is on capital management. It seems that the assets out of the balance sheet showing more stability. The premiums are shrinking, albeit some of that is currency, but still you're seeing a net shrinkage. One would suspect you've got to feel a little bit better about your balance sheet and the excess capital. What do you think about from a capital management standpoint for the balance of the year?

Richard G. Spiro

Look, I mean, obviously everything you said is true and we did earn $341 million after tax in the first quarter. Our capital position is strong and should remain that way, but what the capital market turmoil has done is it continues to make us just a little bit more conservative in terms of what we do with our excess capital. In the current environment, greater asset volatility and the limited access that we perceive to be in the marketplace to financing and capital just tell us that we want to continue to ensure that we retain our robust capital position.

So we are going to continue to be prudent. We did say when we issued our calendar year guidance that you guys should assume about a $250 million buyback for the year. We bought back $74 million worth of stock in the first quarter, and at this point in time we think it's still prudent to proceed cautiously.

John D. Finnegan

I think capital is king in this environment, Jay, so I think we're still taking that very conservative position here.

Jay Cohen - Bank of America

And I guess the next question, related to the economy, I think you did a really good job of laying out how it's affecting your top line and it's all pretty clear. I guess what's less clear, looking forward, is how the economy is affecting the claims environment, whether it's frequency or severity? And I'm wondering if you are seeing any evidence of the economy impacting the claims environment at this point?

John J. Degnan

We're not, Jay. This is John Degnan. We're actually seeing a fairly consistent decline in new arise counts across most lines of the book. We're seeing a mix in average paids but no trend upward. We're not seeing much different. Our book is not as medically cost-driven as some companies books are, but we're not seeing a significant change in the inflationary loss cost trend that we've seen in the last year or two.

Operator

Your next question comes from Sean Timonen - Advantus.

Sean Timonen – Advantus Capital Management

I'm just curious, has Chubb ever considered buying back any of its hybrid debt, especially given it's rating well below par, along with most hybrids out there? I guess, to me, it seems like it would be a better value proposition than share buybacks at this point.

Richard G. Spiro

Obviously, as you might imagine, we do get a few phone calls from time to time suggesting that that is the thing we should do. But getting back to the comments we made earlier that we think capital is king, we do get $1 billion of equity capital credit for that security from the rating agencies. We think that is important. And while there may be an economic benefit to buying it back at its current levels, coming back to the importance of capital, we think it's in our best interest at this time to continue the way we're going and leave it out. Does that answer your question?

Sean Timonen – Advantus Capital Management

Yes, thanks.

John D. Finnegan

Any other calls, Operator?

Operator

Your next question comes from Vinay Misquith - Credit Suisse.

Vinay Misquith - Credit Suisse

Could you help me with the top line growth in the personal lines segment? Are you seeing clients shopping around or has the top line declined, mostly due to Forex and the non-endorsement of jewelry and fine art?

John D. Finnegan

Well, we can define the first part that the top line is 1% positive ex-currency. That's the starting point. And about flat in homeowner's ex-currency, so that gets it on a ex-currency basis. And I'll let John answer the second.

John J. Degnan

We're not seeing a dramatic change in our in-force counts. Homeowners are down about 2% and in-force, personal access liability down 3%. What we're seeing in the marketplace is an increased level of interest by high net worth policyholders in Chubb's secure credit rating.

We've got a healthy flow of submissions, we're quoting a fair amount of business, but we're turning down business from some of our troubled competitors, which is heavily CAT-constrained, which is priced at a level where we don't think it's an appropriate use of our CAT exposure. So we're not taking business where we can't get the price we require. The competitive landscape is pretty much what it's been over the last couple of years. Just more interest, I think, in moving based on credit than has existed in the past.

John D. Finnegan

Fewer endorsements on jewelry, for example, there are not many housing starts, as you might imagine, in the $1 million and up market. There are not many houses moving up in that market by inflation. So the denominator, the opportunity is less in an economic downturn than it is in good times.

John J. Degnan

One final thing we should point out for you is our premiums generally adjust on renewal for inflation guard, so if there is increased cost of replacement attributable to labor or commodities, there is an inflation guard factor that goes into it. Obviously, as I pointed out in the last call, that factor has gone down somewhat as the economy has finally decreased commodity prices in most of the markets in which we do business and lowered labor costs.

Vinay Misquith - Credit Suisse

Did I hear you correctly that the in-force business was down 2% year-over-year?

John J. Degnan

Yes, in the first quarter of this year over the first quarter of last year.

Vinay Misquith - Credit Suisse

For some of us who expected you to gain market share because of the AIG issue, just curious why that has not been faster than we would have thought?

John J. Degnan

Well, the marketplace is still pretty intense out there and one carrier, which I haven't named, is routinely cutting it's renewal pricing by 30% or 40%, so even personal lines customers who are high net worth are interested in saving money and more of them are staying with their current carrier, because they view these policies as relatively short-tail and they'll take another look depending on their perception of the current carrier at renewal. So, while we haven't seen as dramatic a flow of business in from those weakened competitors, depending on how the outlook is for them in the future, it may happen yet.

Vinay Misquith - Credit Suisse

My second question was on the DNO liability, I recall last quarter you mentioned that the dismissal rates on the claims would likely be higher because of high updating standards. Have you seen anything different this quarter versus last quarter?

John J. Degnan

This dismissal rate is still running about 10 points higher on average than the normal dismissal rates in previous clustered claims. It's still relatively early. It's a trend I would hope for the reasons I explained last quarter to see sustainable over a period of time, but it's still higher on a relative basis.

Vinay Misquith - Credit Suisse

Would it also be fair to assume that you're also not reserving to the higher level that you might have done maybe in the last down cycle because of the higher dismissal rates?

John D. Finnegan

That hasn't been a factor in our reserve rate, no.

Operator

Your next question comes from [Mark Duwell] – RBC Capital Markets.

[Mark Duwell] – RBC Capital Markets

You commented on your treaty renewal at 401 and I was wondering despite you obviously changed the program around a little bit, but could you characterize whether you paid much more for that program than the prior or whether the change in limits reduced your cost?

Richard G. Spiro

I guess in summary, we did pay more this year upon the renewal of our two major CAT treaties and our commercial per risk property treaty, but the cost increases were in line with our expectations. Why don't I try to give you some sense of what we saw and what that translates into? I guess consistent with recent market reports, property reinsurance pricing is increasing in some areas, but it varies widely by geography and structure.

So for example, in terms of a pure rate increase, our April 1 market pricing for our North American property CAT program was up somewhere in the mid-teens area, however, we did not see any pure rate increases in our other two treaties. We have a stable long-term trading history with our reinsurers and that helps to mitigate price increases in a year like 2009.

As you pointed out, we did make some changes this year to our retentions to some of the layers to better manage or costs and exposures, as I mentioned earlier, and we did issue a new CAT bond. So to try to put all of that in a box for you, if we take all of those changes into account, the total cost of our major treaties dollars we're actually spending this year, including our CAT bonds, will be only about 5% more than we paid last year. So hopefully that gives you some idea of the trends.

Operator

Your next question comes from Mark Serafin – Citadel

Mark Serafin – Citadel

Could you guys talk a little bit about what you're seeing in the workers comp claims environment and the competitive environment, and maybe talk about what was driving the increase in loss ratio in the quarter looking back over last year whether that was some prior year reserve development or just your current year pick.

John D. Finnegan

I think the answer to the latter question is we had a fabulous workers comp experience, I mean you're not going to run 83 in workers comp forever it's just not possible given regulated rates, so I just think that workers comp has gravitated to a more long-term level. It's pretty damn profitable. I'll ask John to talk about what you see on the claims experience.

John D. Degnan

Well, not much deterioration in the claims experience on the comp side. The book continues to perform pretty well. Comp new arising counts are down 15% quarter-over-quarter so we're pleased with that. Comp is a relatively unique book of business for us and what we tend to write and where we select to play in the market, but we're pretty pleased with the results.

John D. Finnegan

Just to answer further your question, there was no adverse development in the first quarter of 2009, and very small favorable in the first quarter of 2008 mostly due to accident year and due to rate and due to rate. Rates have been coming down, the rate declines have lagged al little bit some of the tremendous performance improvements in a place like California and now they're coming down. I just think 83.7 is an awfully good combined ratio and very tough to sustain over time.

John D. Degnan

One further thing, obviously, this is a line of business affected by the economy, so with payrolls being down and some companies actually diminishing or going out of business you would expect to see some decline in the premium base, but its not out of line with what we would expect or want.

Operator

Your final question comes from [Yuron Kinar] – Citigroup.

Josh Shanker for [Yuron Kinar] - Citigroup

This is Josh Shanker. A couple of questions, first of all I want to find out whether you had any thoughts on positioning the investment portfolio in arising interest rate environment and how that might affect the muni situation in terms of mark-to-markets and whatnot.

John D. Finnegan

I'll let Ricky take that. Are you predicting a rising interest rate environment or is this a long-term concern?

Josh Shanker for [Yuron Kinar] - Citigroup

Maybe 18 months.

John D. Finnegan

Oh, okay. Well, given the rates on cash, we may not put it all in cash in the meantime.

Richard G. Spiro

Obviously, you're question is an important one and one we do consider. I guess what we'd say is one of the key drivers of our core investment strategy is our asset liability analysis, and as you know we deploy an intermediate maturity strategy on the asset side based on the knowledge that we have an intermediate term duration liability.

So as rates start to rise, we'd be investing the coupon and the maturity cash flow of our portfolio, as well as cash flow from operations at higher rates. Likewise, we also get some of the benefit and the value of liabilities as discount rates rises. So in a rising interest rate environment, we think that would most likely be indicative of an improving economy. And should that happen, we would expect yield spreads in the taxable market to tighten significantly and ratios in the tax-exempt bond market to compress, as well.

We think our portfolios actually dramatically outperform Treasury securities and fall in value much less than potentially other assets. So, we're comfortable with where our portfolio is structured today. We think we've got our arms around our exposure to interest rate risk, and we don't expect to make any material changes in our strategy or the composition of our portfolio in the near-term.

Josh Shanker for [Yuron Kinar] - Citigroup

Any interest in the PPIP?

Richard G. Spiro

We continue to review all of those government plans, but we have not made any decision to participate yet and we have not participated to date.

Josh Shanker for [Yuron Kinar] - Citigroup

Okay, and unrelated, [inaudible] the business from the high net worth individuals hasn't moved as quickly as maybe you thought or even I thought. I'm wondering longer term as that starts to move, is there any aggregation risk in Long Island, Florida or whatnot if you took share in that market that you couldn't write as much business as might flow to you?

John D. Finnegan

Sure, I think that you have to watch your aggregation exposures closely. I think it's fair to say that the competitor to whom you probably refer that's having a difficult time gained market share by writing in difficult CAT environments because we had certain limits and that a lot of the business that could potentially flow to us has CAT exposure to it so, unless you're able to get rate and some states you're not able to get rate, we have to turn that down.

Now, in other states you can get rate that's acceptable, but you've got to still work within your aggregate. So, aggregation and CAT exposure is definitely an issue and it's one of the, I wouldn't say price cuts by competitors is one issue, the economy is the second issue. The third is we have to be very prudent and we just can't take on new aggregations unless it falls within our limits and whether it is price justified.

Operator

Mr. Finnegan, there are no other questions remaining in the queue. I'd like to turn the conference back to you for any additional or closing remarks.

John D. Finnegan

Okay, thank you very much for calling in.

Operator

That does conclude today's conference, everyone. Thank you for joining us.

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