The Chubb Corporation Q2 2009 Earnings Call Transcript

Jul.23.09 | About: The Chubb (CB)

The Chubb Corporation (NYSE:CB)

Q2 2009 Earnings Call

July 23, 2009 5:00 pm ET

Executives

John D. Finnegan - Chairman of the Board, President and Chief Executive Officer

John J. Degnan - Vice Chairman, Chief Operating Officer

Richard G. Spiro - Chief Financial Officer, Executive Vice President

Analysts

Jay Gelb - Barclays Capital

Joshua Shanker - Citi

Matthew Heimermann - J.P. Morgan

Vinay Misquith - Credit Suisse

Brian Meredith - UBS

Jay Cohen - BAS-ML

Clifford Gallant - Keefe, Bruyette & Woods

Michael Grasher - Piper Jaffray

Operator

Good day ladies and gentlemen and welcome to the Chubb Corporation’s Second Quarter 2009 Earnings Results Conference Call. (Operator Instructions) 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 may 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 SEC.

In the prepared remarks and responses to questions during today’s presentation of Chubb’s second 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 the financial supplement for the second quarter 2009 which are available on the Investor section of Chubb’s website at www.chubb.com. Please also note that no portion of this conference may be reproduced or rebroadcast in any form without prior written consent of Chubb.

Replays of this web cast will be available through August 21, 2009. Those listening after July 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 would like to turn the program over to Mr. Finnegan.

John Finnegan

Good afternoon. Chubb turned into an outstanding quarter in every respect, despite the recessionary conditions in the US and around the world. We had terrific underwriting results and our investment portfolio performed extremely well. Operating income per share increased 6% to $1.49. On the underwriting side our combined ratio improved 2.6 points to 85.9. We have 1.5 of cats compared to 5.4 points in last years quarter. P&C investment income after tax was adversely affected by foreign currency translation as well as lower yields, but declined only 5% to a solid $312 million.

For the first six months operating income per share was $2.92 which translates into an annualized operating ROE of 15.2%. For the second quarter net written premiums declined 7%, or about 3% ex-currency, reflecting in large part reduced demand due to global recession.

We are very pleased that our investment portfolio produced a net realized capital gain before tax of $27 million. At June 30 our net unrealized depreciation before tax stood at $512 million which is an increase of $229 million over March 31.

The upshot of these investments and operating results was a $2.25 increase in our reported book value per share to $41.44 per share at June 30, 2009 compared to March 31, 2009. Our capital position is excellent and Ricky Spiro will talk about our decision to accelerate our currently authorized share buy back and complete it by year-end.

As you will recall, last January we provided 2009 operating income guidance of $4.80 to $5.20 per share. Based on our performance in the first six months and our outlook for the second half, we are increasing guidance to a range of $5.20 to $5.50 per share. I will elaborate on the revised guidance in my closing remarks.

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

John Degnan

Thanks, John. Let me begin tonight with a review of the individual business units for the second quarter. We are very pleased by their results and by the inherent underwriting talent and discipline that produced them.

Currency again, had a large impact on the quarter. I am going to highlight it where appropriate as I did three months ago. Chubb Personal Insurance net written premiums declined 5%, but currency accounted for about four of those points. CPI produced a combined ratio of 84.2 compared to 81.9 last year. Cat losses were 3.2 points in the second quarter of 2009 compared to 4.5 points a year earlier.

Homeowner’s premiums were down 5% and the combined ratio was a strong 80.7 including 4.7 points of tax. Personal Auto premiums declined 9% with a combined ratio of 90.5 and in Other Personal Lines premiums declined 2% and the combined ratio was 90.7.

CCI’s performance in a difficult economic environment is a tribute, we think, to the franchise value of our brand, which is holding up nicely in a competitive market. At Chubb Commercial Insurance premiums were down 7%, but about 3 points of that decline related to currency. The combined ratio was 89.2 compared to last years 93.7. CCI’s second quarter included cat losses of 1.2 points compared to 9.2 in 2008.

The real story in CCI is its determined and consistent drive to secure rate increases as reflected in its overall 2.0 US renewal rate increase which improved a point over the first quarter and continued a trend of improving rates in each of the last four quarters. The progress has been gradual and incremental, but it has also been steady and disciplined and it has been accomplished with a pretty good retention rate of 83 and a ratio of new to lost business in the US of 1:1.

At Chubb’s Specialty Insurance net written premiums were down 6%, but only about 2% excluding currency and the combined ratio was 83.9 or 5.4 points better than 2008’s second quarter combined ratio of 89.3.

Premiums for Professional Liability were down 7%, about 4 points of which were attributable to currency. The combined ratio for Professional Liability was 90.1 compared to 84 in last years second quarter, due primarily to a lower amount of favorable development. Here again, the story is one of even more significant rate taking. Average US renewal rates for professional liability were up 4% over last years second quarter. This is the third successive quarter of positive rate change and an improving trend in rate over the past seven quarters.

While renewal retention in the US was down a bit to 83% and the ratio of new to lost business was 0.9 to 1.0, we believe this is an acceptable trade off for such substantial rate improvement., most noticeable in public B&O and financial institutions D&O, but also in most other professional lines. For surety net written premiums were flat, profitability was strong, it had a virtually loss free combined ratio of 38.5 for the quarter.

As we indicated three months ago, there are four major developments which we thought would continue to have an impact through 2009, currency, market dislocation, the weakening economy and rating trends. About 24% of our premiums in the first half of 2009 came from outside the US. As a result, our net written premium growth in dollars was affected by the movement in exchange rates of the major currencies in which we conduct our business.

In the first six months of this year the exchange rates to the dollar were volatile with the dollar generally stronger than it was in the first half of 2008. The effect of the year-over-year strengthening of the dollar was to reduce our overall premium growth in the first half of 2009 by about 4 points. That is of our 7.0 decline in net written premium growth in the first half of 2009 about 4 points were attributable to currency. Assuming exchange rates remain constant for the remainder of the year we expect the impact of currency to moderate in the third quarter and to be insignificant in the fourth quarter.

The second major factor affecting 2009 markets are business opportunities arising from insurance market dislocation. Our experience in the second quarter reflects a continued, but somewhat more modest and certainly uneven flow of business opportunities being presented to us as a result of the weakened financial condition of some of our competitors. There are several factors at work here. Many customers remain in a wait and see mode about the consequences of insuring with government supported insurers and the movement of business has slowed somewhat. However, where accounts are credit sensitive, such as REITS or real estate investment trusts, professional liability, [long tail] liability lines such as SS Casualty, and high network personal lines and surety, there is often a flight to quality. In short, where the insured requires or cannot afford the higher security that flows from our ratings, we are seeing business move.

How market dislocation potential plays out for the balance of the year is hard to predict. There are some fundamental unanswered questions. Will severely distressed carriers propped up by government funding and with reduced accountability to shareholders elevate the market share over responsible underwriting and disrupt the normal marketplace constraints of supply and demand? Will the Federal government, which distressingly seems to be settling in as a long-term shareholder act like one and demand adequate returns, or will it elevate social policy agendas over normal business driven return expectations? Ultimately will government control influence buyers to move toward or away from such companies?

Rhetorically one might ask if consumers are unlikely to buy a car built by the government why on earth would they want to buy an insurance policy underwritten and adjusted by folks who act more like bureaucrats than business people?

As for us, we will be opportunistic and responsible, but not reliant on large amounts of market-dislocated business to achieve our guidance, and we will compete vigorously against companies which are unsustainable, but for government bailouts.

The third factor, a significantly weaker economy continues to have a negative impact on the business opportunities we otherwise would have seen in the second quarter. The recessionary shrinkage of sales and payroll and investments in insurable assets all mean lower insurance exposures in such CCI businesses as Workers Comp, general liability, or marine, and in commercial oil as well as in CSI as a result of lower limits and higher deductibles. As a result quantifiable, renewable exposure, that is the level of coverage on contract renewals, is down 3 points from CCI and 1 point from CSI in the second quarter.

The industry is also experiencing many loss business opportunities from depressed economic activity which are not picked up in this exposure metric since they don’t strictly relate to coverage decreases on contract renewals. For example, a drop off in construction activity has resulted in a decline in premium written in our Surety business and in CCI’s Builders Risk business. IN CPI the slow down in the construction of high-end homes and declining housing prices have affected our ability to grow our Homeowners business. In addition we have experienced higher deductibles, lowered limits, fewer endorsements for jewelry and fine arts.

In the case of CSI our professionally growth has been hurt by fewer IPO’s and reduced M&A transactions in areas of meaningful premium contributions in the past. These opportunity costs from the weaker economy are hard to quantify, but probably had a greater adverse affect on second quarter growth than the more readily quantifiable declines in renewal exposure. Going forward, the weaker economy is likely to continue to adversely impact premium growth potential throughout 2009 due to both lower exposure and less business opportunity, despite what we see as a continued positive rate environment.

That leads me to the fourth factor affecting the market; that is the trend in rates. We have seen our US renewal rate changes in both CCI and CSI continue to improve incrementally over the last several quarters. The commercial lines year-over-year rate change improved consistently from -6% in the second quarter last year to +2% in the second quarter of this year, a very encouraging 8 point swing.

In our Professional Liability lines year-over-year rates in the US moved from a 3% in the second quarter of last year to +4% in the second quarter of this year, a 7.0 swing. While we continue to believe we are at an early stage of an incipient market turn, we have to acknowledge that events in the second quarter make us slightly less sanguine about the pace and steadiness of that improvement. Improving capital markets, additional government intervention, a distressed economy, and carriers who seem to be holding their rates on renewal, but drastically reducing new business rates, all have slowed the process down.

We remain committed to pricing our products to their exposure and we will continue to responsibly take rate where it is warranting, but it does look like the process of real market hardening might take longer to play out. Bear in mind that forecasts in this area are notoriously fraught with uncertainty given the unpredictability of events such as major cats and their effects on market hardening.

Turning to credit crisis claims experience. I want to note that many of the points I have been making during our last several calls seem to be being confirmed, at least for now, in both industry trends and in our own experience. For example, that predicted wave of D&O litigation does not seem to be materializing yet and we are now about two years into this developing claims scenario in an arena which has been traditionally characterized by a rush to the courthouse on the part of plaintiff’s lawyers.

In fact, as reflected in the Stanford Cornerstone 2009 mid-year assessment that was issued just this week, new shareholder securities Class Action filings were down significantly in the first half of 2009 when 87 Securities Class Actions were filed compared to 112 in the first half of 2008, a decline of over 20%. Only 35 of those actions were filed in the second quarter of 2009, that is the lowest quarterly filing since the first quarter of 2007 and a 43% decline from the fourth quarter of 2008.

That report concluded that the recent decline in market volatility raises the possibility of a return to the subdued levels of filing activity that were observed from the third quarter of 2005 until the second quarter of 2007. Similarly in another publication, the D&O Diary, which differs somewhat in that the claims it counts and how it counts them are calculated somewhat differently, reports 94 Securities Class Actions filed in the first half of 2009, also a low 35 in the second quarter, 59 in the first quarter, compared to 113 in the first half of 2008.

Moreover, because D&O policies have aggregate limits, which can be exhausted, it is important to look beyond just the number of Securities Class Action filings and focus on the number of publicly traded companies that are sued because obviously multiple claims against one company in the same policy year expose only one limit of liability. Most of the reports you see cited don’t do this, but the Stanford Cornerstone report I have been talking about has begun to do it. So, while the total number of filings in all of 2009, if the trend were to continue consistent with the first half, would be down by 22.3%. The total number of issuers sued would actually decline year-over-year by 39.3%. In fact, if the number of publicly traded issuers sued in the first half of 2009 were annualized it would be the lowest number of publicly traded issuers sued since 1997.

In addition, as we expected, the same report confirms that the litigation remains disproportionately focused on financial institutions. In fact 67% of all the actions filed in 2009. That is a sector where we believe the underwriting strategies I have previously described will serve us particularly well.

Finally, the disclosure loss dollar index that is maintained by Stanford Cornerstone, which is an attempt to monitor the magnitude of losses claimed in Securities Class Action litigations, was down 63% from the second half of 2008 and is 30% lower than the historical average.

These trends are largely consistent with our own experience at Chubb. We have said that our exposure will arise from three types of policies, D&O, E&O, and fiduciary. That hasn’t changed. With respect to D&O credit crisis claims we noted in January that Chubb’s new claims activity was down in the second half of 2008 from the first half of that year. While there were a few more claims in the first half of 2009 relative to the second half of 2008, the number is still below the first half of 2008. Moreover, the beneficial impact of our underwriting strategies reflected in my characterization last July of our D&O claims had more than 1/3 saw A only, more than 80% excess and almost 90% with limits of $15 million or less has played out with remarkable consistency. A year later, at the end of June 2009, our D&O claims remain 31% side A only, 75% excess and 94% with limits of $15 million or under.

I will not repeat to you all, all of the reasons we believe Securities Class Actions and credit crisis claims need to be assessed in the context of higher pleading standards, more benign factual under pinnings, often in absence in fraud, and the attended reduced likelihood of a payday complaint firm. The bottom line is that everything we are seeing bolsters our confidence that we are setting prudent reserves for this category of losses.

With respect to E&O claims I noted in January that the flow of new claims had been steady, but not overwhelming. In the first half of 2009 there were an increased number of new claims, but 80% of them were repeat claims against previously identified insured’s. The actual number of new insured’s sued in each of the last six quarters has remained steady and at a relatively low level.

A significant amount of our more recent E&O claim activity involves investor claims including Class Action investor claims that target the offerings of credit derivative securities such as mortgage-backed securities or asset backed securities, collateralized debt obligations too. These actions typically are brought against multiple defendants, the issuers, the underwriters and the rating agencies involved in the offerings, and allege that the nature and risk of the complex financial securities were misrepresented in their offering materials.

Not surprisingly many of the same entities, in particular rating agencies and investment banking firms appear as defendants in a number of these actions. We are going to continue to watch the development of these claims closely, but we currently see this evolving claim dynamic is subject to several mitigating factors for our potential E&O exposure.

First, the big players in many of these offerings both as issuers and lead underwriters are the major US investment banks and as I have mentioned repeatedly during these calls shall for the most part cease writing US E&O insurance for the major US investment banks before the credit crisis.

Although we do write E&O insurance for some other financial institutions that participated in these offerings their participations in these offerings tended to be very small, thereby limiting their potential exposure. The programs of insurance that they have, have very high per claim deductibles, typically between $25 and $100 million and our participations in those programs tend to be at high excess levels with typical limits of $15 million or less. Moreover, those defendants have significant defenses to liability and may be contractually entitled to indemnification from the user.

Finally, with respect to the third line we thought was exposed, the fiduciary line, there were no additional credit crisis claims in the first half of 2009 and obviously our outlook here remains the same regarding the relatively low potential for significant losses.

In determining the adequacy of our reserves we relied primarily on our own perspective of our ultimate loss exposure which is based on actual claims and limits exposed, reflects coverage issues, is sensitive to the unique composition of our book as determined by our underwriting appetite in strategies, and is informed by our substantial experience in managing such losses. We believe that such an exposure analysis offers the best potential for establishing prudent reserves; however we certainly follow and understand the few attempts that have been made to estimate ultimate industry credit crisis losses which are based upon a projected total industry exposure.

At this stage of the emerging losses I would simply comment that such estimates are highly speculative and often do not sufficiently reflect company specific variables when they attempt to allocate that loss estimate to particular companies. For example, one recent report assigned to Chubb a 20% market share allocation of the revise in estimate of credit crisis losses. However, that revise in estimate, which is at the high end of any published external estimates that we’ve seen, breaks that projection down into $3.7 billion of E&O losses and $5.9 billion of D&O losses. Of the later, 90% were estimated by advising to come from financial institutions claims. That assumption finds some corroboration in that Stanford Cornerstone report I cited earlier, which observes that 67% of the Securities Class actions filed in 2009 were in fact against financial institutions.

At the same time Advison estimated that Chubb had only about a 10% market share of financial institutions D&O and a 9% share of their E&O. The bottom line is that even if the projected total industry loss is reasonable, allocating a 20% share of that to Chubb is unreasonable. If it was based on a market share theory relating to Chubb’s total reported Professional Liability premium it would ignore the fact that Chubb’s 2008 Professional Lines premiums were only 25% public D&O and DFI D&O. Reflecting the diversity of those premiums, 14% of them were for private and not for profit D&O, 47% were for ETO, fiduciary and E&O and 14% were for crime and financial fidelity.

As a further important point, an issue exists only to the extent to the level of overall losses exceeds the reserves we have already established. In actuality our accident year 2007, 2008, and 2009 reserving targets already contemplate our best assessment of the impact of these events and we believe those targets are prudent. We are running accident year combined ratios for the three years affected by the credit crisis that make provision for total Professional Liability incurred losses of well over $4 billion over this period, which comprehends a substantial amount of covered credit crisis claims.

An alternative approach to estimate potential exposure which has been used by some involves extrapolations based on the corporate abuse scandal that impacted our 1998, 2002 Professional Liability results. However, in reference to Chubb’s experience during those years as a basis for projecting its exposure to credit crisis claims overlooks several mitigating factors. We have virtually transformed our Professional Liability books since 2001 and 2002 for the explicit purpose of minimizing the impact of this type of systemic event. These adjustments included a dramatic reduction in our policy limits profile. The reduction of multi-year deals; a significant shift away from primary coverage to excess positions and a substantial in side A only policies especially on large Fortune 200 accounts.

In 2000 and 2008 our in force written premium for US public D&O grew by 40% while limits in force on policies with traditional D&O coverage dropped by 37%. We grew our side A book over those years quite substantially and after including those limits our in force limits are still down, 18%. The number of accounts with limits of $25 million is down 62% over the same time period and it is also important to note that the earned rate level in 2008 is almost 40% higher in public D&O and more than 70% higher in financial institutions D&O than it was in 2002. So those sweeping changes to our book of business render any simplistic comparison to the situation in 2002 invalid.

Finally, concerns that there could be a roll back of torte reform with a Democratic led administration in congress have been used to suggest increased losses. While torte reform is indeed probable, even if it migrated to the Security Class Action arena, which is not at all certain, the process would take several years to be enacted, rolled out, and interpreted by the courts. Torte reform is quite distinct from Class Action Securities litigation where reforms already enacted, like the PLSRA would have to be undone and where over the last few years there have been significant favorable legal rulings such as Dora Pharmaceuticals and Stoneridge and [Pel Lab], that have made it much more difficult to successfully prosecute a Securities Class Action when compared to the legal environment that prevailed back in 2001 and 2002. In other words, the legal standards on which credit crisis claims will be adjudicated are already largely baked in, and any erosion of those standards will not govern this category of claims.

While the trends we have cited all helped put the emerging credit crisis losses into a balanced perspective we certainly acknowledge that they will be substantial. However, we are following our customary practice of establishing prudent RB&I loss reserves for immature accident years as warranted by our continuing evaluation of these exposures.

With that I will turn it over to Ricky Spiro.

Ricky Spiro

Thanks, John. As you heard from John Finnegan and John Degnan we are very pleased with our financial performance in the second quarter. Our underwriting results were strong, our conservative investment portfolio performed well in these challenging markets and we continue to have excellent capital and liquidity positions.

Looking first at our operating results, underwriting income continued to be solid amounting to $396 million in the quarter; Property and Casualty investment income after tax declined by 5% in the quarter to $312 million. This decline was due primarily to currency fluctuations on our international investments and lower yields on our short-term investments.

Net income was slightly higher than operating income in the quarter due to net realized investment gains before tax of $27 million or $0.05 per share after tax. Our net realized investment gains before tax included $78 million of realized gains from the sale of securities partially offset by impairment charges of $19 million and a $32 million loss on our Alternative Investments portfolio.

As a reminder, we account for our Alternative Investments on a quarter lag because the time required to receive updated valuations from the limited partnerships investment managers. There for, this quarter’s loss, which was lower than we estimated it to be on our last earnings call, was largely due to first quarter mark-to-market losses on the underlying assets held by the limited partnerships.

During the second quarter we also adopted the new FASB staff positions related to the recognition and presentation of other than temporary impairment in determining the fair value of assets. The adoption of the new guidance had an insignificant effect on our financial position and earnings during the quarter.

Unrealized depreciation before tax at June 30, 2009 was $512 million compared to unrealized appreciation of $283 million at the end of the first quarter. This positive change was due largely to credit spread improvements in our Fixed Maturity portfolio.

Turning to our Investment portfolio, the total carrying value of our consolidated investment portfolio increased to $40.3 billion as of June 30, 2009 from $39.1 billion at the end of the first quarter. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our Fixed Maturity portfolio is 4.4 years and the average credit rating is AA2.

We also continue to have excellent liquidity as a holding company. At June 30, 2009 our holding company had $2.6 billion of investments including $1 billion of fixed maturity investments and $1.4 billion of short-term investments. In addition, we further enhanced our liquidity position during the quarter by selling our common stock holdings in Allied World. Allied World was an excellent long-term investment for us and we recognized a significant gain on the sale.

Book value per share under GAAP at June 30, 2009 was $41.45 compared to $38.13 at year-end 2008 and $39.19 a year ago. Adjusted book value per share, which we calculate with available for sale fixed maturities at amortized costs, was $40.41 compared to $38.38 at 2008 year-end and $39.29 a year ago.

As for reserves we estimate that we had favorable development in the second quarter of 2009 on prior year reserves by SBU as follows:

In CPI we had about $20 million. CCI had about $90 million. CSI had about $85 million. Reinsurance assumed had about $15 million, bringing the total favorable development for Chubb to about $210 million for the quarter. This represents a favorable impact on the second quarter combined ratio of about 7.5 points overall.

For comparison, in the second quarter of 2008 we had about $235 million of favorable development for the company overall including about $25 million in CPI, $85 million in CCI, $110 million in CSI, and $15 million in reinsurance assumed.

During the second quarter our loss reserves increased by $366 million to $20.4 billion. Reserves in our Reinsurance Assumed business, which is now in run offs, declined by $48 million. Reserves in the insurance business increased by $414 million during the quarter.

The impact of currency fluctuation on loss reserves during the quarter resulted in an increase in reserves of about $300 million. The expense ratio for the second quarter was $30.2 compared to last years $29.8.

Finally, I want to give you an update on our capital management plan. As you recall we announced a new 20 million share repurchase program in December 2008. At the time we recognized our strong financial position, but decided that it would be prudent to proceed cautiously with the pace of our buy back given the prevailing volatile market environment. Accordingly, in our January guidance, we estimated that we would repurchase $250 million worth of our shares which equated to about 5 million shares at the time, but that we would continue to evaluate how to best utilize our excess capital as the year progresses.

In the second quarter we repurchased 2.3 million shares at an aggregate cost of $90 million and as of June 30, 2009 there were 15.7 million shares remaining under our current repurchase authorization. Given the recent improvements in the economic and financial environment, and our strong capital position, we now intend to complete the repurchase of all of these shares by the end of this year. The completion of the repurchase would account for approximately $0.04 per share of our revised 2009 operating income guidance, which John Finnegan will discuss in more detail.

Now I will turn it back to John.

John Finnegan

Thanks, Ricky. Chubb performed extremely well in the first six months. The highlights of our second quarter results were as follows: Operating income per share of $1.49 and an operating ROE of 15.3%. This is excellent performance as we continue to emerge from five years of a soft market.

The strong performance of our investment portfolio in terms of both net realized capital gains and growth of net unrealized capital appreciation. An increase of book value per share of 6% in the three months ended June 30 and 9% since year-end. This is a strong capital position enabling us to complete our share repurchase program by year-end while still leaving us sufficient capital to take advantage of any significant upturn in the insurance market, and a continued improvement in premium rates at CCI and CSI.

Based on our results for the first half and our outlook for the rest of the year we are increasing our guidance for operating income per share from a range of $4.80 to $5.20 for the full year to a range of $5.20 to $5.50. The updated components of this guidance are as follows:

We expect net written premiums for the insurance business to be down 5% to 6% for the full year, down only 2% to 3% excluding currency. With net written premiums down 7% for the first six months or 3% excluding currency our revised guidance assumes a decrease of 4% to 5% or 3% to 4% excluding currency for the second half of 2009. Looking back our January 2009 guidance assumed a 1% to 4% decline in net written premiums including a 3% or 4% negative impact from currency.

Based on actual catastrophe losses of 1.2 points in the first half we are revising our cat assumptions for the full year from the 3 to 4 points that we used in January to 3 points which implies about 5 points of cat losses in the second half. The expected higher level of cat losses in the second half reflects the fact that we are now entering the hurricane season.

For those who would like to make a higher or lower cat assumption the impact of each percentage point of calendar year catastrophe losses on operating income per share for the full year is approximately $0.21.

For our 2009 combined ratio we expect a range of 88:90 compared to the January 2009 guidance assumption of 90:92. The revised guidance is based on a combined ratio range of 89:91 for CPI, 91:93 for CCI and 85:87 for CSI.

We expect 2009 property and casualty investment income to decline 4% to 6%. This assumption is unchanged from our January guidance.

Finally our operating income per share guidance is based on an assumption of 354 million average diluted shares outstanding for the full year. Compared to the $358 million shares assumed at our earlier guidance. The new guidance assumes the completion of our currently authorized repurchase program by year-end.

Chubb has succeeded by managing a company for our shareholders and the way we achieve shareholder value is by underwriting prudently, by investing conservatively, by actively managing our capital and by providing superior products and services to our customers and producers that are unmatched in the marketplace. It is a simple formula, but the hard part of course is the execution. We are confident we have the team in place to execute now and well into the future.

On that note, as we announced in our press release, John Degnan has deferred his expected retirement date until the end of next year. As you know John plays a large role with many responsibilities. Since assuming the job of COO last year John has had direct responsibility for the operating activities of our SBU and field organizations while retaining oversight of the claims and public policy functions and several of the staff and activities. John is performing functions superbly and the board and I are very pleased that he has agreed to stay on another year. Fortunately we have a strong bench of insurance executives that Chubb will have the necessary skills and experience to assume John’s responsibilities at the end of next year. In the interim we will benefit from John’s management of our daily operations and the leadership role he plays in the industry on the legislative and the regulatory fronts.

With that we will open it to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jay Gelb with Barclays Capital.

Jay Gelb - Barclays Capital

On the directors and officers liability can you give us the accident year combined ratios for, I believe it was, D&O and E&O for 2007 through 2009?

John Finnegan

We would give you the professional for liability which I think is 2009 it was running the first half about the same as it did the first half of 2008 which is 102 and a little bit less than 2007. It is overall for the three years probably 100 or so on average.

Jay Gelb - Barclays Capital

Okay, you also mentioned something on the pricing front. Was that 2000 versus 2008?

John Finnegan

It was a comparison of 2008 versus 2002 earned premium 40% higher in public D&O and 40% higher in DFI.

Jay Gelb - Barclays Capital

Okay so it is earned premium and not pricing.

John Finnegan

No, it is earned rate. But, earned rate is really with the comparison of loss, would be the most relevant factor for the comparison of the loss ratio.

Jay Gelb - Barclays Capital

One of the questions I have with the loss ratio analysis is if [Aon’s] data is correct and D&O pricing rates are 50% lower in 2008 than they were in 2002 how do you feel comfortable that you have the right loss picks?

John Finnegan

I think what we are saying in terms of looking at loss picks you have to look at earned premium rather than written premium. Our written premium doesn’t suggest anywhere near that kind of decline in our business from 2002 to 2008. More significantly our earned premium shows a significant increase because if you remember there were huge increases between 2000 and 2002 and those premiums only earned in over time. There was a lag affect on that, plus it was a multi-year deal. So, really the impact lagged in terms of earned premiums so earned premiums was up significantly over that point in time.

Jay Gelb - Barclays Capital

Okay thanks and then John, thanks for outlining the D&O side. What do you think the risks are to not having adequate reserves, given everything that has happened in the credit crisis?

John Degnan

I guess I would have hoped that we would have proven over the last several years that we do reserve prudently. We haven’t hit you with many surprises. We are very confident based on our perspective of, and we have a lot of it, so we do have a broad perspective of these kinds of losses, that we got the reserves right in booking immature accident years. I don’t think we have a high risk of getting it wrong.

Operator

Your next question comes from Joshua Shanker with Citi.

Joshua Shanker - Citi

I was interested I listening to your commentary on pricing. It is something that I have been skeptical of. I guess it will be hard for me to come around on that one, but I am wondering if you can break out what is happening in terms of volume from clients who are perhaps disappearing from clients who are who are saying we would like to buy less and from rate. Is it possible to do some quantitative written down of what’s embedded in those improving rate numbers in terms of both policy and terms of actual price.

John Finnegan

I don’t know, we are talking about rate being up 2 in CCI and 4 in CFI. That is pure rate without exposure. In pure exposure as measured at contract renewals were down 3 in 1 in CCI and CSI, so that gives you an idea of what’s happening in renewals. In addition, there are a lot of lost opportunities in the business that don’t get measured in closure. Let’s take a simple example. Surety construction business is down. There is no reduction in contract renewals; there is just no new business out there. There are fewer million-dollar houses fewer new million-dollar houses. So, I think the exposure, the broad term of the impact of the economy on our business is probably somewhere between 2% and 5% negative, that would just be a guess. Against that we are getting some price, but I am not sure that answers your precise question.

Joshua Shanker - Citi

It is not precise; I am trying to learn more. In terms of terms and conditions, not speaking for the industry or speaking for yourself, are you seeing any changes going on at this point?

John Degnan

Yes we are not seeing much pressure in either CCI or CSI in terms and conditions. Where we see it a little bit in CCILB in things like flood exposure or cat. If we can’t get our price to exposure we walk away from the business, but frankly it’s not the broad deterioration in terms of conditions that have characterized the end of the last soft market.

John Finnegan

I think it makes sense in that today with the economy being what it is the customer is focused on prices. They are not spending a lot of time expanding terms and conditions what they want is lower book.

Joshua Shanker - Citi

I understand. You made the comment before that that surprised me, that one of your preemptive competitors in high net worth individual homeowners was successfully cutting price and taking business from you. Do you have any developments to discuss in terms of that?

John Degnan

I think what we said was that one company that plays largely in that business was cutting its renewal prices substantially in an effort to hold onto business, but was not taking business away from us by and large. Frankly, that latter statement continues to be true.

Joshua Shanker - Citi

Okay and do you have any thoughts on Chinese drywall?

John Degnan

Yes, we are feeling fairly good about it. We only have a couple of claims. We have coverage exclusions in personal lines that will probably insulate us from a large amount of it. While we see it as an emerging torte, at the moment based on what we can see we don’t believe we have a significant exposure to it.

Operator

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

Matthew Heimermann - J.P. Morgan

The work comp dropped off pretty significantly sequentially. I was just curious is that all exposure or are there any specific underwriting actions somewhere?

John Finnegan

I think it is largely exposure and there has been some mandated rate decreases in some states, plus exposure. Obviously what’s happening with employer payrolls. In the order of things there is a little bit of a lag effect in that business so it is hard to do a sequential assessment, but yes, I mean Workers Comp is not going to be growing at any company, I’m sure.

Matthew Heimermann - J.P. Morgan

How is the renewal retention ratio in the Homeowners business? Outside of some of the things you mentioned with respect to endorsements and floaters and things like that are you seeing any impact on renewal ratio because of cost sensitivity?

John Finnegan

I think our renewal rate in that business is only down a point or two from very high rates. Obviously new business is very hard to come by. I mean there is not much new business out there. Sure the customers are price resistant. It is tougher sledding out there than it was before, as you might expect. But our renewal rate is still up in the high 80s, down a couple of points maybe.

John Degnan

One of the things that is affecting our growth there is the inflation guard that we generally assess to a renewing policy. It is a formulaic amount that is affected by commodity pricing and labor costs. As they have finally begun to go down over the last year or so the inflation guard increases that would normally roll onto our books have gotten to be lower single digit percentage increases and that affects the premium.

Matthew Heimermann - J.P. Morgan

This is not directed at John, but with respect to John’s transition when should we expect to hear more about that process? Would it likely be internal or external and how much overlap would there be? I guess that would depend on whether it’s internal or external, but just any thoughts on timing and any other issues around that?

John Finnegan

The second half of next year would certainly be the good timing. I think as I said in my remarks we have a terrific bunch of insurance executives around here, so we have every reason to believe it will be internal.

Operator

Your next question comes from Vinay Misquith with Credit Suisse.

Vinay Misquith - Credit Suisse

On the D&O business how has the time taking for the settlement of Class Action losses changed? Just looking at the Schedule P it seems like it is taking a particularly long time for you to settle a claim. So what are the drivers behind that and what are the implications for the final losses on that business?

John Finnegan

I would say a couple of things. First, what you see in Schedule P and it doesn’t necessarily reflect settlements, but reserving for cases where we come up with an assessment. I mean I think that you have some big lawsuits against a myriad of defendants. They are going to take a long time in terms of how they play out if they are not settled. There are such dollar amounts at stake that they will be difficult to settle in the early stages. Most of them haven’t gone to motions to dismiss yet, so you will probably see them go there before you get settlements of any of the big ones I would think.

What you are seeing is that, I don’t think you should look at the reported as in Schedule P as in indicative of the ultimate loss ratios we have for these years. The reporting you see in Schedule P is relatively low and compares sort of favorably with years we had very low ultimate like 2004, 2005 and 2006, 20 points lower ultimate. Now we are significantly higher than that in our ultimate pick in terms of what we’re targeting as our combined ratio this year. The reason is independent of Schedule P we take into account a number of factors such as paid losses, such as the overall systematic risk and we come up with in the IV&R an assessment of what we think at this point in time our overall obligation might be.

So the 102 combined are 75 ultimate you see in that 75 to 80 ultimate you see and in 2008 is significantly higher than would be implied by the reported numbers in Schedule P.

John Degnan

I might add a little color to that, a couple of dynamics that are working. Certain categories of claims settle more quickly than others. For example some of the stock option back dating claims generally materialized in derivative actions rather than shareholder Class Actions and they tended to settle earlier.

The credit crisis claims are being evaluated in a climate where the laws changed substantially, as I pointed out. With heightened pleading standards more cases are getting dismissed. There is about a 50% dismissal rate of credit crisis securities Class Actions relative to 35% to 40% previously. When more cases get dismissed they don’t settle as quickly and it is harder to get your arms around what the ultimate liability will be, because that often gets assessed realistically from the first time after a dismissal motion. By and large we are not seeing it anecdotally. I am not seeing a significant change in timing in credit crisis claims versus general securities Class Action claims.

Vinay Misquith - Credit Suisse

How long do you think the payments would be from the accident year for you to get a sense that you have made a significant amount of (inaudible). Would it be three or four years from the date of (interposing).

John Finnegan

Statistics show that we make about half of the claimant payments in about four to five years. That has statistically been the pattern in this business.

Vinay Misquith - Credit Suisse

My second question is on pricing. You seem to be optimistic that pricing is moving in the right direction. Those are only about 2% against CCI. I am just curious as to what your loss cost translates. If it is in the mid-to-high single digits shouldn’t we see margins decline slightly going forward?

John Finnegan

I don’t think that our loss - I mean we have inflation around the world now of 1% on the last report. I think insurance inflation is higher than that. It ranges from all sorts of classes, medical classes like Workers Comp it is a little bit higher, and property is a little bit lower. But, certainly no one has high end single digit cost escalation trends, that would be very high. In an inflation environment of 0 mid-single digits would be a reasonably conservative approach I think. But, it is all over the lot depending on which class you are talking about.

To your point, we have seen some accident year deterioration. That is what you see in some of the CCI numbers today, given the rate declines over the last few years.

Operator

Your next question comes from Brian Meredith with UBS.

Brian Meredith - UBS

John, I was wondering if you could break down in your CCI, when you talk about the rate, maybe property versus casualty and kind of how rate is in each of those classes; packages, CMP, property, marine, and then casualty into comp.

John Degnan

I can’t break it down that finely for you. I can tell you that comp, for example, growth is 5% in the quarter. That is a unique line of business. Some of that is driven by reduced loss costs due to legislative reforms.

We are seeing positive rate in almost all the lines in CCI with the possible exception of a section of comp. It is modest, but it is pretty consistent across the board. It is more dramatic in certain classes of business like hospitals and where we have been driving rate for some period of time.

John Finnegan

REITs too, we certainly have gained an advantage with the financial deterioration of some competitors and we have talked about that we are doing well there in terms of market dislocation. So, that ends up to be somewhat property, but Workers Comp is the negative one and the rest are pretty good.

Brian Meredith - UBS

Okay and then on the Professional Liability business, how much of that 4% rate is driven by financial line of D&O going up?

John Degnan

We are seeing the greatest increases in financial institutions D&O and E&O, but we’re seeing solid increases as well in public D&O. Frankly, virtually every one of the professional liability classes had improved rate movement in the second quarter. Most prominently I guess public D&O rates show an improvement up about 3 points.

Brian Meredith - UBS

Looking at your retention ratio there, is something going on here where maybe you are pushing for rate and it’s not always being accepted? Is that why the retention rates are going down? So maybe your rate that you’re getting is going to be better than some of the competition?

John Finnegan

I think that is true, yes. I think it is a good trade off though. We need rate in this business. Some of these lines of business like financial institutions, you need rate or you shouldn’t be writing them, so we are happy with that trade off. We are going to monitor it though.

John Degnan

A lot of times we are moving up in the program when somebody who hasn’t traditionally played in the primary layer comes down with an irresponsible price, we’ll stay in the program, take our rate at the higher level and come back when they need us at our price.

Operator

Your next question comes from Jay Cohen with BAS-ML.

Jay Cohen - BAS-ML

The economic impact on your business, do you sense a difference with that impact on the US business versus the non-US business?

John Finnegan

 I think the developed countries overseas at about the same growth rates and under the same sort of pricing pressure as here. In fact they may even have a little less price. Now the sort of growth countries overseas, or course, they are growing faster. If you look at it in local currency overseas is still growing a little bit faster than the US. But I would say in the countries you’d think of the common wealth countries the pricing growth pressure is comparable.

Jay Cohen - BAS-ML

Secondly, I think in the past you have given us some indication of the trend in newly arising claims. I am wondering if you have any data on that?

John Degnan

Generally the new arising accounts are down significantly in order, where we are seeing a decline in frequency. They are down significantly in comp by about 12% points. The non-marine property area is a single positive area. We have seen a little bit of growth in new arise accounts in commercial general liability, down overall in specialty. So, year-to-date new arise account overall total ex-cat are down 2%. Total including cats are down 5%.

Jay Cohen - BAS-ML

Okay. The surety area, clearly that was an area of fairly significant concern given the economic environment. It doesn’t appear, just based on the results, that you have had any real issues in that line of business. Can you just talk maybe qualitatively of what you are seeing from a claims standpoint relative to the economy and surety claims?

John Finnegan

This isn’t an area where you would see a lot of claims consistently. So, we have had a great first half, but it is a lumpy area. John you might want to talk about the environment these days out there.

John Degnan

We are seeing a significant flow of submissions, but our customers are not hitting as often-on jobs, so they don’t translate into written premium until our customers win. Their position of competition they’re facing there frankly is playing out the way we thought. We are not looking at surety to grow a substantial amount this year. We want them to maintain their discipline, take advantage of the opportunities they do get on a financial security basis because of our ratings.

So, we are maintaining our discipline. We are prepared not to take a significant premium growth. We just don’t want to do anything foolish and that’s pretty much reflected in the roughly 38 point combined ratio we had in the second quarter. It was lumpy. It is a lumpy business though, as John said. Last year in the second quarter we had one significant loss which was a huge amount of money, but in the end we ran the combined ratio at the year-end at 70. This year we are looking to do better.

Operator

Your next question comes from Clifford Gallant with Keefe, Bruyette & Woods.

Clifford Gallant - Keefe, Bruyette & Woods

I wanted to develop Jay’s question a little bit more in terms of the US versus the international books. Are you seeing anything different in terms of client behavior? The flight to quality trends that you talked about, or the credit sensitivities, is there much difference? I don’t know if you can generalize that.

My second question is you have talked a lot about one major competitor cutting price per share and you are still holding a line. How about other parties, third parties, other competitors, are they reacting to rate cuts by that one?

John Degnan

Well let me say first to your first question, I think since the beginning the market dislocation impact of the first carrier to go would be affected by that has been less than Asia and in Europe than it has been in the United States. The companies are viewed differently there. Those operations aren’t as dramatically impacted, at least in the perception of the consumer, or the customer, as they were in the US. So while there were some opportunities there was never a significant flow there and we haven’t been projecting it that we would have much for the balance of the year either.

We are seeing some unusual market place behavior by other companies. There are a couple of otherwise respected companies that seem to be holding the line on renewal rates and pricing, but seem to be taking new business at surprisingly low levels. Some companies might do that on the strategy that the market turns next year, they’ll get that price back. That is not a marketing strategy we have ever thought played well.

We are also seeing some surprising behavior by a couple of carriers that generally do pretty stable players, but I am not going to get into specifics.

Operator

Your final question comes from Michael Grasher from Piper Jaffray.

Michael Grasher - Piper Jaffray

I have a follow up on the inflation question from earlier. What assumptions, or do your assumptions carry over in your guidance around foreign exchange and the impact on your guidance?

John Finnegan

All we do for foreign exchange is that we take the current rate and compare it to the year ago quarter to third and fourth quarter. We are not projecting anything more than just making the assessment based on current rate levels. So, what happens is that the third quarter you see still a negative comparison, but by the fourth quarter it’s pretty much flat, it’s even slightly positive, if the dollar continues at exactly the same level it was today or last week.

Operator

Gentlemen there are no further questions.

John Finnegan

Thank you. Thank you very much for joining us. Have a good night.

Operator

That concludes today’s conference. Thank you all for your participation.

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