The Chubb's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: The Chubb (CB)

The Chubb Corporation (NYSE:CB)

Q1 2014 Earnings Conference Call

April 24, 2014 5:00 p.m. ET

Executives

John Finnegan - CEO

Paul Krump - President of Personal Lines & Claims

Dino Robusto - President of Commercial & Specialty Lines

Richard Spiro - CFO

Analysts

Amit Kumar - Macquarie

Josh Stirling - Sanford Bernstein

Kai Pan - Morgan Stanley

Vinay Misquith - Evercore

Michael Nannizzi - Goldman Sachs

Jay Cohen - Bank of America

Meyer Shields - KBW

Ian Gutterman - BAM Investments

Operator

Good day, everyone, and welcome to The Chubb Corporation's First Quarter 2014 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 makes today. Additional information regarding factors that could cause such differences appears in Chubb's filings with the Securities and Exchange Commission.

In the prepared remarks and responses to questions during today's presentation, 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 GAAP measures and related information are provided in the press release and the financial supplement for the first quarter 2014, which are available on the Investors section of Chubb's website at www.chubb.com.

Please also note that no portion of this conference call may be reproduced or re-broadcasted in any form without Chubb's prior written consent. Replays of this webcast will be available through May 23, 2014. Those listening after April 24, 2014, should please note that the information and forecast provided in this recording will not necessarily be updated and it is possible that information will no longer be current.

Now, I'll turn the call over to Mr. Finnegan.

John Finnegan

Thank you for joining us. As we said in the press release today, Chubb produced solid results in the quarter, which was adversely impacted by several factors, including cat and non-cat weather losses due to the harsh winter weather in the United States, and then usually high level homeowners' fire losses. We are very pleased with the continued positive rate movement in all three of our businesses along with continued strong retention.

Our commercial businesses have particularly strong quarters. In professional liability, our combined ratio of 84.6 was as good at quarter as we've had in five years. It represented a whapping 7.8 point improvement from our first quarter of last year.

In CCI, our x cat combined ratio of 82.4 was our third best quarterly performance in six years. The performance of both of these businesses benefited from the rate actions and underwriting initiatives that we have undertaken over the past few years.

Operating income per share was $1.50 compared to $2.14 in last year's first quarter. Annualized operating ROE was 10.1% for the first quarter of this quarter. The combined ratio for the first quarter was 93.2 this year compared to 84.6 last year. Excluding the impact of cats to combined ratio for the first quarter was 86.6 in 2014 versus 84 a year ago. This deterioration is more than fully accounted for by the higher x cat weather-related losses and homeowner fire losses in this year's first quarter.

During the first quarter, we had net realized investments gains of 160 million before tax or $0.30 per share after-tax. This brought up first quarter net income per share to $1.80 resulted in an annualized ROE of 11.1%. GAAP book value per share at March 31, 2014 was $66.36, that's 2% increase in sheer end 2013 and a 7% increase at March 31 a year ago.

Our capital position is excellent and we continue to actively repurchase our shares as Ricky will discuss later. In addition, during the first quarter we increased our common stock dividend by 13.6% to $2 per share on an annualized basis. It was Chubb's 32nd consecutive annual dividend increase.

Now, for more details on our operating performance, we will start with Dino, who will discuss Chubb's commercial and specialty insurance operations.

Dino Robusto

Thanks, John. Chubb commercial insurance and Chubb's specialty insurance, both had strong performance in the first quarter, starting with CCI, the first quarter combined ratio was 88.5 in 2014 compared to 81.9 in 2013. The impact of catastrophe losses accounted for 6.1 point of the combined ratio compared to minus 1.7 point in the year ago first quarter. Excluding the impact of catastrophes, CCI's first quarter combined ratio improved from 83.6 in 2013 to 82.4 in 2014. The 82.4 is within (indiscernible) points of CCI's, the best x cat combined ratio in the last six years.

CCI's first quarter net written premiums were down 1% to $1.4 billion with flat growth in the U.S. and down 4% outside the U.S. which in general continues to be a more competitive environment. Although overall growth was down, we continue to retain our best accounts and write new business in the segments where we are the most rate adequate. While at the same time, maintaining discipline of culling accounts where we can't secure appropriate terms and condition. A balance among these actions will vary from quarter-to-quarter based on our mix of business, which in the first quarter resulted in a small decline in overall premium.

This slow start in the beginning of the year actually improved in March. In April, it's coming in even stronger than March. So we are optimistic about stronger growth in the second quarter than the first quarter based on the quality and quantity of opportunities we are seeing in our target markets.

CCI's average U.S. renewal rate increase in the first quarter of 2014 was 5%, which is above our long run loss cost trend. Given the 6% to 7% increases we experienced in the U.S. in the prior three quarters, the year end impact in the first quarter was 6%. Outside the United States, CCI's average renewal rate increases were in the low single-digit.

CCI achieved average U.S. renewal rate increases in every line of business. And as we discussed on our prior earnings call, after three years of rate increases much of our book is no longer in need of large rate increases. So, on a number of segments we are pushing for greater retention and more moderate rate increases and we are writing the majority of new business and segments, but we are the most rate adequate. And the first quarter in the large part reflects this strategy.

CCI's first quarter renewal retention in the U.S. increased to 85% from 83% in the fourth quarter of 2013. CCI's new to loss business ratio in the U.S. was 0.9 to 1 compared to 0.7 to 1 in the fourth quarter of 2013, and 0.8 to 1 in the same period last year.

It's important to remember we have never relied solely on rate to achieve our historically excellent results. As more and more of our book approaches rate adequacy and rate increase is moderate, we will continue to target growing our profit by remaining vigilant in our underwriting and management of our mix of business across our board set of products in customer segment. It is this legacy of underwriting expertise that allowed us to build an enviable book of business, which we expect will enable us to maintain strong performance relative to the industry in any market.

Moving to Chubb's specialty insurance, net written premiums were down 1% in the first quarter to $624 million. CSI's first quarter combined ratio was 88.9 in 2014 versus 87.4 in 2013. For the professional liability portion of CSI, which represents the lion share of the portfolio, net written premiums were up 1% to $552 million. Similar to CCI, the marketplace outside the U.S. continues to be more competitive than in the U.S. with premiums down 2% outside the U.S., but up 2% in the U.S.

The combined ratio for professional liability improved almost eight points to 84.6 from 92.4 in the year ago quarter. That 84.6 is the best combined ratio that professional liability has produced in the last ten quarters.

We are very pleased with the 7% average renewal rate increase we achieved for professional lines in the U.S. in the first quarter of 2014 as we continue to drive greater profitability. The first quarter of 2014 was the 10th consecutive quarter of professional liability renewal rate increases in the U.S. and the 7th consecutive quarter that professional liability rate increases ranged from 7% to 9%.

Each of our professional liability lines of business in the United States achieved renewal rate increases in the first quarter. As in CCI, we continue to differentiate our rate and retention action based on the performance of each line of business and each policy.

In markets outside the U.S. average renewal rate increases for professional liability in the first quarter were consistent with the fourth quarter 2013 rising by low single-digit. Renewal retention for professional liability in the U.S. in the first quarter was 85% up one point from the fourth quarter 2013 and up four points from the first quarter of 2013.

Retention was the highest for our best performing segments and lowest for our worst performing, again improving the overall quality of our book of business. The new to loss business ratio for professional liability in the first quarter was 0.9 to 1, up from 0.8 to 1 in the fourth quarter of 2013, which continues the flow of steady improvement in that metric since the first quarter of 2013 as more of the new business we target is meeting our demanding underwriting standards.

Turning to the surety portion of our CSI book, net written premiums in the first quarter were down 13% to $72 million, also impacted by the competitive marketplace outside the U.S. The combined ratio for surety was 122.9%. The unusually high combined ratio was driven by one large loss in the current accident year from an insured outside the United States that was primarily engaged in mining construction services, whose business failed due to several problem contacts they inherited as a result of an acquisition.

As we've stated in previous earnings calls, results can e lumpy in the surety business as the presence or absence of a large loss can have a significant impact especially on one quarter's results. The last time surety had an unprofitable quarter was back in 2008. Our aggregate loss ratio since 2005 is under 15%. So clearly our surety business has been very profitable and remains attractive to us.

And with that, I'll turn it over to Paul, who will review our personal lines and corporate-wide claim results.

Paul Krump

Thanks, Dino. Chubb's personal insurance net written premiums increased 3% to $1 billion, and CPI produced a combined ratio of 101.8 compared to 87 in the corresponding quarter last year. CPI's profitability was adversely affected by the severe winter weather resulting in both increased cat and non-cat losses as well as several large fire losses.

The impact of catastrophes on CPI's first quarter combined ratio was 11.2 point in 2014 compared to 3.9 points in the first quarter a year ago. On an x cat basis, CPI's combined ratio was 90.6 in the first quarter compared to 83.1 in the first quarter of 2013.

Homeowners' premiums grew 4% in the first quarter. The combined ratio was 104.9 compared to 82.5 in the corresponding quarter last year. Cat losses accounted for 17.9 points of the homeowners combined ratio in the first quarter of 2014 compared to 6.1 point in the first quarter of 2013.

Due to the unprecedented cold snap, some of the homes of our targeted high net worth customers experienced costly interior damage especially from burst pipes and ice damages. Excluding the impact of catastrophes, the 2014 first quarter homeowners combined ratio was 87 compared to 76.4 in the same period a year ago. This 10.6 point difference is more than accounted for by the first quarter's unusual non-cat weather-related losses and an increase in the impact of large fire losses.

As I mentioned, the severe winter resulted in an elevated level of non-cat weather-related losses compared to last year's mild winter. Non-cat weather-related losses accounted for about 14 points of our homeowners combined ratio in the first quarter of this year, which is nine points higher than in the first quarter of 2013.

In addition, we experienced an uptake in home fires or a perspective on how the first quarter 2014 fire loss impact stacks up. It was 4.5 points higher than in the first quarter of 2013.

To summarize, when one compares the homeowners x cat loss ratios of the first quarter of 2014 and the first quarter of 2013, this year's elevated non-cat weather-related losses added nine points. And the impact of fire losses added about 4.5 points. Together, these 13.5 additional points of losses in the first quarter of 2014 more than account for the 10 points fixed point of year-over-year deterioration in the homeowners' x cat loss ratio.

During the first quarter of 2014, we achieved an average homeowner's renewal rate and exposure increase of 7% in the United States. The same is in the first quarter of 2013. Our pricing momentum remained strong, and this is our fourth year of homeowners renewal rate and exposure increase.

Personal auto premiums declined 2%, and the combined ratio was 101.4 compared to 94 in the first quarter of 2013. Worldwide auto growth was down in the quarter as we experienced a negative impact from foreign currency translation, as well as, slower growth in our Brazilian operation due to targeted rate action. Auto growth in the U.S. remains strong at 5% driven by renewal rate and exposure increases. U.S. in force comp was up slightly as well versus the first quarter of 2013.

The auto combined ratio in the quarter was adversely affected by challenging winter driving conditions in many parts of the United States including flooding in an affluent section of Palm Beach County, Florida in mid January. All told, the unusual winter weather resulted in about three points of auto losses in the quarter.

Policy retention in the U.S. in the first quarter was 90% for homeowners and 89% for auto, both of which are essentially unchanged from the fourth quarter of 2013.

In other personal, which includes our accident, personal excess liability and yacht volume, premiums were up 3%, and the combined ratio improved to 92.4 from 94 in the first quarter a year ago.

Turning now to claims corporate-wide; in the first quarter of 2014 we had cat losses of $199 million before tax or 6.6 points on the combined ratio. This reflected about $206 million of losses from seven cat events in the United States and one event outside of the United States, partially offset by about $7 million decrease in our estimated losses from catastrophes which occurred in prior years.

The U.S. events included two catastrophes that occurred in early January of this year for which we provided a preliminary loss estimate at the time of our last earnings conference call. Our current estimate for those events remains in line with our earlier estimate, and they accounted for the bulk of the overall catastrophe impact in the quarter. Of the total first quarter catastrophe losses, 60% were attributable to CPI and 40% to CCI.

Now, I'll turn it over to Ricky who will review our financial results in more detail.

Richard Spiro

Thanks, Paul. As usual I will discuss our financial results for the quarter and I will also provide an update on the April 1st renewal of our major property reinsurance program, looking first at our operating results underwriting income with $208 million in the quarter. Property and casualty investment income after-tax was down 4% to $277 million due once again to lower reinvestment rate in both our domestic and international fixed maturity portfolio.

Net income was higher than operating income in the quarter due to net realized investment gains before tax of $116 million or $0.30 per share after-tax. For comparison, in the first quarter of 2013 we had net realized investment gains before tax of $138 million or $0.34 per share after tax. In both quarters, $0.14 per share of the net realized investment gain came from alternative investments.

As a reminder, unlike some of our competitors, we do not include our share of the change in the net equity of our alternative investments in property and casualty investment income. We included a net realized investment gains and losses. Unrealized depreciation before tax at March 31 was $2.2 billion compared to 1.9 billion at year end 2013.

The total carrying value of our consolidated investment portfolio was $42.9 billion as of March 31, 2014. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 3.9 years and the average credit rating is AA3.

We continue to have excellent liquidity at the holding company. At March 31st, our holding company portfolio had $2 billion of investment including approximately $830 million of short-term investment. Book value per share under GAAP at March 31 was $66.36 compared to $64.83 at year end 2013.

Adjusted book value per share, which we calculate with available for sale fixed maturities at amortized cost was $62.39 compared to $61.86 at 2013 year end. As for loss reserves, we estimate that we had favorable development in the first quarter of 2014 on prior year reserves by SBU as follows. In CPI, we had approximately 5 million, CCI had 90 million, CSI at 65 million and reinsurance assumed had zero bringing our total favorable development to approximately $160 million for the quarter. This represents a favorable impact on the first quarter combined ratio of almost 5.5 points overall.

For comparison, in the first quarter of 2013 we had about 119 million of favorable development for the company overall including 5 million in CPI, 125 million in CCI, 55 million in CSI and 5 million in reinsurance assumed.

The favorable impact on the combined ratio in the first quarter of 2013 was about six points. For the first quarter of 2014, our x cat accident year combined ratio was 91.7 compared to 90.2 in last year's first quarter.

During the first quarter of 2014 our loss reserves increased by $26 million, including an increase of 40 million for the insurance business and a decrease of 14 million for the reinsurance assumed business which is in runoff.

The overall increase in reserves reflects an increase of $57 million related to catastrophes and the impact of currency translation on loss reserves during the quarter resulted in a decrease in reserves of about $25 million.

Turning to capital management, we repurchased 4.7 million shares at an aggregate cost of $409 million during the quarter. The average cost of our repurchases in the quarter was $86.73 per share. At the end of the first quarter, we had $1.2 billion available for share repurchases under our current authorization. And as we said on our last earnings call, we expect to complete this program by the end of January 2015.

In February, as John mentioned, our board raise the quarterly common stock dividend by 14% to $0.50 per share or $2 on an annual basis. This is our 32nd consecutive annual dividend increase, a continued indication of our consistent performance and financial strength.

I'd now like to say a few words about our reinsurance program. On April 1st, we renewed our major property treaties including our North American Cat Treaty, our Non-U.S. Cat Treaty and our commercial property for risk treaty. We renewed these programs with a similar limit structure to what we had in 2013, but with expanded coverage and improved terms and condition.

The reinsurance market was orderly and there was plenty of capacity to meet our needs in each treaty as you might expect we are an attractive [cedent] (ph). We achieved double-digit price decreases on all three property treaties that we renewed and the aggregate cost of these three treaties will be meaningfully lower than last year.

In addition in March, we successfully completed our sixth catastrophe bond offering East Lane VI to replace the maturing cat bond. The transaction was very well received by the market, and this enabled us to increase the existing limit from 225 million to 270 million and expand the perils covered relative to the expiring arrangement at attractive pricing.

Under this new arrangement, we purchased fully collateralized multiyear coverage to supplement our reinsurance program for the perils of main storm including hurricane and tropical storm, earthquake, winter storm and severe thunderstorm in the northeast U.S. running from Virginia to Maine.

In terms of pricing, we attained the lowest pricing ever achieved on a cat bond with U.S. hurricane risk. Similar to our previous cat bonds we have indemnity-based trigger, which means that our right to collect is based on our actual incurred losses as opposed to industry or index-based losses. We like the diversification that these cat bond arrangements bring to our overall reinsurance program, especially in our peak zone.

Importantly, they provide us with the cost effective fully collateralized alternative to traditional reinsurance with pricing locked in for several year.

And now I'll turn it back to John.

John Finnegan

As you can see, first quarter results were a mixed bag. A strong underlying performance was offset to a large degree the by the impact of higher cat, non-cat weather-related losses and unusually high homeowner fire losses. The adverse effect of these factors is reflected in our operating income per share for the first quarter of $1.50, which was $0.60 per share less than the $2.14 per share we earned in the first quarter of 2013.

This $0.64 per share differential, $0.45 per share was attributable to higher cat in this year's first quarter. Remaining $0.19 per share difference was more than accounted for by the $0.23 per share aggregate negative impact of higher non-cat weather-related losses $0.15, and homeowner fire losses $0.08 per share in the first quarter of 2014. Bear in mind that we also had this surety loss which accounted for approximately $0.10 per share this quarter.

Cat/non-cat weather-related losses and homeowners' fire losses had the most pronounced adverse effect on the profitability of personal lines in the first quarter of this year. The deterioration in the personal lines combined ratio versus the first quarter of last year was more than totally attributable to these factors, which can swing significantly from quarter-to-quarter.

As we have said before we have enjoyed benign loss experience with respect to non-cat weather and large homeowner fires for a number of years. And as indicated in our January call, our guidance for this year contemplates some reversion to the mean in 2014, and we certainly got it in the first quarter. Well, nothing is for sure, we think it is reasonable to expect lower level of non-cat related weather and fire losses during the balance of this year.

Turning to our commercial businesses, we feel good about a number of positive developments in the first quarter. Professional liability first quarter combined ratio improved almost eight points from the first quarter of last year. It was the eighth consecutive quarter in which our combined ratio and professional liability improved. All of our accident year loss ratio was about 66, 4 points better than last year's first quarter.

Our x cat CCI combined ratio of 82.4 was 1.2 points better than the first quarter of last year, two points better than last year's full-year combined ratio and better than any full-year combined ratio in the recent memory.

There is also place in all three of our business units we continue to obtain mid single-digit renewal rate increases in the U.S. in the first quarter of this year. Commercial, we now enjoy mid to high single-digit renewal rate increase for 10 consecutive quarters. Also in professional liability we have now enjoyed eight quarters of mid to high single-digit renewal increase.

In personal lines, the homeowners' line of businesses enjoyed nine quarters of mid to high single-digit renewal increases. Meanwhile we continue to enjoy strong renewal retention in all of our business units. Finally with respect to capital management, we returned $533 million to our shareholders in the first quarter, $409 million of share repurchases and $124 million in cash dividends.

With that, I'll open the line to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Amit Kumar from Macquarie.

Amit Kumar – Macquarie

Thanks, and good afternoon. Two quick questions; first of all, just going back to the discussion on the fire losses. Can you sort of expand on the nature of these fire losses and was there some sort of a geographic concentration to these fire losses?

John Finnegan

I think the quick and dirty answer is no geographic concentration, and most of fire losses from quarter-to-quarter are a matter of good fortune or bad fortune. No pattern really.

Amit Kumar – Macquarie

Okay, got it. That was just more of an aberration than anything else.

John Finnegan

Well, we were aberrational on the low side for a few quarters, and this was a little bit on the high side. So we've been talking about a little reversion to the mean. Yeah, hopefully it will revert back down a little bit. But yeah, we've had a good run, though.

Amit Kumar – Macquarie

Got it. I got the point. The second question I have is -- and this relates to CCI. I think the comment was made that you have gotten good rate increases for some time, and hence based on the book of business that level of rate increases diminishes sort of going forward. If you were to fast-forward, let's say to the end of 2014, how do you foresee the rate versus loss cost equation to shape up?

Dino Robusto

What I could say is we look at April. Pricing in April appears to be in line with what we saw in the first quarter, but I can't predict what the rest of the year is going to bring. What I can tell you is that we continue to differentiate our rate increases by account based on the underwriting merits and the performance of each of the accounts. There is a meaningful difference in the average rate changes we get. And so, we're going to continue to execute that strategy.

One thing on loss cost trends, to keep in mind, obviously you got this sort of benefits of the like earned impact of the prior quarter's higher rate increases and those all play forward for a couple of quarters, but I can't really predict what's going to happen to rate by the end of the year.

Amit Kumar – Macquarie

Okay, so all is somewhat of a steady state right now.

Dino Robusto

Yeah, what we saw essentially in April.

Amit Kumar – Macquarie

Got it. Okay, that's all I have. Thanks for the answers and good luck for the future.

Dino Robusto

Thank you.

Operator

Thank you. And let's now go to Josh Stirling with Sanford Bernstein.

Josh Stirling - Sanford Bernstein

Hi, good afternoon. Thank you for taking the call. So, I appreciate all the commentary on pricing and it sounds like you guys think your bad adequate, and obviously record earnings, so it is a probably a good confirmation of that. The question is if you think about the industry structurally, you guys have visibility to sort of the way people actually act, we are just trying to respond to earnings calls and things. What do you think happens when the rest of the industry isn't inadequate? Are we going to maintain sort of pricing stability more or less like around the rate of inflation, kind of like theoretically the new rationality should leave people to do, or when you talk about things like double-digit declines in reinsurance pricing, do you think we'll sort of see like a real softening cycle, if you look at six months or a year and you are sort of doing your planning and you are thinking about the people you are actually competing with?

John Finnegan

So, I think for one thing the industry is a good deal from price adequate. I mean I think in some lines we are getting the price adequate. I have seen professional liability for example, we have made great strives and we are probably running a steady face '95. If you look at normalized expense ratio, and that's still not really price adequate over a longer term in current interest rate.

I would guess the industry on a current accident year basis fully loaded for caps to current investment rates, the industry itself is probably running high single-digit. There are some of our competitors that are running like us, running low double-digits, but that's still not quite where people want to be. So I think there is a way to go.

There is lot of people who can speculate on how the market will react as we go down the road. I really don't have any great insight. I think we're all taking a wait-and-see. Reinsurance is interesting, but for now the benefit to us whether it will be a detriment down the road, it's just hard to say.

Josh Stirling - Sanford Bernstein

That's fair. If I can ask another question, so I am surprised as you guys are shrinking internationally this quarter. I realize I didn't know that much honestly about your national businesses, and I am wondering it's better to refer to your book, and we don't talk that much about it. I am wondering if you can give us just some color on sort of what's going on, and big picture, the growth opportunities internationally, and how you guys are sort of able to leverage Chubb as a global brand? Thank you.

John Finnegan

Paul, you can answer. I'll start off and say it's more like a quarter of our business, not a third.

Paul Krump

Yeah, I would say, Josh, it's about 25%, it depends on the line of business, and the personal lines base. It's right around 25%. We have some very good opportunities for growth. What you saw -- and we saw mostly in our auto, because Brazil is a very large automobile market for us. We took some rate action. I think Dino has mentioned that on previous calls. So we have been surgically improving the book of business there. So we had about flat policy in-force count in Brazil, but when it translated it into U.S. dollars, it came back down about 10%.

If I go over to the accident help business and other areas, that is more disproportionately outside the United States and almost the inverse about 70% outside the United States, 30% inside the United States. We've been enjoying some very nice growth there. We have been writing both employer groups and some affinity groups. So things like travel accidents for credit cardholders outside the United States.

Dino Robusto

And on commercial, as we've been indicating over some of the prior calls and we said it today too, we got a lot less rate historically overseas is just a much more competitive marketplace in particular places know Europe and clearly we are not going to chase any unprofitable business and maintain a disciplined approach. And so, we are seeing a little bit less growth recently.

Over time though we still see good potential and we expect that the underpricing will eventually catch up in the marketplace, and we will continue to be a player outside the United States.

Josh Stirling - Sanford Bernstein

Great. Thanks for the time.

Operator

Thank you. And next we will go to Kai Pan from Morgan Stanley.

Kai Pan - Morgan Stanley

Good evening, thank you for taking my call. First question on the 150 basis point deterioration in turn by your underlying combined ratio year-over-year, how much of that is attributable to this non-cat weather and the large fire losses, and also the surety loss?

John Finnegan

Well, I would say about 200 basis points are attributable to non-GAAP weather and fire losses, so it's more than accounts for the deteriorations. And the surety loss will be another point.

Kai Pan - Morgan Stanley

Another point, okay.

Dino Robusto

And then the fire losses were probably another point as well.

Kai Pan - Morgan Stanley

Okay. So as we -- sort of the rate of increase is actually slowing down, and if inflation keeps the same that it's right now, and at what point we would no longer see the underlying margin expansion?

John Finnegan

As you know, I think the part of the thing is that it's a little bit complicated like most say. Margin expansion is a long-term projection that doesn't take into account quarter-to-quarter variation. We saw significant variation in this quarter. But just looking at it, I mean you can do the mathematics and say it's 4.5 or two points now and we still haven't earned premium as we move forward in terms of margin expansion. But also remember as rates come down, our book has improved.

So whether you call that a lower loss cost trend line or more immediate impact to loss cost right now, there is a benefit. You need 10 points if you have -- maybe you have nothing but a lousy book and when you prune that book, you don't need 10 points any more, you need less points. I don't know that you can just as easily just look at -- given where the book is let's compare it to full points and say the point is too higher. It's got this pretty close. I think right now we get margin expansion, but again, we have a better book. So we would expect a little bit less rate as we move forward.

Kai Pan - Morgan Stanley

Okay, thank you. Lastly on the sort of reinsurance cost, you mentioned that meaningful lower sort of like reinsurance costs, would that flow directly into the bottom line, or are you going to tap some of it on to consumers?

Richard Spiro

Well, again, I think as John said, we are now -- we are going to benefit from those lower costs whether or not we incorporated that into pricing as we go forward, time will tell.

John Finnegan

You are thinking -- in the order of magnitude you are thinking $30 million, $40 million, $50 million on a $4 billion book. It's not a major driver of the pricing decision.

Kai Pan - Morgan Stanley

Thank you so much.

Operator

Thank you. Next we will go to Vinay Misquith with Evercore.

Vinay Misquith – Evercore

Hi, good evening. For the higher fire losses in the non-cat whether that's about three points year-over-year change, just curious how much of it was higher was on a normalized basis for this quarter, because last year I believe it -- you had a below average number?

Richard Spiro

Yeah. Give us one sec. So if you look over a five year average for first quarter for non-cat weather-related losses, this is excluding the current first quarter, so that five years prior, we had about seven points on average of non-cat weather relate losses in our first quarter. The same comparable number if you look at fire losses would have been about eight points. I am sorry, yeah, eight points. And again, those numbers are on homeowners' loss ratio, not on the overall company.

John Finnegan

And remember you would expect that the first quarter of a year would have a little bit higher non-cat related weather than most of the other quarters, right? Fire will be different, but non-cat related-weather is almost -- first quarter was about 14.

Vinay Misquith – Evercore

Sure. So for the non-cat weather that was seven points in average versus I think this quarter was 14 points you said?

John Finnegan

Yes.

Vinay Misquith – Evercore

Right. And on the fire, do you normalize this eight versus towards the nine for this quarter?

John Finnegan

Yeah.

Vinay Misquith – Evercore

Okay, that's helpful. Secondly on the auto combined ratio, that also seems to be high. I believe you mentioned three points or something. If you could just help me understand that, it will be helpful. Thanks.

John Finnegan

Sure. You are talking about the personal auto?

Vinay Misquith – Evercore

Yes, correct.

John Finnegan

Okay. What you have in the personal auto was the three points of the adverse weather that was hitting it. I mentioned as well we had experienced some profitability issues in Brazil. We have been taking action there. We feel like we are addressing that very adequately through our surgical underwriting action and specific rate taking by tier. I just -- of course you would remember that we have a very small auto book in our portfolio. So it doesn't take much to move the overall combined ratio. We have enjoyed good rate and exposure increases of five points in that book of business. And our U.S. book is growing at 5%. That's really the story behind auto and the personal lines front.

Vinay Misquith – Evercore

Fair enough. And just one last follow up. So looking at the reduction in the pace of rate increases and the increase in per retention and the new to loss business, it seems that there is a modest improvement, but curious from your perspective as to what -- so how you will you look at the risk reward period being taking less rate versus sort of growing the book, because the book doesn't seem to be growing right now.

Dino Robusto

Yeah. As I indicated a little bit earlier, after multiple years of rate on rate increases plus given the fact that we have been calling the lowest performing parts of our book in managing our mix of business. Increasingly, we are focused on retaining our best accounts, and also those kinds of rate increases that have impacted some of the new business opportunities. So we are looking at increasing the retention and going after a little bit more new business which we saw. It didn't really manifest itself in the total. In the aggregate as I indicated outside U.S. was still a little bit more competitive, so our growth was down there, and there was a couple of additional factors affecting some of the growth on the U.S. side. Our exposure decrease was actually two points and that was function of the fact that we were reducing our participation on certain accounts to manage our aggregation.

So that had a dampening effect on what you are seeing in term of the higher retention and a little bit more new business, but directionally clearly we are interested in retaining more of our accounts and we see some good opportunities going forward. And so, as I indicated earlier, a little bit more optimistic that the growth will look a little better in the second quarter.

Vinay Misquith – Evercore

Okay, thank you.

Operator

Thank you. And the next question is from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Hi, thanks. So I guess one question I had was obviously reinsurance is very inexpensive for the market for you in particular, why not -- but the homeowners' book shrank obviously, there are some issues on homeowners' book that were specific to the quarter, but why not grow that book of business if you are able to get very good rate, you are comfortable with the risk profile and you can buy an expensive protection?

Paul Krump

First of all, Mike, this is Paul, and homeowners grew at 4% in the quarter. So we felt pretty good about that. I would tell you that we do look at reinsurance, occasionally we look at it opportunistically in the homeowners' front. It depends on the geography. It depends on the customer, but when we most often step into the [fact] (ph) market is where we are looking at the ultra high net worth that kind of a family office type exposures where they have properties all over the globe often times in places like Florida. And that's where we use reinsurance the most often on a facultative basis in the homeowners' world. Dino, I don't know if you want to add anything.

Dino Robusto

I mean you don't have any new overall strategy to increase the reinsurance prices, but clearly as thoughtful underwriters, we are always looking to maximize our risk-return tradeoff. And lower reinsurance pricing could potentially offer us that on certain accounts, and we will clearly look at that.

Michael Nannizzi - Goldman Sachs

Got it. And then maybe if I could, Paul, on the comp book, can you comment just a bit on where that is right now on an underlying loss or combined ratio basis, and whether or not you are continuing to get rate there at the same level as previously or where that's factoring relative to loss trend? Thanks.

Paul Krump

Yeah. So the workers' comp, it continues to be very profitable for us. The rate increases for comps have declined from the higher levels that we saw on 2011 and 2012, and -- but we continue to see some really good performance in it. Our growth was down a little bit this quarter, but in general we are very optimistic about our comp portfolio. It's been historically very profitable, and we continue to see it as an opportunity going forward.

Michael Nannizzi - Goldman Sachs

So where are you writing that business now? Can you tell us?

Paul Krump

Yeah, so the combined ratio in the quarter for our commercial workers' comp was 84.

Michael Nannizzi - Goldman Sachs

On an underlying basis?

Paul Krump

No, no, no, calendar year.

Michael Nannizzi - Goldman Sachs

Okay. So I guess my question is whether it's comp or other business, I mean, obviously you have your levels of profitability that you are willing to write business and we can't see it at the segment level because we just don't have this disclosure, but is there -- are you seeing the market competitors that are looking to get -- to frankly start to get more competitive and pick up your business if your threshold for profitability is higher than their's? I mean because you are running in 84 comps, you are probably writing it as 74 on an underlying basis -- it's clearly profitable. Are other people willing to write that business at less profitable levels because they can clip the coupon on the investing side and maybe give you more competition whether it's there or whether it's in other books?

Dino Robusto

Well, just in terms of the competitive side of it, as we've always indicated we write our workers' comp in our work comp portfolio in parallel with other coverages, in our target niches and its attractive business. It's been historically profitable, but our retentions has stayed historically very high, and clearly based on our value proposition we can keep the business that we want on comp based on all the other lines that we are writing. And your question about where we are writing it, we are writing it across the U.S. in line with our target market strategy.

Paul Krump

Mike, I would just add that as underwriters we put our business into -- we tier it all the time. It's where that we lose a customer just on a couple of points of price. We know which ones are performing exceedingly well and which ones are not performing so well. So we put them into different cohorts, and our underwriters are trained to know when to back away and when to let an account go and when to hang on one. I think at 84, it was a very good quarter for workers' comp.

Michael Nannizzi - Goldman Sachs

We all know. Of course, absolutely. Great. Thank you very much.

Operator

And next we will go to Jay Cohen with Bank of America.

Jay Cohen - Bank of America

Yeah, thank you, a couple of questions. You had mentioned in the property reinsurance treaties getting better terms and conditions, I'm wondering if you could give us a bit more detail on that?

And then, second question I'll ask is, in CCI did you have a similar experience with non-cat weather as you did in personal lines or was that -- would you consider that to be fairly normal?

Dino Robusto

You want to answer?

Richard Spiro

Yeah. Jay, it's Ricky; I will start with the first question on reinsurance and then Dino will take the non-cat weather. So I'll give you one example, the biggest change that we were able to achieve was with the definition of a single occurrence for key perils. So as you probably know within cat treaties, a single occurrence or specific perils is based on the number of hours from the beginning of an occurrence to the ending of occurrence. And the losses that fall within the hours caused for a given peril are covered in the single loss occurrence. Generally speaking, one hour causes are better for the ceding company, so you have more time in which to cover losses that occur as part of an event.

So with that as background, I'll give you one specific example. In our North American cat treaty for the peril of hurricane and tropical storm, our expiring hours caused with 96 hours or four days, and our new hours cause is a 168 hours or seven days, so a meaningful increase in the length of time that we can put losses for a specific event. And that sort of thing happen for almost all the perils in each our major treaties, so a very positive development for us.

Dino Robusto

Then on the non-cat weather, it's clearly much more of a personal lines issue for us. In most cases, weather event that could trigger large commercial losses is probably going to be designated a catastrophe, and in fact, in the first quarter of 2014 we did not have any large non-cat weather-related property losses.

Jay Cohen - Bank of America

Got it. If I could squeeze one more; it's a yes or no question. You talked about having some favorable development in the cat line, was that also -- did that also show up in a favorable development that you talked about overall?

Richard Spiro

Yes, it did. It was about 0.2 points of development related to that. So you don't double count. If you're trying to get to say, our accident year, x cat combined ratio, you got to deduct about 0.2 points from the overall favorable development number.

Jay Cohen - Bank of America

That's helpful. Thanks, Ricky.

Operator

Next question is from Meyer Shields with KBW.

Meyer Shields - KBW

Thanks, good evening. Just with regard to the weather, does that have any favorable impact on workers' compensation, because there is less activity going on outside, is that all relevant?

John Finnegan

Good question. I guess we've never thought of it that way. I don't think we have an answer to that. I think (multiple speakers) claim data points they give you.

Meyer Shields - KBW

Okay. I'm not trying to take anything away from the 84.

John Finnegan

I think, A) It's a good question, B) It has stumped us, and C) I can assure you it wouldn't be material to the 84, I'm sure. Yeah.

Meyer Shields - KBW

Okay. That's the part that matters. Second, with regard to the culling, I'm not sure how to quantify this question, but can you compare how much of your book now is in the underperforming tiers compared to what a reasonable long-term target is?

Dino Robusto

I can't really quantify it exactly for you. What I can clearly tell you is that a lot more of our accounts in our book is rate adequate, and which is why you saw a little bit of the slight moderation in the rate. We are still getting, though, some strong differentiation. One thing maybe as the data point that I can give you, if you look at sort of distribution of the increases in the U.S. about 20% of our CCI book got greater than 10% rate increases, whereas our professional liability was roughly a quarter of the book that got over 10 in terms of price reductions. Less than 10% of our book got rate decreases from both our commercial lines and professional liability lines, but clearly over time, we have less and less of the need for the larger rate increases.

Meyer Shields - KBW

Okay. That's very helpful. And is there any difference in terms of loss cost trends outside of U.S. and inside?

Richard Spiro

The lines of business are roughly the same. I would say it's roughly the same.

Paul Krump

Yeah, I would agree.

Meyer Shields - KBW

Okay, fantastic. Thank you very much.

Operator

Thank you. (Operator Instructions) And we will take the next question from Ian Gutterman with BAM Investments.

Ian Gutterman - BAM Investments

Hi, I just had a couple of questions on reserves. The first one, in CPI the 5 million releases, I know that's the same as last year, but most quarters that's 20, 30, 40 favorable, was there anything that was less unusual in CPI?

Richard Spiro

No, really it's hard to say the correct definition. Most of it came from personal other, and then there was a small piece that came from homeowners due to what we were talking about earlier, the favorable prior year cats, and personal auto was a little bit adverse.

Ian Gutterman - BAM Investments

Okay. So there is less releases from home than usual, that's what it sounds like.

Richard Spiro

Yes.

Ian Gutterman - BAM Investments

Okay. And then the other one, this is a little bit more tactical, but on D&O reserves, going through your Schedule P, the other liability claims made, my analysis, I think several of the analysts on the sell-side published more analyses that seem to show that they, say, starting in 2010 through 2013, those accident years don't look to be reserved as well as the older years.

At the same time, obviously you guys have discussed for the past couple of years running hot in the lines that are more frequency-type lines that arguably would cause pays to happen sooner than if we looked at the historical pay pattern. So I was wondering if you had any insights into why we are seeing that pattern where it seems like reserves aren't as strong as what (indiscernible) professional lines?

Richard Spiro

Sure. Well, obviously as you are pointing at it, if you aggregate what's shown in part two of Schedule P for our individual writing companies, the average development in the other liability claims made for two of the accident years, that being '11 and '12, were slightly adverse; about $4 million adverse in '12 and about $ 9 million adverse in '11. So when you say that there they're developing adversely, there is really hardly any change at all.

The other thing I would say is that there are naturally many moving parts within an aggregated line of business like this. So parsing movement this small, it's contributing elements is inherently problematic, but as you point out, we have talked on prior earnings calls about, for example, some of the issues we've had with the employment practice liability line. And so, part of the adverse development you are seeing is related to that.

Going forward, I'd say these accident years are still green and we will see how it develop over time, but we said our year end reserves we believe are at appropriate levels and you guys can draw your own conclusions.

Ian Gutterman - BAM Investments

If I can just clarify a little bit, I'm not so much aware that they developed adverse initially. It was more looking at -- I am not so much worried that they developed adverse initially, it was more looking at sort of the initial page relative to incurred in the early years versus older early years and the initial IBNR versus other year's IBNRs, would that be -- it seems like there is maybe a tale that's changing. And it's obviously hard for us outside given some of the points you raised to disembowel that I guess. Is there any suggestions you can give us on what appropriate adjustments might be that might give us a better answer?

Richard Spiro

Yeah. Again, it's hard to point anything specific. There have been some mixed changes that may have some impact there, but nothing on a philosophical basis that I would point out.

Ian Gutterman - BAM Investments

Okay, great. That's all I have for tonight. Thanks.

Richard Spiro

Thank you.

Operator

It appears there are no further questions at this time. Mr. Finnegan, I would like to turn the conference back to you for any additional or closing remarks.

John Finnegan

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

Operator

This does conclude today's conference, and thank you for your participation.

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