The Chubb Corporation Q1 2010 Earnings Call Transcript

Apr.23.10 | About: The Chubb (CB)

The Chubb Corporation (NYSE:CB)

Q1 2010 Earnings Call

April 22, 2010 5:00 pm ET

Executives

John D. Finnegan – Chairman of the Board, President & 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

Clifford Gallant – Keefe, Bruyette & Woods

Joshua Shanker – Deutsche Bank Securities

Paul Newsome – Sandler O’Neill & Partners LP

Michael Nannizzi – Oppenheimer & Co.

Vinay Misquith – Credit Suisse

Matthew Heimermann – JP Morgan

Michael Grasher – Pipper Jaffray

Ian Gutterman – Adage Capital

Mark Dwelle – RBC Capital Markets

Keith Walsh – Citi

Operator

Welcome to The Chubb Corporation first quarter 2010 earnings conference call. Today’s call is being recorded. Before we begin Chubb has asked me to make the following statements. In order to help you understand Chubb, its industry and its results, members of Chubb’s management team will include in today’s presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

It is possible that actual results might differ from estimates and forecasts that Chubb’s management team might make today. Additional information regarding factors that could cause such differences appears in Chubb’s filings with the Securities & Exchange Commission. In the prepared remarks and responses to questions during today’s presentation of Chubb’s first quarter 2010 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 in the financial supplement for the first quarter 2010 which are available on the investor’s section of Chubb’s website at www.Chubb.com.

Please also note that no portion of this conference call may be reproduced or rebroadcast in any form without the prior written consent of Chubb. Replays of this webcast will be available through May 21, 2010. Those listening after April 22, 2010 should please note that the information and forecast provided in this recording will not necessarily be updated and it is possible that the information will no longer be current.

I will now turn the call over to Mr. Finnegan.

John D. Finnegan

As we noted in today’s press release, the big story for the property and casualty insurance industry in the first quarter was the extraordinary level of natural catastrophes worldwide. Although these catastrophes had a negative impact of $0.67 per share on Chubb’s first quarter results, we still produced operating income of $1.14 per share for the quarter, an excellent result. This reflected outstanding underwriting results with a combined ratio excluding catastrophes of 81.3%, nearly six percentage points better than a year ago. This was our best ex cat combined ratio since 2007 and it was driven by strong contribution from each of our business units.

Our investment portfolio also continued to perform well with net realized investment gains of $127 million pre-tax or $0.25 per share after tax. That brought our first quarter net income per share to $1.39. In addition, our portfolio’s unrealized appreciation before tax increased by about $170 million from year end 2009. These investments and underwriting results produced a GAAP book value per share of $48.17 at March 31, 2010. That’s a 2% increase since yearend 2009 and a 23% increase since March 31, 2009.

Our capital position is excellent. During the quarter we raised our common stock dividend for the 28th consecutive year and also have been actively buying back our stock. Now, John Degnan will discuss our operating performance.

John J. Degnan

Net written premiums for the first quarter increased 1%. This included a 4% positive impact of currency translation with a generally similar impact in each business unit. For Chubb personal insurance, net written premiums were up 4% and CPI produced a combined ratio of 104.4 compared to 90 last year. However, CPI had 22.8 points of cat in the first quarter this year compared to only 1.5 points in the first quarter of 2009.

On an ex cat basis, CPI’s first quarter combined ratio was 81.6 in 2010, nearly seven points better than a year ago when it was 88.5. Homeowner’s premiums were up a point with a combined ratio of 113.3 including 35.1 points of cats. On an ex cat basis the combined ratio for homeowners in the first quarter was 78.2 in 2010, a substantial improvement over a year ago when it was 85.8. Personal auto premiums increased 11% driven by growth outside the US. The combined ratio was 91.5. In other personal lines, premiums were up 7% and the combined ratio was 87.5.

At Chubb commercial insurance, premiums for the quarter were down 1%. Premiums for multiple peril and for workers’ comp were down 6% but casualty premiums increased 1% and property and marine was up 2%. CCI’s combined ratio for the quarter was 93.8 compared to 90.2 a year earlier. Excluding the 11.4 point impact of cats, CCI’s first quarter combined ratio this year was 82.4, nearly seven points better than last year’s 89.2. CCI’s renewal retention rate in the US was 84% for the quarter with an average renewal rate increase of 1%, further evidence of our success in retaining business at profitable rates at a competitive marketplace. The ratio of new to lost business in the US was one-to-one.

At Chubb specialty insurance, net written premiums were up 3% for the first quarter and the combined ratio was 80.9, more than four points better than the 85.1 we recorded in the first quarter of 2009. Professional liability premiums grew 3% in the first quarter and the combined ratio was 86.2 compared to 91.3 in the first quarter of 2009. In the US, first quarter retention and renewal was 85% and average renewal rates were down 1%. The ratio of new to lost business was one-to-one.

For surety, first quarter net written premiums were down 1% but profitability was strong with a combined ratio of 39.8 for the quarter. Before I comment on what we are seeing in the marketplace, let me give you some context around our first quarter cat numbers. First, the $344 million pre-tax impact of catastrophes that we reported today is higher than the $290 million that we estimated in our press release on March 29 largely because of the impact of a late March storm on the east coast of the US that produced additional losses that were not included in the March 29 announcement.

Second, although our cat losses in the quarter add up to a large number, these losses are consistent with our overall presence in the effected markets. For example, this year’s Mid Atlantic and northeast storms hit many of Chubb’s high concentration territories. In contrast, our cat losses in last year’s first quarter were substantially lower than many other companies because the majority of US cat activity then was in the Midwest and the South where Chubb has a relatively modest market share.

Each time we’re confronted at Chubb with a widespread cat I’m reminded of one consistent dynamic, for us a catastrophe is a business event, one which will affect our financial results and will challenge our value added business proposition of providing world class service. For our insureds, particularly homeowners, it is a personal event involving disruption of their lives as well as property damage.

As such, it presents a unique opportunity for us to demonstrate value in the timeliness, empathy and fairness with which we respond. Our most loyal customers tend to be the ones that have had a claim. I am pleased to say that our survey results of customers impacted by the largest of the March storms in the US indicated a satisfied or very satisfied rating of more than 95%. That means to me our folks are responding yet again in a way that has distinguished this company for 128 years.

As John said earlier, we are very pleased with our outstanding underwriting results. They were not easy to come by. The marketplace remained quite competitive. Average commercial renewal rates in the US were up 1% in CCI but down 1% in CSI so overall basically flat. It appears that for now rates have plataued from the slightly higher increases we were seeing last year. We are still not seeing the broad based weakening of terms and conditions which characterize the soft markets of the late 90s with two exceptions among our competitors.

In commercial lines we see some insurers dramatically increasing flooding, quake sub limits in certain lines without any commensurate premium increase and in specialty lines some competitors are substantially lowering deductibles on non-financial institution public D&O without any corresponding premium increase. Neither of these paths is sustainable long term.

Turning now to new commercial business, we were successful in writing well priced new accounts in our targeted niches. Furthermore, our renewal exposures and audit premiums were less negative in the first quarter of this year than in the fourth quarter of 2009 suggesting that the negative impacts of reduced payrolls and other recession related phenomena are beginning to trail off. Other encouraging signs include stable to slightly higher renewal retention, submission count and written to submitted ratios.

We have commented previously about the aggressive pricing we’ve observed from some of our competitors in their question for new business. When those accounts that we lost as a result of this behavior came up for renewal in the first quarter this year, we won some of that business back in the face of dramatic rate increase demands, often at the last minute in the renewal process by those very same competitors.

Over the long haul, what we have always supposed to be the case is bearing out. Our customers, both producers and insurers place a high value on consistency and predictability, two qualities we have always reflected and in the end they prevail. While we are encouraged by the modest improvement in premium growth this quarter compared to the fourth quarter last year we are not yet prepared to say that it reflects a trend. In fact, given the ongoing economic uncertainty and the historically erratic property and casualty market, we believe any sustained improvement will likely emerge in a choppy fashion.

In January, I gave you a pretty detailed update on our credit crisis claim experience. I’m happy to say that the positive trends we saw then and the frequency of securities class action suits and in some of the judicial trends of dismissals have continued and we remain confident that we are appropriately reserved for credit crisis claims in the accident years in which the claims have been made. I am particularly pleased about developments in two areas I want to mention specifically, the frequency of non-credit crisis security class action claims and the recent rulings in credit crisis derivative actions.

For the second straight quarter, even as the number of new credit crisis security class actions virtually disappeared we did not see a corresponding increase in the number of non-credit crisis class actions. So for those observers who have speculated that there was a substantial number of backlog claims waiting to be filed, the evidence so far doesn’t support that. And, the two year statute of limitations is already a bar to actions in which the triggering event, typically a corrective disclosure took place in 2007 and early 2008, the years in which that presumed backlog would have been building.

In addition, we’re encouraged by the continuing relatively high dismissal rate in the first quarter of derivative actions which might otherwise trigger our side A coverages. Unlike the stock option back dating claims which were heavily weighted towards derivative actions, credit crisis claims have been predominately securities class actions. However, in connection with the credit crisis derivative claims which have been brought, we are seeing the allocation of well established legal protections governing mismanagement allocations and the defendants are having great, in some cases even unexpected success in defending those claims.

For example, in the recent decision involving AIG’s credit crisis whoas, the court has made it clear that they will not engage in second guessing managements’ legitimate business decisions regardless of how badly those decisions played out. So, although some observers have asserted that credit crisis derivative claims have the potential to impact side A coverages, we are not currently seeing an increased level of exposure as a result of them.

Now, I’ll turn it over to Ricky Sprio.

Richard G. Spiro

As usual, I will review our financial results for the quarter. I will also provide commentary on capital management, the impact of currency and the April 1 renewal of our property reinsurance program. Looking first at our first quarter operating results, we had underwriting income of $204 million even in a difficult cat quarter.

Property and casualty investment income after tax was up 2% during the quarter to $313 million. The continued impact of the low yield environment was offset this quarter by a modest favorable effect of currency fluctuation on the income from our international investments. Net income was higher than operating income in the quarter due to net realized investment gains before tax of $127 million or $0.25 per share after tax including net gains of $88 million on our alternative investments portfolio.

For comparison, in the first quarter of 2009 we had net realized investment losses before tax of $266 million or $0.48 per share after tax largely due to losses on our alternative investment portfolio related to the credit crisis. As a reminder, we account for alternative investments on a one quarter lag and we include the changes in the net equity of our alternative investments in net realized gains and losses unlike some insurers who include them in investment income.

During the first quarter of 2010 we incurred a onetime tax charge of $22 million or $0.07 per share related to the recently enacted federal healthcare legislation which eliminated the tax benefit associated with Medicare Part D subsidies to be received by companies that provide qualifying prescription drug coverage to retirees.

Unrealized appreciation before tax at March 31, 2010 increased to $1.8 billion from $1.6 billion at the end of 2009. The total carrying value of our consolidated investment portfolio was $42.3 billion as of March 31, 2010 slightly higher than the amount at year end 2009. The composition of the 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 rating is AAII.

We also continue to have excellent liquidity at the holding company. At March 31, 2010 our holding company portfolio included $2.4 billion of investments including $868 million of short term investments. Book value per share under GAAP at March 31, 2010 was $48.17 compared to $47.09 at year end 2009, an increase of 2%. Adjusted book value per share which we calculated with available for sale fixed maturities at amortized costs was $45.19 compared to $44.37 at 2009 year end.

As for reserves, we estimate that we had favorable development in the first quarter of 2010 on prior year reserves by SBU as follows: in CPI, we had about $30 million; CCI, had about $90 million; CSI, had about $90 million; and reinsurance assumed had about $10 million bringing our total favorable development to about $220 million for the quarter. This represents a favorable impact on the first quarter combined ratio of nearly eight points overall.

For comparison in the first quarter of 2009 we had about $130 million of favorable development for the company overall including none in CPI, $35 million in CCI, $80 million in CSI and $15 million in reinsurance assumed. The favorable impact on the combined ratio in the first quarter of 2009 was about five points.

During the first quarter of 2010 our loss reserves increased by $242 million including an increase of $288 million for the insurance business, nearly all of which was accounted for by the increase in reserves for cat. This is partially offset by a decrease of $46 million for the reinsurance assumed business which is in runoff and the impact of currency fluctuation on loss reserves during the quarter resulted in a decline in reserves of about $55 million.

At this point let me say a few additional words about the impact of currency fluctuation on our financial results. Since about one quarter of our premiums come from outside of the US, our results expressed in dollars are affected by movement in exchange rates. For example, we had a positive currency impact in the first quarter of 2010 of about 4% on net written premiums. This reflects the fact that the US dollar was significantly weaker against most major currencies in this year’s first quarter compared to the first quarter of 2009.

Going forward, assuming currency rates during the rest of 2010 remain similar to recent exchange rates, we would expect that the favorable impact of currency fluctuations will decline in the coming quarters given the weakening of the US dollar that occurred throughout the remainder of 2009.

Turning to capital management, we were very active with our share buyback program during the first quarter. We repurchased seven million shares at an aggregate cost of $344 million and the average cost of our repurchases in the quarter was $49.47 per share. Through the end of the first quarter we have repurchased about 10 million shares for approximately 40% of the 25 million share buyback program we announced in December 2009.

This high level of activity reflects the fact that we are opportunistically taking advantage of the attractive economics of repurchasing our stock at current levels. As we have previously stated our intention is to complete this new repurchase program by the end of the year. In addition, as we said on our fourth quarter conference call, we will continue to review the size of our buyback program in light of our capital position, the prevailing insurance market environment, portfolio investment opportunity costs and other factors.

In February, our board raised the quarterly common stock dividend by 6% to $0.37 per share or $1.48 on an annual basis. As John said earlier, this was our 28th consecutive annual dividend increase, a continued indication of our financial strength and resilience in a cyclical industry. As you may know, on April 1st we renewed our major property treaties including our North American cat treaty, our non-US cat treaty and our commercial property [inaudible] treaty. All of these were renewed with the same limits and coverage that we had in the 2009 program. The reinsurance market was orderly and there was plenty of capacity to meet our needs in each treaty. We were able to achieve an overall cost reduction of approximately 8% across the three treaties.

Finally, I would like to make a comment regarding our 2010 earnings guidance. As John Finnegan and John Degnan discussed earlier, the adverse affect of the high level of cat activity in the first quarter was partially offset by the strong ex cat performance of our core property and casualty businesses. As we have done in the past, we intend to defer revisiting our guidance until after the second quarter when we have more information about how the year is progressing. We believe that you have enough information available regarding the impact of cats to make any adjustments that you deem appropriate at this time.

Now, I’ll turn it back to John Finnegan.

John D. Finnegan

In a very difficult catastrophe environment, Chubb performed extremely well in the first quarter. Here are the highlights; operating income per share of $1.14 despite a $0.67 per share adverse impact of cats and a onetime $0.07 per share Medicare related tax charge. Our ex cat combined ratio of 81.3 was nearly six points better than last year’s excellent 87.2. On an ex cat basis, CPI and CCI’s combined ratios were nearly seven points better than last year. In addition, CSI’s combined ratio was more than four points better, clearly outstanding underwriting results.

Premium growth improved in what continued to be a difficult economic competitive environment. Retention rates remained consistent and new to lost ratios improved. Our conservative investment portfolio continued to perform well generating a substantial first quarter net realized capital gain as well as an increase in unrealized appreciation. Book value per share increased by more than $1 since 2009 year end to $48.17 and we continued to actively manage our capital by buying back shares at attractive prices and by increasing our dividend by 6%.

In summary, we had a good first quarter despite substantial cat losses. Our financial strength, conservative investment portfolio, strong credit rating, underwriting talent, producer relationships, unparallel claim services and commitment to managing capital for our shareholders’ benefit are true differentiators which we believe will enable us to continue to provide superior returns to our investors.

With that, I’ll open the line to questions.

Question-and-Answer Session

Operator

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

Jay Gelb – Barclays Capital

On the cat losses within homeowners, could you give us a sense as to how much, if any, of those losses were from flood?

John D. Finnegan

We’re not prepared to break it down but I might point out to you Jay that the masterpiece product for Chubb provides coverage for backed up water and sewers which in some of the forms of our competitors are not covered. So we probably have disproportionately a higher amount attributed to water infiltration. Normally, we don’t cover flood under homeowners policies but we do cover water back up and sewer back up and we adjust it in a way that’s sensitive. If you have a sump pump for example, that failed because your back up battery is out due to several days of energy interruption, that’s a backed up sewer or pump then we’ll pay.

Jay Gelb – Barclays Capital

Then the separate issues, I realize it’s an emerging issues but John if you can give us your perspective on the Goldman situation? That would be helpful from a D&O and E&O perspective?

John D. Finnegan

You know Jay we typically don’t confirm coverage or amounts without the permission of the insured so I need to talk generally. The one thing I would point out is the article that’s reported that Goldman has an extensive side A D&O coverage and mentioned one of our competitors as primary needs to be understood in the context of what I know you know side A is and that is it only comes in to play if either the company is unable by state law to indemnify its employee or by virtue of its insolvency it cannot.

The kind of claims that were brought by the SEC for example, against Goldman, are clearly indemnifable results and there’s no indication that the company doesn’t intent to indemnify the individual who was named in those complaints. I don’t think the Goldman suit is going to have much impact on exposure of insurers. It’s a unique kind of action. First of all, it’s more likely to trigger E&O coverage than it is D&O coverage and a lot of the investment banks had a hard time buying E&O coverage. We certainly got out of that business a few years ago.

Then secondly, the SEC damages sought are either for fines and penalties or disgorgement of ill gotten gains, two items that are excluded in our and most E&O policies. So even if they have E&O coverage it may very well not be included as a covered event. It’s also a transactional suit, it’s brought based on that single transaction that Goldman entered in to so it’s less likely to trigger a D&O claim.

The last point I would make is if there is a likelihood of a D&O claim, it would be that Goldman failed to disclose early enough that it was impending but the story suggests that Goldman was blindsided by the complaint and that they heard nothing from the SEC since it issued wealth notice in the summer of 2009. So I think even a D&O suit is probably unlikely. If it is, it’s not going to trigger side A coverage.

Jay Gelb – Barclays Capital

Could side A be triggered, and this is obviously thinking ahead, if there is a derivative class action suit whereas Goldman were to reimburse the investors that loss money and that could trigger a derivative claim suit?

John D. Finnegan

Theoretically yes. That’s a good question. If there were a derivative suit against Goldman, defense costs would be covered and I’d prefer not to be a primary on the policy.

Operator

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

Clifford Gallant – Keefe, Bruyette & Woods

I just wanted to ask a little bit about the international growth to 16%. How much of that was just foreign exchange? What degree was there impact of reinstatement premiums? Then, on the auto side you mentioned a lot of the 11% growth was international, can you talk a little bit about what’s happening in those markets? Then, how does that compare to the domestic market for auto?

John D. Finnegan

Let me start with the last part of your question which is the outside of the US auto growth. First of all, it’s aided by currency fluctuation when we reported it and secondly, we’ve been aggressively growing auto in some countries, particularly Latin America, but we also provide it in Europe and some of the other Commonwealth countries. It has for the last several quarters been growing at a pace substantially higher than our US book has been growing and we’ve called that out on several occasions.

John J. Degnan

If you look at just personal auto we said that it increased about 11%, I think currency is probably seven or eight points of that. If you look at our overall business which was your first question, 16% was with currency. If you look at the last line in the press release, it’s 2% local currency so that’s the breakout. So overseas grew 16%, 2% in local currency.

Clifford Gallant – Keefe, Bruyette & Woods

An reinstatement premiums in the quarter, what was the impact of that?

John D. Finnegan

I don’t think we usually break out reinstatement premiums. It’s not a substantial impact on our bottom line or even our growth except in the one line at fx.

John J. Degnan

Yes, the reinstatement premium for the Chilean earthquake for example showed up in the commercial multiple peril results and would make it look worse than it was but I think that’s the only one.

John D. Finnegan

It’s not a material impact on the overall results.

Operator

Your next question comes from Joshua Shanker – Deutsche Bank Securities.

Joshua Shanker – Deutsche Bank Securities

First question I have, given the unusual catastrophe events in the quarter, maybe everything is fresh in your head, I’m wondering if you can talk a little bit about your gross loss exposure and how Chubb uses reinsurance to protect itself?

John D. Finnegan

I don’t think we have gross loss exposure identified anywhere. We obviously manage it in terms of reinsurance and taking on the exposure with acceptable limits based on our capital position, based on the rating agency’s capital requirement. Reinsurance, we did have a substantial amount of reinsurance as it relates to the Latin America Chilean earthquake which came in handy.

Joshua Shanker – Deutsche Bank Securities

Can you give any information at this point about how much your reinsurance recoverable went up during the quarter?

Richard G. Spiro

No Josh, we don’t have that number at this time.

John D. Finnegan

It’s not a huge number though.

Joshua Shanker – Deutsche Bank Securities

In terms of when you think about what type of events does Chubb by reinsurance? Where does it attach? When I think about the northeast storms, was Chubb receiving reinsurance benefit from that of any significant form?

John J. Degnan

No, in the US losses its essentially on reinsurance. It didn’t trigger the treaty.

John D. Finnegan

Josh, we should clarify that. When you ask about the reinsurance recoverable, it hasn’t gone up that much and it only really applies to Latin America. We don’t trigger with our deductibles and things, we’re not triggering any US resinsurance on any of those. There were a lot of storms. There was one fairly big one but we still haven’t reached the levels beyond our retention.

John J. Degnan

We don’t buy reinsurance to level earnings, we buy it to protect us against truly catastrophic losses.

Richard G. Spiro

Josh, in terms of our cat treaties, our North American cat treaty, our non-US cat treaty and our commercial property treaty, the attachment points and the key terms of those are all described in our 10K.

Joshua Shanker – Deutsche Bank Securities

The other question was in regards to the repurchase, given that the stock is trading around $50 today, book value is around $50, you’ve been in the program for about five years now. Maybe even Ricky with a fresh set of eyes, what do you think as intrinsically accretive share repurchasing and is that going on right now? Any thoughts in retrospect?

John D. Finnegan

First Josh I think it’s more like $51 to $52 price and $48 in book?

Joshua Shanker – Deutsche Bank Securities

That’s correct.

Richard G. Spiro

I think Josh we are big proponents and fans of capital management. It’s part of our core operating principles. As I said earlier, we’re going to continue to review the size of our program in light of the factors that I highlighted but we have been pretty aggressively buying our stock back at the current levels because we think opportunistically it’s very attractive for us and I think we are going to continue to do that. As you know, over the last number of years we have bought back over six billion of our stock so it’s a core part of what we do.

John D. Finnegan

Our economics for buybacks are obviously good. We’ve taken good advantage and since this program began we’ve bought back 10 million shares at 40% of our authorized level for a program that goes on another nine months. So I think we’ve been opportunistic in the market.

Joshua Shanker – Deutsche Bank Securities

I understand that but if we look in to the future thinking about it, obviously if you had the cash you would have had use of that cash over that period of time. Do you think intrinsically the accretive point, even if you can’t see it given the historical financials?

John D. Finnegan

Stock buybacks at these levels are clearly accretive. The alternative investment opportunity is very low. The premium you’re paying on the buyback is very low. It’s a very accretive transaction at this point in time.

Operator

Your next question comes from Paul Newsome – Sandler O’Neill & Partners LP.

Paul Newsome – Sandler O’Neill & Partners LP

I wanted to ask about the surety operation where the losses have really been very low for quite some time and I think there’s been a thought that eventually the recession would catch up to us. Any thoughts as to why that hasn’t happened?

John D. Finnegan

Why credit losses haven’t increased in surety, is that what you’re asking?

Paul Newsome – Sandler O’Neill & Partners LP

Yes, that’s the question.

John J. Degnan

I think the state of the economy is reflecting more in the relatively flat growth that surety has experienced over the last year or two. As you know, it’s a volatile business, it is characterized by lumpy quarters in which we might have significant losses and then by the happier quarters in which we have like this quarter, virtually no loss experience so that it runs at a combined ratio in this quarter of [inaudible].

But, over the years since we’ve been in the business, that’s generally been true. The deteriorating economy does not generally generate losses it just creates an environment in which its harder to grow if you’re going to be a disciplined underwriter and not chance market share.

Paul Newsome – Sandler O’Neill & Partners LP

Do you think there’s any truth to the idea that because the banks have continued to extend credit more than they have perhaps in the past to keep companies a float that there’s the potential for more construction bankruptcies that we just haven’t seen that would ultimately impact share?

John J. Degnan

We don’t believe that would be true in our book. I mean we watch the creditworthiness of our accounts extremely closely, it’s what we underwrite to in this business unlike the property and casualty standard insurance. I can’t speak to the general supposition whether it’s accurate but we don’t have that concern in our book.

Operator

Your next question comes from Michael Nannizzi – Oppenheimer & Co.

Michael Nannizzi – Oppenheimer & Co.

Just a question on rates and professional liability, can you talk about trends in financial and non-financial D&O?

John D. Finnegan

Rates in financial D&O are clearly much better. I think they were up maybe 10 or 11 points in the quarter.

John J. Degnan

Financial institutions public D&O was up about 11 points in the quarter. Public D&O was down a bit and the marketplace is highly competitive. There is still companies, some of whom have learned their lessons but many of whom haven’t that are moving in to the primary space with pricing that just doesn’t support the risk that they’re taking on at that level in the program. Overall, you saw that the CSI rate increase was down actually a point and it’s flattened out a little bit from where it was last year.

Michael Nannizzi – Oppenheimer & Co.

So then just in terms of the line overall, you think it’s more capacity or less perceived risk that people are reducing prices on the non-financial side?

John D. Finnegan

Both, both for sure. There’s a lot of capacity and as you see in the statistics published on security class action claims and things, there are less filings and a lot of new players and they tend to be optimistic. They didn’t suffer through some of the past problems. So yes, I think there’s definitely less perceived risk. There’s also more money chasing.

Michael Nannizzi – Oppenheimer & Co.

Then one last one if I could, just relative to development, can you talk in professional liability about accident year ’08 and ’09 and did those years contribute to the development experience in the first quarter?

John D. Finnegan

No. Accident years 2008, 2009 the impact was negligible. The favorable development was all in slightly 2007 and then in prior years.

Operator

Your next question comes from Vinay Misquith – Credit Suisse.

Vinay Misquith – Credit Suisse

Two questions, first is on Stoneridge, there have been some – the senator is trying to repeal Stoneridge through some legislation. Any thoughts on that? And any ideas as to whether that will be retrospective and what would be the impact on the D&O liability for Chubb and other D&O writers?

John D. Finnegan

Well, you’re right the tort reform movement has been under attack by the Plaintiff’s trail lawyers over the last couple of years and undoing the effect of that decision which created a higher pleading standards for the industry is one of them. I doubt that it would be retroactive but there’s no way of telling what’s going to happen in Congress today. If it is prospective only, it’s certainly not going to affect our book of claims that we have in house to date and we’ll deal with it from an underwriting perspective going forward.

Vinay Misquith – Credit Suisse

How bad do you think it is versus the past? How much would rates have to rise just to account for this?

John D. Finnegan

I wish I could operate with that level of precision. I don’t know that over turning the Stoneridge decision in and of itself would require or move the market towards increasing rates or that our customers would react to it. We did pretty well in this business before Stoneridge was decided and I don’t think that going back to the status quo ante in and of itself is a doomsday scenario although we certainly would much prefer that the legislation not pass.

Vinay Misquith – Credit Suisse

The second question was on the margins, your margins improved this year versus last year in the last few quarters and it makes sense in professional liability because you are reserving at a lower loss ratio. I’m just curious on the commercial side and on the other lines of business, what are you seeing that’s making you more comfortable about your loss ratios this year versus last year?

John J. Degnan

Well, it’s the first quarter. I would say that over the last three years we’ve had rate declines until recently and we’ve had loss trends tend to increase and so we’ve had margin compression. If you look back at accident year ex cat number over three years you’d see a deterioration. It hasn’t been massive but it’s been incremental. This quarter we had a very, very good quarter. If you exclude professional liability because you understand why we have a better what you call margin there or better accident year ultimate, and you look at let’s take personal lines, well personal lines is a short tail line of business. The bottom line was that we had less claims, less losses in homeowners this year than we had in recent years.

That’s lumpy. That comes and goes. It was a good quarter. Last year’s first quarter was a little bit heavy in terms of non-cat losses. We had a lot of freezes and things that weren’t characterized as cats and we incurred some losses there. So it was a good quarter. That’s not really a speculative number, that’s really mostly related to the losses that you incur so it’s actually.

Similarly in commercial we have some long tails and some short tails but in terms of the accident year performance, property stood out, commercial property. Again, it relates to we just didn’t have that many losses this quarter, better than expected. It really goes to the actual amount of losses we had and most of this is in short tail lines and it’s lumpy again. So we’re not saying that it’s going to be this way all year, we don’t know that. We had a very benign quarter in terms of homeowners and commercial property losses.

Operator

Your next question comes from Matthew Heimermann – JP Morgan.

Matthew Heimermann – JP Morgan

I guess the first question is regarding the homeowners business and I guess I’m just trying to figure out what macro factors we should be looking at as we think about maybe growth resuming? Is it more important to think about absolute employment levels? Is it more important to think about wealth in the system and where markets are at? Just some thoughts in terms of what you’re watching internally vis-à-vis kind of growth expectations.

John D. Finnegan

All of them. I mean employment clearly helps, macroeconomic clearly helps. Housing prices moving up and they don’t necessarily move in tandem, I mean housing prices were obviously over bought, they suffered significantly. It will take employment to bring housing prices back but it’s not clear that housing prices will quickly get back to where they once were. You’ve got to look at all of them.

John J. Degnan

I agree with that, in our book of high net worth homeowners, clearly increased wealth which would staunch the down tick in [inaudible] being added by rider, would stimulate additional buying of high end homes and increase the amount of insurance being bought. But, they’re all important.

Matthew Heimermann – JP Morgan

How important are second homes to the growth story? I mean, if you look back at prior cycles, is there a disproportionate benefit you get from existing customers expanding their exposures dramatically that way?

John D. Finnegan

I guess that’s probably true. I couldn’t empirically prove it to you based on data we assembled but high net worth individuals are the ones that can more easily buy the kinds of second homes that we –

John J. Degnan

Certainly we ensure them, they’re usually bigger but secondly, quite often they’re in high cat areas so we have limitations on the Florida’s of this world.

John D. Finnegan

One interesting point here, a significant contributor to our growth in the past in homeowners has been our inflation guard feature which is a formulaic calculation of the cost of rebuilding since most of our homes are insured to replacement value. So if you’re a Chubb homeowner each year you’ll see an inflation guard increase in your homeowners premium. Well, as the economy started to tank, particularly over the past couple of years, the inflation guard increase got much more modest than it had been over previous years and it returned to economic vitality with increase both in commodity and labor rates are going to increase the formula and the legitimate inflation guard aspect of it.

Matthew Heimermann – JP Morgan

I guess just one follow up John on the credit crisis related claims. I think you’ve talked about this in prior calls but any update on kind of defense costs? I mean the claim side seems to be rolling in your favor to date but on the defense cost side, how is that faring because I’ve been hearing that is still very hot and I’m just curious how you think about that?

John D. Finnegan

Well the obvious answer to your question which is a good one is that it makes me happier we moved several years ago to a higher proportionate excess position in the program than primary because defense cost go ups. Carriers have gotten better and insureds have cooperated with us more aggressively recently in trying to curtail litigation costs but if you’re playing primary that’s often a bigger part of your risk assessment in terms of your loss potential than the ultimate merits of the case.

We’re seeing modest increases in costs in our own defense management but we’re more aggressive these days apply litigation management guidelines to the costs being incurred by these law firms than we have in the past and we’re better at it.

Operator

Your next question comes from Michael Grasher – Pipper Jaffray.

Michael Grasher – Pipper Jaffray

A quick question following up on your audit premium comment, can you comment or do you see any particular class of risk that maybe is being impacted more than others or is it pretty even across the board?

John D. Finnegan

On audit premium?

Michael Grasher – Pipper Jaffray

Yes.

John D. Finnegan

Well sure, workers’ compensation would the lead, I guess general sales, general liability, workers’ comp. Stuff that you factor in based upon presumed employment levels or presumed sales levels.

John J. Degnan

It’s not a big proportion of our book where we do retrospectively rated premiums. But John is right, it’s primarily workers’ comp and to some degree general liability.

Michael Grasher – Pipper Jaffray

So within workers’ comp per say is there anything in particular, class of risk with workers’ comp that maybe is moving or not?

John J. Degnan

No, we’re generally known in the industry for having sort of a white collar book of workers’ comp. We tend to cover professional firms and not heavy duty blue collar industrial firms. But, I wouldn’t call out any particular unit among them. To the extent that last year the decrease in employment is being offset this year even by no further decreases, even better by increases in employment, we’re going to get the benefit on the audit of increased premiums rather than the negative we took based on a relative basis.

Operator

Your next question comes from Ian Gutterman – Adage Capital.

Ian Gutterman – Adage Capital

A couple of numbers things first, do you have the charge for the healthcare bill? Where exactly does that show up, is that in the corporate line?

Richard G. Spiro

No, it shows up in the tax line, it’s treated as a tax expense.

Ian Gutterman – Adage Capital

I’m trying to do some quick math here so that implies without it your tax year would have been lower than normal? If I back that out I’m getting 22% to 23% tax rate?

John J. Degnan

I think why Ian is because the mix of income this quarter comes more heavily from investment income vis-à-vis underwriting income and obviously investment income attaches a lower tax rate because of our muni portfolio.

Ian Gutterman – Adage Capital

A couple of other things, first am I remembering correctly that in Europe you have some agents, some travel business? And if so, would that be affected by the whole volcano issue?

John D. Finnegan

No. In Europe for example, our homeowners policy for example covers trip interruption. We do have some of those claims in but we don’t think all up either under that exposure or trip cancellation or accident and health or event cancellation that we’re going to see anything significant out of this.

Ian Gutterman – Adage Capital

Then if I can go back to Vinay’s question on the accident year ex cat, I guess I’m struggling a little bit, I understand obviously that the CSI should improve but I guess CSI and CTI, they’re the lowest that they’ve been in three years and that just seems a little more than maybe a low event quarter. Is there something else going on? Or maybe if you can tell us how you set your picks? I guess I would have thought that you sort of set a pick for the year and that attritional loss being low or high in that quarter don’t usually affect things too much.

John D. Finnegan

Ian, clearly neither of us are actuaries but I think that is true for some of our long tail lines of business, such as umbrella and professional liability. But, for the short tail lines of business like property, like commercial and homeowners, the losses for the quarter materially affect our results. As I said, property losses were just very low in the quarter.

Ian Gutterman – Adage Capital

Then I guess one other last numbers one, the paid losses seem to be trending lower than usual. Is that anything going on there? They’re down about 5% year-over-year an in the second half they were down a bunch although that’s probably comparisons to Ike in ’08 but they’ve been down for several quarters in a row which usually you don’t expect at this point in the cycle.

Richard G. Spiro

I think Ian if you look at the paid losses, 2008 was probably little bit higher than normal and that was driven by as you rightly point out catastrophes and a couple of other moving pieces. But, we would expect that that would calm down a little bit and has started to come down. I think 2008 was a bit of an outlier and things seem to have improved since then.

Ian Gutterman – Adage Capital

So nothing usual about this quarter then?

John D. Finnegan

We had almost no cats in 2009 which certainly helped and then back to your earlier question, linking up we’ve had very low – in the lines and we play claims sort of contemporaneously, we had very low losses so we didn’t pay much in the short tail lines.

Operator

Your next question comes from Mark Dwelle – RBC Capital Markets.

Mark Dwelle – RBC Capital Markets

Most of my question have been answered but I have two others that are kind of a follow up. Looking specifically at commercial lines, I guess if rates are up 1% and there are obviously some negatives from audit premiums and what not, would it be fair to characterize that sort of unit counts and volume levels were roughly flat?

John D. Finnegan

CCI declined 1% in the first quarter, rates were up 1% ,you have a currency impact of course that was positive so overall what you’re really talking about is exposure being down. Exposure was probably down 2.5% for the quarter.

John J. Degnan

John, actually it was -2.9% but that was better than the 3.3% that we had for the full year last year and the 2.3% we had in the first quarter of 2009.

John D. Finnegan

[Inaudible] was about the same, new to losses pretty good, certainly better than the fourth quarter of last year but exposure was down and that’s a result of the economy.

Mark Dwelle – RBC Capital Markets

I guess that leads to the second point of I guess you’re not seeing any strong evidence that the economy is starting to help stabilize unit counts? Certainly that would be the line it would show up in most?

John J. Degnan

I wouldn’t say strong evidence but we refer to it as a modest premium increase and we’re encouraged but not willing to declare victory or even that it’s a trend yet.

Mark Dwelle – RBC Capital Markets

One other small question, it looked like the level of short term investments was fairly elevated certainly versus yearend and somewhat versus where your normal run rate is. Is there any particular reason for that or is there just some timing?

Richard G. Spiro

It’s more timing than anything else. We had some maturities and frankly given what we’re seeing in terms of investment opportunities in the marketplace today we’re being a little more cautious and waiting for things that we find attractive so it’s a combination of those factors.

Operator

Your next question comes from Keith Walsh – Citi.

Keith Walsh – Citi

First for John, just going back to CCI, I’m looking at the 84% retention rate with a 1% increase in renewal rates so maybe if you can just talk about what has been the range of retention historically at CCI?

John D. Finnegan

Right where we are now, almost on for five and 10 years, it’s almost where it is. If you go back far enough when we started pruning the book back in the late 90s early 2000s, we kind of led the charge there. Of course, we had combined ratios well in to the 100s at that point, our retention rates did fall off but I mean it’s been pretty darn consistent since then.

Keith Walsh – Citi

I guess what I’m trying to reconcile is why wouldn’t retention be lower? You’re getting an uptick in renewal rates but your competition is supposedly pricing very aggressively.

John J. Degnan

Well, we’re getting a modest uptick, we’re a better company. We’re getting a modest uptick in premiums but we sell to niche specialists who like and buy our kind of insurance.

John D. Finnegan

As a base line case, over the years, we probably have somewhat higher rates than many of our competitors. We provide what we think is better service. So I don’t think that’s an unusual rate relationship. It sounds like if you went back in time five years you’d find we were underpricing the competitors. We would consider ourselves a top of market, a premium company.

Keith Walsh – Citi

Then Ricky, just first on the regulatory side, any thoughts about capital changes in the business going forward? Then, if you can talk about what you view as the core ROE of the Chubb franchise over the cycle?

Richard G. Spiro

In terms of the regulatory issues, I mean the only one I think I would call out is Solvency II. In Europe we do have a European operation, a pretty significant one so they will be dealing with the capital requirement issues and the other related issues to Solvency II. As far as it goes in the US, I think it’s a little premature to be talking about what regulatory changes may or may not happen in the coming years.

As far as ROE, we don’t really talk about an ROE over a cycle. We tend to talk about historically getting 10 points better than the rate of inflation as sort of our target for returns on equity. So that is sort of what I would point you towards in thinking about what we’re looking for.

John D. Finnegan

We’ve run over the last five year in excess of 15% on average and 15% or more in four of those five years.

Operator

Your next question comes from Michael Nannizzi – Oppenheimer & Co.

Michael Nannizzi – Oppenheimer & Co.

I just have a broader question, generally it seems like your posture and positioning focuses on claims paying and the reputation you’ve accumulated over time. Does that proposition resonate less in longer tail lines particularly on the commercial side than shorter tails? If not, why not?

John J. Degnan

Actually the longer tail lines tend to have larger limits exposure. So it’s not only the claim paying reputation of Chubb but it’s creditworthiness that tends to make us a better relative market in those areas.

John D. Finnegan

Quite often in professional liability the person making the claim is a third party so it’s a little bit different situation. I think our reputation was established probably mostly in property but as John said, our creditworthiness and our ability to work with the customer on the long tail line is also a positive. Creditworthiness is as much a differentiator in short tail, a much bigger differentiator in long tail.

Operator

Your next question comes from Ian Gutterman – Adage Capital.

Ian Gutterman – Adage Capital

I guess AIG recently lost a case on Chinese drywall about the homeowners exclusion. I’m wondering if that’s a concern for you on masterpiece?

John J. Degnan

No, that was the AIG auto bond subsidiary that lost the case in Louisiana before a state court judge. First of all Ian, it was a homeowners policy and I would point out two things, first our policy language happily is different than that that was before the state court there. We have a provision dealing with corrosion which was not present in the same form in the AIG policy so it would not be an absolute decision to our own exposure which in homeowners in Louisiana would be pretty modest anyway.

Secondly, a state court decision in Louisiana as we saw in Katrina is not the end of the story. There’s an excellent federal district court judge in charge of a multi district litigation in Louisiana, the same guy who handled many of the Katrina claims who has made it pretty clear that he’s going to take an active role in managing these litigations and a decision there, particularly if it was on language was similar to ours would worry me somewhat more.

With respect to the claims that might come out of Chinese drywall other than homeowners, you know they fall under a variety of different commercial policies. They can come under the general liability policy or an environmental site liability, or a contractor’s pollution liability. All of them have particular coverage issues which would not be impacted by that decision but which will affect coverage. In the couple of handfuls of claims that we have on the commercial side we’re often not the primary rider so the language will ultimately adjust the claim because as you know the excess carriers follow forms to the language of the primary policy, will not necessarily be ours. We’re looking at what we have and reserving where appropriate but at the moment we’re not regarding this decision as a materially significant aspect.

Ian Gutterman – Adage Capital

The corrosion terms you have, is that something that’s unusual for most homeowner’s policy or is that kind of common and AIG was uncommon for not having it?

John J. Degnan

That’s a good question and I can’t really speak to that. I should remind you too every claim is unique and is factual circumstances and in the policy language. I’m talking generally about coverage but not about rendering a generalized coverage opinion.

Operator

At this time we have no further questions and I’d like to turn the call back over to you Mr. Finnegan for any additional or closing remarks.

John D. Finnegan

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

Operator

That does conclude our conference for today. Thank you for your participation.

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