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The Chubb Corporation (NYSE:CB)

Q4 2009 Earnings Call Transcript

January 28, 2010 5:00 pm ET

Executives

John Finnegan – Chairman, President and CEO

John Degnan – Vice Chairman and COO

Ricky Spiro – EVP and CFO

Analysts

Dan Johnson – Citadel Investment Group

Josh Shanker – Deutsche Bank

Jay Gelb – Barclays Capital

Vinay Misquith – Credit Suisse

Cliff Gallant – KBW Wealth Management

Brian Meredith – UBS

Jay Cohen – Bank of America/Merrill Lynch

Michael Nannizzi – Oppenheimer

Matthew Heimermann – J.P. Morgan

Ian Gutterman – Adage Capital

Mark Dwelle – RBC Capital Markets

Operator

Good day, everyone, and welcome to the Chubb Corporation's fourth quarter 2009 earnings conference call. Today's conference is being recorded.

Before we begin, Chubb has asked me to make the following statements. In order to help you understand Chubb's 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 take today, additional information regarding factors that could cause such differences to appear in Chubb's filings to the Securities and Exchange Commission.

In the prepared remarks and responses to questions during today's presentation of Chubb's fourth 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 fourth quarter of 2009, which are available on the Investors section of Chubb's Web site 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 February 26th, 2010. Those listening after January 28, 2010 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 conference over to Mr. Finnegan.

John Finnegan

Thank you very much. We had another excellent quarter capping off a terrific year. Despite a weak economy and negative premium growths throughout the industry, we produced outstanding results for 2009, the second best operating income per share in Chubb's history, an ROE of 15.4%, and book value per share growth of 23% for the year. Each of our SPUs produced a combined ratio below 90% for both the fourth quarter and the full year.

The drivers of our success have not changed. We have good underwriters. We have the best producers in the industry. We take care of our customers with unparalleled service. We invest conservatively. And we actively manage our capital.

For the fourth quarter, operating income per share was up 5% to $1.56. For all of 2009, operating income per share was up 10% to $6.14. The strength of our fourth quarter performance is further evidenced by the fact that unlike many other companies in the industry, our operating results do not include increases in the net value of our alternative investments.

For the fourth quarter, increases in the net value of alternative investments amounted to $159 million or $0.32 per share after tax. This increase is largely responsible for our net realized capital gains of $0.37 per share after tax bringing our fourth quarter reported net income to $2.03 per share, an increase of 80% over the quarter of 2008. On a net income basis, our return on equity in the fourth quarter of 2009 was 18%.

Net written premiums for the fourth quarter were down 4% or 5% excluding currency, driven largely by lower exposures that have resulted from the decline in economic activity. Recent investment and underwriting results produced a GAAP book value per share of $47.09 at 2009 year-end. That's a 4% increase since September 30th, 2009, and a 23% increase since year-end 2008.

Our capital position is excellent. And Ricky will talk about the progress we've made in our share buyback program. As you saw in our press release, we provided operating income per share guidance for 2010 of $5.15 to $5.55. I have more to say in guidance in my closing remarks.

And now, John Degnan will discuss our operating performance.

John Degnan

Thanks, John. I'm going to begin with a review of the individual business unit results for the fourth quarter.

Chubb Personal Insurance net written premiums were down 3%, and CPI produced a combined ratio of 80.7, slightly better than 2008's outstanding 80.9. CPI had negligible CAT in the fourth quarter, whereas in the fourth quarter of 2008, CPI had a 1.2% point benefit from CATs due to a downward revision of our estimates for losses from Hurricane Ike. On an ex-CAT basis, CPI's fourth quarter combined was 80.8 in 2009, contrasted with 82.1 in 2008, a great result.

Homeowners premiums were down 4% with a combined ratio of 75.8. Personal auto premiums increased 3% driven by growth outside the US, and the combined ratio is 94.2. In other personal lines, premiums were down 7%, and the combined ratio was 75.5. Reduced purchases of new homes, cars, yachts, jewelry, and fine art continue to adversely affect premium growth.

But it seems obvious to us, from our homeowners results particularly, that our masterpiece product in the superb claim service had backed it up, which were the subject of a very positive story in balance last week, continued to meet both our customers' needs and our shareholders' expectations.

For the full year, CPI turned in a combined ratio of 84.1, three points better than 2008. Excluding CAT, CPI's combined ratio was 83.2 in 2009 and 81.7 in 2008.

At Chubb Commercial Insurance, premiums were down 6% for the quarter. Premiums for multiple peril and property and marine were down only 3%, casualty was down about 5%. But worker's comp, the CCI line that is perhaps most impacted by the current adverse economic conditions, was down 18%.

Worker's comp renewal retention was comparable to prior quarters, and renewal rates increased slightly. The worker's comp renewal exposures were down significantly due to lower payrolls resulting in an overall premium change of about negative 7% on renewal. In addition, there was a similar negative on fourth quarter worker's comp growth from audit premium adjustments related to prior quarters as actual payrolls turned out to be lower than original estimates. The balance of the decline of worker's comp premiums is due to fewer new business opportunities.

CCI's combined ratio for the quarter was 89.9, compared to 88.8 in 2008. For the full year, CCI's combined ratio was 89.9, which was four points better than 2008. Excluding CAT, CCI's combined ratio was 88.7 in 2009 and 85.8 in 2008.

CCI's renewal retention rate in the US was 84% for the quarter with an average renewal rate increase of 2%, evidence of our success in retaining business at profitable rates. The ratio of new to loss business in the US was 0.9 to a 1.

At Chubb's Specialty Insurance, net written premiums were down 1% for the fourth quarter, and the combined ratio was 84.1, compared to 83.8 in the fourth quarter of 2008. For the full year, CSI's combined ratio was 84.1 in 2009 and 83.3 in 2008.

Professional liability premiums declined two points in the fourth quarter, and the combined ratio was 89.5, compared to 88.4 in the fourth quarter of 2008. In the US, fourth quarter renewal retention was 84%, average renewal rate was up one point, and the ratio to new to loss business was 0.7 to 1.

New business is hard to come by as some of our competitors appear to be willing to under-price new business with the expectation that they'll return to rate adequacy when a hardening market permits it. But as that's a game that can have a bad ending and it's a game we won't play.

Surety fourth quarter net written premiums were up 80%, and profitability was strong with a combined ratio of 40.5 for the quarter and 37.4 for the year.

We'd explained during our last several conference calls the adverse impact on premium growth, which results from the weakened global economic climate. So it was no surprise to us that Chubb's premiums for the year were down about 4% ex-currency. Exposures are down in all three lines of business. They run the gamut from lower luxury home construction and reduced purchases of valuable articles and personal items, to lower payrolls and fewer new plans and additions in commercial lines, to reduced M&A and IPO activity and professional liability. While we obviously have not yet seen all the year-end numbers for the industry, we believe that the economic environment has had a similar negative impact on the industry as a whole.

As we ended 2009, there were some signs that an economic recovery was underway. But as we said in October, it will be a while before economic divisions are sufficiently robust to generate premium growth which is lag in the economic recovery. Accordingly, we expect the industry to experience negative premium growth in 2010 for the fourth consecutive year. However, if economic conditions improve, we would expect the incremental or (inaudible) improvements in premium trends over the course of the year.

We obviously look for any signs of market firming. And based on what we have done over the past two years to centralize and make more efficient our processing, along with managing our superb distribution system, we are poised to take advantage of any opportunity. So don't worry about our missing the signs. That said, they're not here yet. And when they do emerge, they'll probably be more incremental than dramatic, but we're ready.

In the meantime, we'll continue to focus on good underwriting, solid bottom line results, and doing the things we need to do to be ready for more dramatic improvement down the line. Our ability to carefully navigate the shoals of the soft market while we're waiting for a return to more rational pricing in the industry should be evident in our ability to secure two points of average renewal rate increases in CCI, and three points in professional liability in 2009 in the midst of tough economic conditions and declining premiums.

Last July, I gave you a comprehensive overview of how we were assessing our exposure to credit crisis claims, which have emerged over the past three accident years, 2007, '08, and '09. In the six months since then, the observations relied upon to support our conclusion that we are prudently reserving those accident years for such claims remain accurate, and in some cases, even more convincing.

I described the exposure-based analysis we prefer to use to establish our reserve, in contrast to the methods which start with an industry exposure pick, and then extrapolate the individual carrier exposure by allocating the industry estimate among carriers based on market share. Our own analysis looks at the actual claims we have and the developments in the underlying litigation. So the longer we have to manage our claims, the higher level of confidence we have in our estimates. As a result, six months later, we have a more developed experiential base on which to predicate our accident year estimates. And as a result, even – have even more confidence in assessment that current reserves are adequate.

With respect to D&O securities transaction credit crisis claims, the last six months in Chubb's experience have not reduced significant additional D&O exposure. Both the Nera and the Cornerstone year-end reports confirmed Chubb's experience, noting a significant decline in 2009 of credit crisis related to securities transaction filings. As for the financial sector claims where the greatest activity has occurred, one leading commentator concluded that all of the major cases that were profitable have already been filed and the pool was in effect fished out.

With respect to E&O claims where there's been more activity relatively in credit crisis claims since early 2008, that continued in the second half of 2009. As I mentioned last year, a significant amount of this E&O claim activity involves investor class action claims that target the offering materials for credit derivative securities. They are typically brought against multiple defendants including the issuers, underwriters, and the rating agency that were involved in the offerings. We cover only some of these defendants. And of those we do cover, we had already received claims for most of them.

In our July call, I also discussed a number of mitigating factors affecting our potential E&O exposures in these claims, including the type of insurers we have in these claims, our limits and excess attachments profiles, significant defenses for liability, and mitigating coverage issues. Given that the continuing claims activity in the fourth quarter involves many of the same insurers and policies, which contain annual single aggregates of liability, these factors have not changed.

As with earlier types of E&O claim activity, we're watching the development of these claims closely and believe that we're prudently deserving for the exposures we see developing. We continue to believe that in the end, the exposure we do have will be relatively lower in E&O than in D&O. The bottom line is that we're even more confident today than we were six months ago that we are adequately reserved for the accident years in which the claims have been made.

Jumping back from the credit crisis claims activities for the moment, there have been varying reports over the past several weeks about the trend in 2009 of overall securities transactions, some of those reports suggesting that there has been a dramatic increase. For our purposes and we believe for those who are trying to assess insurance carriers exposure, the relevant statistics to look at is not the number of filings because that counts multiple defendants in a lawsuit including non-issue co-defendants such as law firms, and accounting firms, and investment banks as well as multiple lawsuits against one issuer, rather than simply the number of issuers sued. As a result, it tends to inflate or amplify losses because it doesn't clarify the actual limits exposed.

Therefore, a count of the number of unique publicly traded companies sued in securities transactions as appears in the Cornerstone report is the preferable tool for analyzing exposure. In CSI, we take care to count the number of public companies sued in securities transactions, which drives the severity to this class, as opposed to counting the number of lawsuits or the number of defendants in each lawsuit. Our approach to industry statistics suggests that the number of securities transactions against publicly traded companies was down dramatically in 2009, in fact to the lowest point in the last six years, and comparable Cornerstone calculation shows a similar result and has the 2009 number the second lowest in the last six years. That's good news for professional liability carriers.

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

Ricky Spiro

Thanks, John. We're also very pleased with our financial performance in the fourth quarter and for the full year. Looking first at our operating results, underwriting income continue to be strong, amounted to $436 million in the quarter. Property and casualty investment income after tax was flat during the quarter at $317 million, impacted by the low yield environment, partially offset by a modest favorable effect of currency fluctuations on our international investments.

Net income was higher than operating income in the quarter due to net realized investment gains before tax of $193 million or $0.37 per share after tax. In the fourth quarter of 2008, we had net realized investment losses before tax of $250 million or $0.45 per share after tax.

Let me elaborate for a moment on John's earlier comment on how we present the results of alternative investments. We include our share of the change in the net equity of our alternative investments in net realized investment gains and losses, which is not a component of operating income. In contrast, many of our competitors include the change in net equity from their alternative investments in investment income, and therefore in operating income. The distinction is important when comparing operating results among different P&C companies.

For example, in the fourth quarter of 2009, our net realized investment gains before tax included $169 million of gains from our alternative investment portfolio, including $90 million from a single private equity investment. In the fourth quarter of 2008, our net realized investment losses before tax included a $125 million of losses from our alternative investments.

On an after tax basis, we have net realized investment gains from alternative investments of $0.32 per share in the fourth quarter of 2009, compared to net realized investment losses of $0.23 per share in the fourth quarter of 2008. As a result, we had a $0.55 per share after tax improvement in the performance of our alternative investments in the fourth quarter of 2009, compared to the fourth quarter of 2008. This positive swing is not reflected in our increase in operating income in the fourth quarter of '09, compared to the year earlier quarter, but it is recognized in that income.

Unrealized depreciation before tax at December 31st, 2009 declined to $1.6 billion from $1.8 billion at the end of the third quarter. This decrease was largely attributable to the increase in Treasury rates during the fourth quarter. The total carrying value of our consolidated and investment portfolio was $42 billion as of December 31st, 2009, unchanged from the end of the third quarter. The composition of our portfolio also remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 4.1 years, and the average credit is AA, too.

We also continue to have excellent liquidity of the holding company. At December 31st, 2009, our holding company portfolio included $2.6 billion of investments, including $1 billion of short term investments. Book value per share under GAAP at December 31, '09 was $47.09, compared to $38.13 at year-end 2008, an increase of 23%. Adjusted book value per share, which we calculate with available for sales fixed maturities at amortized costs, was $44.37, compared to $38.38 at 2008 year-end.

As for reserves, we estimate that we had favorable development in the fourth quarter of 2009 on prior year reserves by SBU as follows, in CPI, we had about $35 million; CCI, we had about $40 million; CSI, had about a $125 million; and, reinsurance assumed had about $15 million; bringing the total favorable development for Chubb to about $215 million for the quarter. This represents a favorable impact on the fourth quarter combined ratio of about 7.5 points overall.

For comparison, in the fourth quarter of 2008, we had about $210 million of favorable development for the company overall, including about $40 million in CPI, $30 million in CCI, $115 million in CSI, and $25 million in reinsurance assumed. The favorable impact on the combined ratio in the fourth quarter of 2008 was about 7 points.

During the fourth quarter of 2009, our loss reserves increased by $26 million, including an increase of $74 million for the insurance business, and a decrease of $48 million for the reinsurance assumed business, which is in run off. The impact of currency fluctuation on loss reserves during the quarter resulted in an increase in reserves of about $70 million.

The expense ratio for the quarter is 30.1, compared to 30.4 in the fourth quarter of 2008.

Turning to capital management, we were very active with our share buyback program during the fourth quarter. We repurchased $9.8 million shares at an aggregate cost of $489 million. This completed the $20 million share repurchase program we announced in December 2008. Last month, we announced a new $25 million share repurchase program, and we began in December to buy back shares under the new authorization. Our intention is to complete this new repurchase program by the end of the year. The average cost of our repurchases in 2009 was $47.09 per share.

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

John Finnegan

Thanks, Ricky. You all know 2009 was another challenging year for the economy in general. In this environment, Chubb performed extremely well in both the fourth quarter and the full year. Here are the highlights.

For the fourth quarter, we had operating income per share of $1.66. For the full year, we had operating income per share of $6.14 and operating ROE of 15.4% even after five years of soft market conditions. These results were achieved through disciplined underwriting and a focus on bottom line profitability rather than premium growth.

We also enjoyed a substantial fourth quarter net realized capital gain bringing net income for the year to $2.2 billion, a 21% increase over 2008. Premium renewal rates of CCI and CSI continued to be positive in the fourth quarter as they have been all year. Our conservative investment portfolio continued to perform well and remains a major contributor to the strength and stability of our balance sheet.

Book value per share increased 4% in the three months ended December 31, and was up 23% for the full year. We continue to manage our capital for share repurchases and dividends, while still leaving us sufficient capital to maintain our ratings and take advantage of any significant upturn in insurance market conditions.

We have developed our 2010 guidance within the following framework, we are assuming that the industry will continue to experience a decline in net written premiums, that capital losses will revert to more historical average, and that interest rates in the US dollar will remain at 2009 year-end levels. On that basis, we expect operating income per share to be in the range of $5.15 to $5.55. This guidance is based on our expectation that net written premiums will be flat to down 2%, including about a 2% point positive impact of currency based on current exchange rates. We'll have a combined ratio of 90 to 92 for the year based on a combined ratio of 90 to 93 for CPI, 92 to 95 for CCI, and 84 to 87 for CSI. Property and casualty investment income will be flat. Finally, we will have $328 million average diluted shares outstanding for the year.

The guidance assumes 3% points of catastrophe losses in line with our historical average. This compares to the unusually benign 0.8 points of CATs we had in 2009. In terms of sensitivity, the impact of each percentage point of catastrophe loss in 2010 operating income per share is approximately $0.22.

At the mid-point of the guidance range, our projected operating income per share for 2010 is down $0.79 from our actual operating income in 2009. About $0.50 of this anticipated year-over-year decline relates to the higher assumed level of CATs in 2010 versus the unusually low level in 2009. The balance largely reflects the negative impact of the continued soft market on both the margins and lower earn premium, which more than offsets the positive effect of our stock buyback program.

In summary, Chubb posted terrific results in 2009 in a difficult industry environment. Going forward, we expect 2010 to continue to present major for the industry related to both the economy and the likelihood that CATs will increase this year to levels more aligned with historical experience. Accordingly, we expect earnings to decline in 2010, but to levels that will still be attractive by historical standards especially that – given that we're on the sixth year of a soft market. Moreover, we believe that excellent capital position, conservative investment portfolio, and strong credit ratings will allow us to leverage our demonstrated underwriting talent to generate solid returns in an uncertain economic environment, capital on market opportunities and rate increases as they materialize.

And with that, I'll open up the call the line to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll pause for one moment. We will take our first question from Dan Johnson with Citadel Investment Group.

Dan Johnson – Citadel Investment Group

Thank you very much. I'm still trying to digest the two numbers, so bear with me if we're making any mistakes here. But can we talk a little bit about the outlook for CSI please? I guess I have two questions. When looking on an accident year basis, I'm coming up with something a high 90% number for this year, 2009. And we're going with that GAAP number in the mid-80s. Can you help us walk from – walk us through the accident year starting point of '09 getting us to your GAAP reported estimates for 2010 please? And then I got a follow up on the fourth quarter.

John Finnegan

Why don't we start with '09. There're a lot of questions there. '09, I guess our accident year ex-CAT number for '09 was – in CSI was 97.9. So we reported for the year – we reported in CSI in 2009 total favorable development of $390 million.

Dan Johnson – Citadel Investment Group

Okay. Great. That's exactly what I was coming up with. And then starting with the accident year number of 97-something, getting a stack down to the mid-80s, can you walk us through the key variables that get us there?

John Finnegan

For the year, we had 13 points of – 14 points of favorable development.

Dan Johnson – Citadel Investment Group

No, I'm sorry. I meant for next year. So do we – effectively, do we – we're accounting on a similar level of prior period development or is there something we think is going to happen with the accident year numbers, mainly within liability? I'm assuming the loss ratio I'm sure is not going to go much further down than whatever the three points were this year.

John Finnegan

I think to start off with – our projected guidance in CSI for 2010 looks pretty much like our reported for 2009. It's up about 1.5 point, I think. We don't break out favorable development versus accident year. We develop guidance under a number of scenarios, with a number of ranges. Our guidance does comprehend any development that does occur, but it is not specifically identified that could come in a variety of ways. I would say that if the loss – if the favorable loss trends we've had over the last few years continue, we'll expect to see some favorable development again in professional liability in 2009.

Also, with respect to the 2010 accident year, we don't even establish yet (inaudible) your number until we get into the first quarter. But as John indicated, we believe that the credit crisis appears to be subsiding. I think that this is reinforced by the data indicating that security transaction litigation was down significantly in the last half of 2009. Of course, I certainly have a reason to believe that 2010 could be a better accident year than 2009. And it's just a projection at this point, but we’ll update our assessment as we get into the first quarter.

Dan Johnson – Citadel Investment Group

Then maybe the last question on the fourth quarter was the accident year number and ESI poked its head over a little bit of 103 based on my calculation, up a good maybe seven or eight points. Anything unique there or anything we want to not extrapolate into the next year?

John Finnegan

Definitely nothing to extrapolate, but I would say that we did have a couple of unusual – with had a conflict of – a couple of large unusual losses in the fourth quarter, which brought our combined ratios over 108 in the fourth quarter on an accident year basis. And they were basically at Fidelity and crime losses arising out of none made of Ponzi schemes, and in fact, one case in outright embezzlement.

Dan Johnson – Citadel Investment Group

Great. Thank you for answering the questions.

Operator

And moving on to Josh Shanker with Deutsche Bank.

Josh Shanker – Deutsche Bank

Good evening, everyone. Two questions, the first one involved the reinvestment rate that you are thinking about when you contemplate net investment income for 2010. We see a guidance going of – going flat, that seems to me to imply that you’re expecting a new money yields to continue to decline for some time. I just want to understand your thought process on how you forecast that?

Ricky Spiro

Sure. As you just mentioned, our projection is that investment income is going to be flat. Again, remember that we don't include any raw alternatives in that number. For the fourth quarter we earned an after tax yield on our TNC invested assets of about 3.34%. In 2010, we actually expect our after tax yields are going to be lower. As a result, lower investment yields on some of our maturing investments. So we actually have the re-investment rate going down in 2010.

Josh Shanker – Deutsche Bank

And in terms of the makeup of that portfolio, would you be – continue to shorten duration of – as about as lowering the yield?

Ricky Spiro

At this point, our intention is to continue with the investment strategy that we have today. So it’s possible that the ratio may drift down a little bit if we don't see investment opportunities. But it's certainly not a conscious decision to dramatically lower the duration.

Josh Shanker – Deutsche Bank

Okay. Thank you. And the second question involves the up-tick in personal auto combined. I’m wondering if you just have some thoughts in that.

John Finnegan

Remember that’s a very small line for us. It’s not a big line if the small auto books, results aren't stable from quarter-to-quarter. We had a few more accidents. But for the full year of 2009, a combined with 90.4, a pretty good result versus 87.6 in 2008. And we have more favorable development in the fourth quarter of 2008. So I mean there's been – I don't think there is anything significant there. That’s moved around every quarter. It doesn’t take much to move it around.

Josh Shanker – Deutsche Bank

Okay. Thank you.

Operator

And our next question comes from Jay Gelb with Barclays Capital.

Jay Gelb – Barclays Capital

Thanks, and good afternoon. Could you give us a sense on trends in new business pricing in CCI?

John Degnan

Our new business is highly competitive across the three SPUs and CCI. If it’s an account that’s out for new business, weak price to exposures as Jay. So we generally will get a little price on a new – a little less rate on a new account than we will on a renewal account. We’re seeing some fairly aggressive pricings still in the market. It’s episodic. It varies by geography. It varies by carrier. But it’s not unusual for a new piece of business to be seeing a quote that’s as high as 25% to 30% lower than the expiring. Not from us generally, but from our competitors. So pricing is still fairly aggressive and the marketplace is very competitive in new business for CCI.

That said, we’re seeing about a 5% up-tick in submissions. We write about 15% to 20% of submissions we normally get. So we’re seeing a nice flow of new business, but because we priced to exposure and we’re selective about how we do it. And because generally, on a historical basis, we only write about 20% of the new submissions we see. We’re benefiting from it, but modestly.

John Finnegan

Jay, you should note that given our new to loss business, our percentage of our total business, which is new business in CCI, has dropped significantly over the last few years because of that competitive situation. We tried to retain our pricing discipline. It’s very difficult to win new business with such a discipline. You get some, but we – our new to loss is 0.9 to 1 this quarter. The percentage of our total business probably dropped with the low teens from maybe high teens, 20% only a few years back.

Jay Gelb – Barclays Capital

Right. The separate issue – the prim to surplus is now down to 0.76. It's the lowest it's been in at least a couple of years. I’m wondering why you might not choose to buy back stock faster than the current pace you've outlined.

John Finnegan

Jay, I guess to answer that question, obviously as active capital management is one of our core operating principals. Since the end of ’05, we’ve repurchased $6 billion of our common stock. In deciding how much stock to buy back, we’ve taken into account a number of factors, including the size of our excess capital position, which we believe is substantial, other investment opportunities, the rating agencies, our stock price, the market environment, the divided paying capacity of our subs, and the needs of our holding company. And we believe that our current $25 million share repurchase program appropriately down to these considerations and reflects our continued commitment to returning capital to our shareholders. So at this point, we don't see – we have no expectation to change the size of our buyback program

Jay Gelb – Barclays Capital

Thanks for the answer.

Operator

Moving on to Vinay Misquith with Credit Suisse.

Vinay Misquith – Credit Suisse

Hi, good evening. On the loss cost trends for the nonprofessional liability business, could you give us a sense for that and how they're trending?

John Degnan

Yes. We’re generally seeing a decrease in frequency, although that’s only one of the many factors that we use in assessing how loss costs are developing. Their debt new rise are down about 2% overall. They're up in some classes of business and down and others. We’re seeing only a very modest increase in loss costs themselves. It varies by line of business. And we generally assume some place between the 3% and 5% inflation pressure. That's offset by other things that we take into consideration, like inflation adjusted pricing for some lines of business where we price according to anticipated sales or the amount of payroll.

So frequency and severity combined are generally benign. We haven't seen any dramatic change in the trends that would cause us to react dramatically. And there are two packets of that – several that we look upon to judge how the market is –how these costs are going to play out over the future.

Vinay Misquith – Credit Suisse

Okay. That’s great. The follow up for that would be, it seems that you are getting a small amount of rate increase, at least you actually did get a small amount, 1% to 2% in the fourth quarter. Just curious, since the frequency trends are very favorable and the profitability is very good, are you surprised that the competition is not more than it is right now?

John Degnan

The competition is as strong as we would like to see it. I’m not surprised that it isn’t any stronger. You got to remember, our book is more niche focused. We’re less of a commodity player than some of our competitors. So as you said correctly, we got a point rate in CSI in the fourth quarter, and two points in CCI. Overall for the year ,we have three points in CSI and two points for CCI. We're able to do that because of the way we position ourselves in selling our products. We’re niche providers on a value-added proposition basis. We sell our claim service and our support service. So we’re able to get, on a relative basis to our competitors, a little more rate out of it. That’s not a commentary on the level of competition in the market lately. It’s very significant.

John Finnegan

Place in perspective, the industry ran one-on-one this year with a very benign CAT environment. So they start off with – at a normal CAT environment, 103 to 104 next year. The industry isn’t getting one and two point rate increase. If the industry is still getting negative rates, cost is still – increase is still positive. So you want to speculate that you’re going to get a 105 to 110 combined ratio in 2010 for the industry and moving up until rates turn around. So I don't think that there’s a lot of room for sensibly cutting rates in this industry

Vinay Misquith – Credit Suisse

Okay. That’s it. Thanks for your answers.

Operator

And Cliff Gallant with KBW Wealth Management has our next question.

Cliff Gallant – KBW Wealth Management

Good evening. In the answer to Jay’s question about excess capital, I didn’t hear acquisitions among that list of uses. I'm curious with – I presume it'd still be a pretty significant excess capital position and a lot of T&T companies now trading at or below book value. Why aren’t acquisitions on that list of uses?

John Finnegan

We’re one of them, unfortunately. We’re really at book value ourselves or a little bit over. Acquisitions are obviously always (inaudible) and the past. I suggested it’s not a priority of Chubb. I don't think the history of acquisition from this industry has been a successful one. And I don't – never say never, but I don't think acquisitions are really one of our major priorities.

Cliff Gallant – KBW Wealth Management

Okay.

Operator

Brian Meredith of UBS is next.

Brian Meredith – UBS

Yes. Thanks. Good evening, everybody. Two quick questions, the first one, John, can you talk a little bit about your expectations on what pricing is going to look like going to Tier 4 for the professional liability business particularly since it seems like losses have turned out much better than expected? And you've seen some reports from some of the brokers saying that they expect competition to increase in that line of business, particularly for some side A coverage.

John Degnan

Well, we’re still expecting to pursue a rate where it's appropriate in those kinds of coverages. We’ve seen though – to be honest, Brian, in financial institutions, we’re now in the third year of getting significant double digit rating pieces. So it might abate somewhat with respect to financial institutions next year. But I don't think that the loss scenario, especially for many of our competitors, is sufficiently played out at this point that there’ll be reduced pressure on the need to get additional rate through to 2010. It may not be dramatic, but I think people will be pushing for it and we will as well.

In selling our products and where we're willing to play and what our specialized knowledge in value added is – our outlook is that we’ll get a some rate through to 2010, hopefully, more towards the end of the year than in the beginning.

Brian Meredith – UBS

Okay. Great. And then, the next question on the CCI business, I'm just curious, if you look back to’98, ’99, your retention rates on that business were low 70s where you’re low 80s today. Do you think we need to get back to those types of retention rates before we’re getting material movement in pricing?

John Degnan

In the late ‘90s and early 2000s, we were running well in excess of 100 in combined ratio in CCI. We had a major problem there. We said, when we announced it, there are rate initiatives in ’99 that we were prepared to lose $300 million to $400 million worth of premium in order to get rates up and get pricing right. So we were prepared in inflecting that to let the retentions drift down into the mid even to the low 70s in some quarters.

But historically over the last five years, CCI has run at about an 84 retention. And over the last 10 years, I think 181. So we’re pretty happy with the 84 we’re running at now. We think that’s probably where we ought to be. It’s a balance. We’re not going to push rate so much that we're non-renewing good business that’s performing well. On the other hand, so we are very conscious of our retention rate. There’s no perceived need on our part to let it go down as far as you’re suggesting.

Brian Meredith – UBS

Great. Thank you.

Operator

And moving on to Jay Cohen with Bank of America/Merrill Lynch

Jay Cohen – Bank of America/Merrill Lynch

Yes. Thank you. Two questions, first, on the statutory surplus. It looks like your surplus went up about $850 million in the quarter, but your net income for the whole company was only $700 million. I’m wondering where the rest come from. Was there some accounting changes?

Ricky Spiro

Yes. There was one accounting change related to the NAIC treatment of deferred tax assets under statutory accounting that resulted in an increase of north of $200 million to our surplus. So that’s probably a big piece of that. There were a couple of other adjustments in and out that had an impact as well, but that was a major one.

Jay Cohen – Bank of America/Merrill Lynch

Okay. Thank you, Ricky. And I guess the next question, a follow-up on the share repurchase, looking back at 2007 and your – it went back about 40 million shares that year at higher valuation. It's quite higher valuation than you’re trading now. Your premium to surplus ratio then was 1 to 1. Now it’s 0.76 to 1. I don't understand why you wouldn't to be – should refer to that kind of pace given the dramatic amount of excess capital you have to purchase then and a lower valuation? What’s changed since 2007?

John Finnegan

Well I think there’s been a far more, far greater uncertainty in the industry and the economy to 2007 for one. I mean there are not too many companies buying back stock at this point in time, of course. Secondly, we don't think, premium to surplus, we did have a big run up in surplus at ESPRN, which reduces that ratio a little bit perhaps more than expected. But if premium to the surplus and at lagging – in a declining economic environment tends to overstate to some degree, the excess capital is going to impact in reserves and premiums. We delayed for a little while early this year doing the buy-back. We then accelerated to finish one buy-back program and we’ve announced another, which is kind of in line with our past programs. we continue to revisit it. There’s a lot of factors that go into it. Maybe you get it right, maybe you don't but we will continue to revisit. If what we think we’re – we feel that where we are refer now.

Jay Cohen – Bank of America/Merrill Lynch

It seems that the phase you’re talking about you’re still going to be at the end of the year at about the same – I know it’s not the best measure to use, but it is a pretty simplistic one I know. Same premiums to surplus ratio you’re at now. You’re not going to really use that much excess capital till it look like?

John Finnegan

Well, yes hopefully. But I would think the industry – what, if you look at an average in the industry when it comes out this year, it was like the industry premium to surplus will be 0.8, 0.85. I mean, we’re not going to be particularly low on premium to surplus.

Jay Cohen – Bank of America/Merrill Lynch

All right. Thank you.

Operator

And moving on to Michael Menessy with Oppenheimer

Michael Nannizzi – Oppenheimer

Thank you. Just a question in CSI. Can you talk about what years generated most of that development and maybe discuss a little bit about development in ENO and TNO separately?

John Degnan

Sure. In CSI – is that what you asked that?

Michael Nannizzi – Oppenheimer

Yes.

John Degnan

And the vast majority of the stable development in the quarter was in professional liability. It was driven principally by the accident in years 2004 to 2006. And there was also some favorable development in our surety book as well.

Michael Nannizzi – Oppenheimer

Okay. And if we look back at the developed loss ratios for maybe the last couple of years ’07. ’08, can you talk about where those are today?

John Finnegan

I just say that in the fourth quarter even if – I don't have the history here, but in the fourth quarter, probably an offset, I think are – development was unfavorable in 2008. So we got a 1.5 and it was favorable in 2007 by more than 1.5.

Michael Nannizzi – Oppenheimer

Okay. And then if I could one follow up on that share repurchase – you mentioned the economy, if top line is sensitive to the economy. So if the economy contracts and demand for insurance receipts, wouldn't that arrive more opportunity to potentially buy back stocks and so it’ll need less capital than you anticipate today?

John Finnegan

Yes. Our projection is it that the premium growth will recede to get more negative than it is today. We’re suggesting at 2010 the first half will look a little bit like 2009 and hopefully will pick up towards the second half, given it a little bit that year in 2009. I would say that the premiums continue with the current level. We’ll obviously have to reassess our capital position on our stock buy-back program for sure.

Michael Nannizzi – Oppenheimer

Okay. Thank you very much.

Operator

And Matthew Heimermann with JP Morgan is next.

Matthew Heimermann – J.P. Morgan

Hi. Good evening. A numbers question here just – do you have the estimated liquidity at the holding company as of yearend.

John Finnegan

Yes. Total invested assets for holding company is $2.5 billion, of which a billion is in short term investments.

Matthew Heimermann – J.P. Morgan

Okay. And what would you normally say your – the kind of required amount of liquidity is at the hold go?

John Finnegan

Yes. We tried to maintain at least $1 billion at the holding company, which is the level that the rating agencies consider as the appropriate as well.

Matthew Heimermann – J.P. Morgan

Okay. So most of the buy backs are effectively will be funded by the statutory – by divided of statutory income for ’09, not anything necessarily incremental from the old go? So is that a fair way to think about it?

John Finnegan

Well, I think a fair way to think about it will be that the buyback will be done out of the holding company with our excess cash position. Some of which will be replaced by dividend from the operating companies or in the course of the year.

Matthew Heimermann – J.P. Morgan

I’m just saying, I guess, there isn’t any reason to believe you want to take your full divided this year though?

John Finnegan

No.

Matthew Heimermann – J.P. Morgan

Okay. The last other last –other question I had just had more to do with other personal lines – product line and TPI. And just, you’ve seen some pretty market improvement margins in that product over the last four or five quarters in particular. I guess, are there any specific trends that are driving that that you could share with us?

John Finnegan

Yes. I guess two, I mean, one, is we have a paying some rate increases, which is always positive. And second, we got some modest favorable development in that line. So the trends in that line had been very good. They were bad for a long time. They’ve been very good lately.

Matthew Heimermann – J.P. Morgan

Okay. Perfect. All right. Thank you.

Operator

And Ian Guttermann with Adage Capital has the next question.

Ian Gutterman – Adage Capital

Hi guys. I have some professional library questions. The first is – the difference in your back class actions having picked and strength to the client. I’ve seen that data as well. But the other data I’ve seen, I guess, on the other side is that other classes like (inaudible) claims, judiciary things like that or – are near record high. So can you talk about what you’re seeing in a non-class action side of – do ?

John Finnegan

Yes. We’re actually seeing a – something of a decline in overall securities class action cases as well in Chubb’s book, which is not inconsistent with what we’re seeing in the credit prices claims. There was a theory originally that the credit crisis claims were being brought in sufficient numbers with the pent up demand by the plaintiffs’ bard to bring additional cases. That’s not being materialized in the flow of some various class action cases that we’re seeing.

Ian Gutterman – Adage Capital

I guess, I’d asked a little bit tip in there . So my understanding is that the plaintiff’s bard is now not filing in this cause actions of filing them to other methods. Big claims or judiciary or fraud, other types of filings?

John Finnegan

Yes. There is an increase in the tenancy to use either state courts or to try to bring claims under either state courses of action or non-security class action cases. They generally, we don't think will drive the same severities as security class actions themselves have driven. We’re not noticing a significant up-tick in activity in those kinds of claims in our book although, it is a phenomenon that people are commenting about.

Ian Gutterman – Adage Capital

Okay. That’s (inaudible) –

John Degnan

This fiduciary for example ended was up 2% for the quarter and down 5% for the year. So new rise ups . I mean, it’s jumped back and forth but it’s hard to tell.

Ian Gutterman – Adage Capital

Okay. I just want to make sure that you guys warn this as ethics first to some others to that trend. My other one is a defense cost. I’m hearing a lot of noise by defense cost stirring external problem. First layer is being completely born on defense, defense reaching into the lower access layers. What chance are you guys seeing in defense cost in your book?

John Finnegan

It’s pretty much more the same. I mean, there is an inflationary increase in defense cost that occurs annually. We take some fairly aggressive steps to manage those cost off with respect to tunnel counsel where we appoint the insured for the defense – we appoint the defense counsel for our insured, because that’s the duty to defend under the policy. And also in managing our lawyers that are appointed in the CSI defense where the insured has the right to pick their counsel.

So we’re seeing some modest inflationary pressure on defense cost, but nothing unusual over the last several years. And frankly, we were managing more effectively going forward the half of the last (inaudible).

Ian Gutterman – Adage Capital

Okay. And on the credit crisis claim as well, I mean, I guess I’ve heard a couple of brokers kind of tell me who the correct credit crisis claim because it’s pretty the same; however as the primary has to full on a loss even if they know once it gets passed motion to dismiss, we’re going to have a full on the loss just for defense cost no matter what the verdict is.

John Finnegan

You know that’s a generalization that I can understand people saying. I think you need to know more about the nature of the claim. If it is securities class action, credit crisis claim, the defense cost will be significant and we’ve always said that being the primary carrier exposes you much more heavily to defense cost. As , we reconstituted our book over the last several years and are playing while we – by no means, we’re still a primary carrier. We’re playing much more frequently at a higher attachment level on the net cost basis. And we did that precisely to reduce our exposure to the defense cost.

Ian Gutterman – Adage Capital

Okay. I guess that’s what I was wondering. And now I’m hearing talk about Clipper defense more often and to the first access and to the extent that – I don't know how well a job you guys have done or you think you’re kind of first have done. That the first excess is really priced for the risk of defense cost. Or could that be a surprise to the industry?

John Degnan

When this surprise does I will speak to the (inaudible).

Ian Gutterman – Adage Capital

Okay. And after that, I guess this is my last one is – side A, and then I – this give me a lot of fact over the last years about – since the last psycho fact to move to side A being more conservative and not being sure to good and the kid are under (inaudible) quality. And again, it almost sounds like that I’m discerning the back part a little bit maybe that more of plain to just try and go for the – to rev these cases. And that side A (inaudible) to be more than just a typical bankruptcy cases and we’re getting more into side A than usual. Again, are you seeing some surprise there, or you hearing cases where work industry dumped an issue?

John Finnegan

Yes. Just for the sake of every one listening, side A gets triggered when the entity can't or won’t indemnify the director and officer who are the – usually the defense costs involved. We did see a significant up-tick in side A being implicated when derivative actions were brought heavily in connection with stock option back-gating where a lot of those claims came in not as securities class actions but as derivatives or as both, but wound up settling fairly early as derivative cases. And side A took a hit there overall. We’ve not seen the same thing developing with respect to credit crisis class actions. There are much more heavily oriented toward the traditional securities class action liability than derivative. And they’re heavily oriented toward E&O as well (inaudible).

Ian Gutterman – Adage Capital

All right. Great. Very thorough I got answers. Thank you, guys.

Operator

And now we’ll move on to a follow up questions from Jay Gelb with Barclays Capital.

Jay Gelb – Barclays Capital

Ricky, I know this will probably by in the 10-K. What would the impact be on book value for 1% or 100-bit parallel shift in interest rates?

Ricky Spiro

Sure. As I mentioned, the duration of our bond portfolio is a little north of four years caught somewhere between four, four-and-a-half years. The total amount of our bond portfolio is in the $34 billion, $35 billion range, so 100 basis point move would be equal to around $1.5 billion on a pre-tax basis. I would caution you though that more than half of our bond portfolio is in municipal securities. And you need 10 to move differently than Treasury at a – not on a one-to-one basis. So I will think that it will be lower than that amount, somewhere in the $1.3 billion, $1.4 billion range pre-tax.

Bear in mind though, that’s an instantaneous shift all at the same time. And there would be some other mitigating factors should the interest rates start to move, including higher reinvestment rates and other things. But that the impact is what I just said.

Jay Gelb – Barclays Capital

Right, tighter spread as well probably.

John Finnegan

Correct. And an improving economy, which could impact other parts of the business as well.

Jay Gelb – Barclays Capital

That’s a helpful point of reference. Thanks.

Operator

And our final question today comes from Mark Dwelle with RBC Capital Markets.

Mark Dwelle – RBC Capital Markets

Yes. Good evening. One small question. I just wanted to go down a little bit into the guidance related to the premium growth. You start by assuming a couple of points of positive from currency. And you also add that you had – expect the couple of point of positive rate in both PL and CCI. When I weigh those things together with an economy that is likely to be at least modestly growing, I guess the only conclusion I reached is that you must be assuming a fairly significant amount of new to loss businesses. You may be a 0.8 or 0.7 new to loss business ratio in order to square all of those factors and come out to that level of guidance.

John Finnegan

I think that a – no, I don’t think that at all. But I can see where you can get that, went up the big fact to your – you're putting as exposure of course and the lower insurable assets due to the economy. First, we didn’t say – I don't know, we don't have any – that explicit rate forecast in the premium growth. We're thinking flat to a couple of points. But I mean, I don't – we’d like to get a couple of points. We’ll see.

I think in this past year we saw a rate of a couple of points. We also saw our ex-currency – currency adjusted growth of negative 4% for the year and 5% for the quarter. What we’re suggesting for the upcoming year would be ex-net adjusted for currency growth of negative 2% to 4%, which shall – that assumes probably the first half of 2010, a little bit like the – all of 2009. And at the second half improves somewhat so that we end the year a little bit better off than 2009, and more importantly, hopefully, on an up swing.

Mark Dwelle – RBC Capital Markets

Okay. That's helpful. Thank you.

Operator

And there are no further questions at this time, gentlemen. I'll turn the conference back to you for closing remarks.

John Finnegan

Thank you very much. Have a good evening.

Operator

This does conclude our conference call. We'd like to thank you for your participation.

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Source: The Chubb Corporation Q4 2009 Earnings Call Transcript
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