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Chubb Corp (NYSE:CB)

Q4 2010 Earnings Call

January 27, 2011 05:00 pm ET

Executives

John Finnegan - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Chairman of Finance Committee

Paul Krump - President, Commercial and Specialty businesses

Dino Robusto - President, Personal Lines and Claims

Richard Spiro - Chief Financial Officer and Executive Vice President

Analysts

Jay Gelb - Barclays Capital

Vinay Misquith - Credit Suisse.

J. Paul Newsome - Sandler O'Neill

Matthew Heimermann - JP Morgan Chase & Co

Keith Walsh - Citigroup Inc

Gregory Locraft - Morgan Stanley

Jay Cohen - Bank of America

Joshua Shanker - Deutsche Bank AG

Mike Nannizzi - Goldman Sachs

Robert Glasspiegel - Langen McAlenney

Ian Gutterman - Adage Capital

Operator

Good day, everyone, and welcome to The Chubb Corporation's Fourth 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 the Chubb's management team will include in today's presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It is possible that actual results might differ from estimates and forecasts that Chubb's management team might make today. Additional information regarding factors that could cause such differences appears in Chubb's filings with the Securities and Exchange Commission. In the prepared remarks and responses to questions during today's presentation of Chubb's fourth quarter 2010 financial results, Chubb's management may refer to financial measures that are not derived from the Generally Accepted Accounting Principles or GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP and related information is provided in the press release and the financial supplement for the fourth quarter 2010, which are available on the Investors section of Chubb's website at www.chubb.com.

Please also note that no portion of this conference call may be reproduced or rebroadcast in any form without the prior written consent of Chubb. Replays of this webcast will be available through February 25, 2011. Those listening after January 27, 2011, should 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. Now, I will turn the conference over to Mr. Finnegan. Please go ahead.

John Finnegan

Thank you for joining us. We finished the year with another excellent quarter, making 2010 the third best in Chubb’s history for operating income per share, and the second best year ever for net income per share. These were outstanding results, especially considering the continued weakness in the global economy, a soft property and casualty market environment, and heavy catastrophe losses for the year. 2010 was the fifth consecutive year in which we produced a combined ratio below 90%. Over the same five year period, we also generated a very attractive average annual ROA of 16%.

For Q4, operating income per share was $1.69 and annualized operating ROA was 14.5%. Q4 net income per share was $2.02, an annualized ROA was 15.7%. For the full year, operating income per share was $5.90 and operating ROA was 13.1%. Net income per share for 2010 was $6.76, and ROA was 13.9%. Net written premiums for Q4 were up 3%, driven largely by higher exposures that have resulted from an improvement in economic activity over the last year’s depressed levels.

GAAP book value per share at 2010 year end was $52.24, up 11% since year end 2009. Our capital position remains excellent, and Ricky will talk about the progress we made in our share buyback program. As you saw in our press release, we provided income per operating share guidance for 2011 of $5.35 to $5.75. I’ll have more to say on guidance in my closing remarks. As you know, our Chief Operating Officer, John Degnan retired on December 31st. Upon his retirement, we promoted three executive vice-presidents of the corporation, each of whom is a seasoned veteran who has risen through the ranks, and each of whom has been with Chubb for at least 25 years.

Paul Krump became President of our Commercial and Specialty businesses, Dino Robusto became President of our Personal Lines and Claims, and Harold Morrison, our Chief Global Field Officer, took on the additional role of Chief Administrative Officer. Now Paul will discuss the performance of Chubb’s Commercial and Specialty Insurance operations and provide some market color.

Paul Krump

Thank you John, and good evening everyone. The Chubb Commercial Insurance net written premiums for Q4 were up 4% to $1.1 billion. We were helped by improving economic conditions in the United States, which I will discuss in a minute. The combined ratio was 93.5% versus 89.9% in Q4 2009. Excluding the impact of catastrophes, CCI’s Q4 combined ratio was 91%, compared to 89.8% in Q4 2009. In the United States, CCI’s renewal rates were down 1%, the same as the decline experienced in Q3.

Retention for Q4 was a strong 86%, comparable to the 87% retention rate in Q3. High retention was a key contributor to our new to loss business ratio of 1.3:1 for the quarter. At Chubb Specialty Insurance, net written premiums for Q4 were down 3% to $746 million. CSI’s combined ratio was 82.4% versus 84.1% in Q4 of 2009. Net written premiums for professional liability were down 4%, and the combined ratio was 88.7%, compared to 89.5% in Q4 2009.

Renewal rates for professional liability in the US in Q4 2010 were down 3%, and renewal retention was 87%. The new to loss business ratio for professional liability was 1.1:1 in Q4. For surety, net written premiums in Q4 were flat, and the combined ratio was 37.8%. Turning now to conditions in the standard commercial market; we saw encouraging signs that the overall economy is easing off the bottom and demand for insurance is picking up.

For example, in the United States our renewal exposure change was slightly positive for the quarter; this is the first quarter since mid-2008 that our renewal exposures were higher. Our midterm policy endorsements were also up, driven by customers adding to their plant and equipment schedules, and this too helped growth. By comparison, Q4 2009 was among the lightest in years for mid-term endorsement activity. Finally, audits of adjustable premiums for our worker’s compensation policies resulted in our receiving additional premiums in Q4 2010, instead of having to refund premiums, as had been the case in Q4 2009.

As background, premiums for worker’s compensation depend on the size of the insured’s payroll. Premiums are initially set based upon assumed payroll levels, which subsequently are audited against the actual levels. These audits can result in retroactive adjustment of premiums. Because of the dramatic downturn in the economy, which began in 2008, we saw negative net audit premiums in Q4 2009. Q4 2010 was the first quarter in over a year in which we had positive net audit premiums.

Despite these signs of improvement in economic activity, the market remained competitive in Q4 as evidenced by CCI’s 1% renewal rate decrease that I mentioned earlier. However, we were encouraged that we did not observe the typical year end pricing frenzy in the market from competitors, making last minute attempts to achieve their annual premium targets. With respect to general market conditions in the specialty business, the environment was similar to what we experienced in Q3. The exception was in the D&O market for publically traded companies, where competition heated up in Q4.

It should be noted that our professional liability portfolio is extremely well diversified with public D&O accounting for about 20% of our professional liability premiums. In response to this increased pressure in public D&O, we have become even more rigorous in our underwriting standards. As a result, we got off some accounts altogether, and for some others, reduced our limits or repositioned our participation on a program from primary to an excel layer, if we deemed the relative pricing of that layer’s risk to be better.

Notwithstanding the competitive pressure, professional liability in general and public D&O in particular continue to be important and solidly profitable businesses for Chubb. With regard to the improvement in the economy, we did see signs of stabilization in our professional liability exposures, but they were subsumed by the negative 3% renewal rate change in the quarter. And now I’ll turn it over to Dino, who will review personal lines and claims.

Dino Robusto

Thanks Paul, and good evening everyone. Chubb personal insurance net written premiums increased 6% in Q4 to $963 million. CPI produced a combined ratio of 83.7% compared to 80.7% in the corresponding quarter last year. The impact of catastrophes for the quarter was one point in 2010, whereas in Q4 of 2009 the impact of cats was negligible. For the full year, the impact of cat losses on CPI was 10.2 percentage points, compared to 0.9 points in 2009. The large impact events in 2010 for CPI were the northeast rainstorms in Q1 and the Oklahoma hail storm in Q2.

Homeowner premiums were up 3% for the quarter, and the combined ratio was 78.8%. In the US, where premiums had been under pressure due to the economic downturn, we began to see improved new business and endorsement activity giving homeowner’s its best premium growth rate in eight quarters. Personal auto premiums increased 10% and the combined ratio was 90%. In other personal lines, premiums were up 12% and the combined ratio was 92.7%.

Top lines improvements in both personal auto and other personal were driven largely by growth outside the United States. Overall, CPI’s premium growth reflected both a healthier economy and our multi-pronged initiative to grow and retain business. Among them are our drive to achieve greater penetration in the US for both homeowner’s and personal auto in the West and Southwest, where our market share is not as substantial as in other regions.

These efforts have met with considerable success in no small measure because of our wall fire defense services and our broad coverage offerings. We also rolled out to additional states our more granular pricing tiers for our auto product, making our rates more competitive and stimulating increased producer interest in marketing our auto product to high network customers.

Let me say a few words about our CPI strategy and why we have been able to consistently outperform the market. First, we focus on the high net worth market and we have no interest in becoming a mass market commodity carrier. Second, a commitment to serious underwriting is firmly embedded in our DNA. By serious underwriting, we mean pricing to the risk, not the market. For example, we appraise virtually every home we insure, to make certain there is adequate coverage to enable us to rebuild the home with like materials and workmanship in the event of a loss.

Third, we have superior loss control services, such as our wall fire defense program which has saved many homes from destruction, and saved us many millions of dollars in claims. Fourth, and very important, is our claims service. When our customers have a claim, we take care of them, resulting in brand differentiation and high retention. Indeed, customers who have experienced our claim service and that of our competitors usually become our customers for life. They are willing to pay a premium for the peace of mind of knowing that if they have a covered loss, they will be treated often beyond their expectations as they tell us in our customer satisfaction surveys.

Let me now turn to some claim trends for Q4 for Chubb as a whole. Claim frequency and severity results varied by line of business but continued to be relatively benign. Our overall new arising claim counts, excluding catastrophes, were steady in Q4 2010 compared to Q4 2009, and were down 5% for the full year, led by our decrease in property excap frequencies.

As far as catastrophe losses are concerned, we had very modest cat losses in Q4, despite the winter storms in the US and the first round of floods in Australia. As we mentioned in our press release, there has been additional flooding in Australia since the new year began, so we wanted to provide you with some detail on our exposure that impacts 2011. The vast majority of our January losses stems from the flooding in and around Brisbane. Our access to the area is affected for the purpose of assessing our customer’s losses, was delayed due to evacuations, power outages, and the time it took for the flood waters to recede, so it’s still very early to pin down a precise estimate.

Our inspections are underway as we speak; however, given the potential size of this event, we wanted to provide you an order of magnitude for our losses. Our preliminary estimate at this time is the range of $75 to $100 million before tax, based on total projected industry insured losses from the Australian floods of between $5 and $10 billion. Our estimated losses would be consistent with our share of commercial and personal markets in Australia. As John will discuss, we have taken these losses into account in our catastrophe assumption for our 2011 guidance.

Also on the subject of January weather, we have experienced some difficult weather in the US, which has generated the type of claims typically associated with snowstorms and cold winter weather, such as water infiltration, damages from the weight of ice and snow, and in some cases, pipe freezing. None of these events have been large enough to be categorized as a catastrophe, now did any one have a material impact on Chubb. Nonetheless, in the aggregate they will probably result in significant weather related non-cat losses for the month.

Turning back to claim trends in 2010, for professional liability, claim developments are for the most part, encouraging. D&O security class actions against unique insureds, which traditionally has been our most costly claims, were down again in 2010. Finally, the number of new claims related to the credit crisis was insignificant in Q4. Losses from credit crisis claims are developing consistently with what we had set previously. And now I’ll turn it over to Ricky, who will review our financial results in more detail.

Richard Spiro

Thanks, Dino. As you’ve already heard we are very pleased with our financial results in both Q4 and for the full year. Looking first at our operating results, underwriting income was $356 million in the quarter. Property and casualty investment income after tax was up 1% over last year’s Q4, as a decline in yields was offset by an increase in average invested assets and an increase in dividend income. Net income was higher than operating income in the quarter due to net realized investment gains before tax of $155 million were $0.33 per share after tax with $0.23 per share coming from our investments portfolio. For comparison, in the Q4 of 2009 we had net realized investment gains before tax of $193 million where $0.37 per share after tax of which $0.32 came from alternative investments.

As we’ve pointed out in prior earnings calls, we include our share of the change of the net equity of our alternative investments in net realized investment gains and losses which is not a component of operating income. In contrast, many of our competitors include the change in that equity from their alternative investments in investment income and therefore, in their operating income. This distinction is important when comparing operating results among different TNC companies. For example, if we had included the change in that equity from alternative investments in investment income instead of in that realized investment gain, for Q4 our operating income per share would have been higher by $0.23 and our annualized operating income ROE would have increased by approximately two points from 14 ½ to 16 ½.

Unrealized appreciation before tax at December 31, 2010, declined to $1.7 billion from $2.6 billion at the end of the Q3. This decrease was largely attributable to the impact on our fixed maturity securities of the increase of underlying treasury rates during Q4. The $1.7 billion of unrealized appreciation before tax at year end 2010 was slightly higher than at year end 2009 when it was $1.6 billion.

The total carrying value of our consolidated investment portfolio was $42 billion dollars as of December 31, 2010, down $1 billion from the end of Q3 due almost entirely to the decline in unrealized appreciation of our fixed maturities. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturities portfolio was 3.9 years and the average credit rating was AA2. In light of the recent headlines regarding municipal bonds, I want to take this opportunity to make a few comments about the current market environment as well as our own tax-exempt portfolio.

We recognize that the recent well-publicized fiscal challenges affecting some municipal borrowers have led to heightened concerns about municipal bond default risk and wider credit spreads. We are very focused on these issues and we are watching these market developments closely. However, as an experienced municipal bond market participant, we believe, as many others have commented, that these concerns are largely over-blown and we do not expect wide-spread municipal defaults. More importantly, we believe that our own portfolio, which has been structured through careful risk selection and stringent credit standards, is of extremely high quality. As I have said previously, our tax-exempt portfolio is well-diversified by geography, sector, and source of security and has an average credit rating of AA2.

In addition, we are heavily weighted in high quality revenue bonds such as water, sewer, and electric utility bonds which are supported by stable income streams and which are generally not affected by the fiscal issues of state municipalities. At year end, approximately 62% of our portfolio of tax-exempt securities was invested in these high quality revenue bonds. Another 13% of the portfolio was invested in pre-refunded bonds which are backed by US Government securities. The remaining 25% of the portfolio was invested in state and local government general obligation bonds where we favor larger, more liquid issuers who have greater financial flexibility. To summarize, despite the presence of headlined risk and potential market volatility, we remain comfortable with the credit quality of our tax-exempt portfolio.

Turning to our Liquidiate, the holding company, we continue to have excellent liquidity. As of December 31, 2010, our holding company portfolio included $2.2 billion of investments, including $800 million of short-term investments. Book value per share under gap at December 31, 2010, was $52.24 compared to $47.09 at year end 2009; an increase of 11%. Adjusted book value per share, which we calculate with available for sale fixed maturities at advertised cost, was $49.05 compared to $44.37 at 2009 year end, also an increase of 11%.

As for reserves, we estimate that we have favorable development in Q4 of 2010 on prior year reserves by SBU as follows: in CPI we had about $25 million. CCI had about $50 million. CSI had about $60 million and reinsurance assumed had about $10 million, bringing the total favorable development for Chubb to about $145 million for the quarter, This represents a favorable impact on Q4 combined ratio of about five points overall. For comparison, in Q4 of 2009, we had about $215 million in favorable development for the company overall including about $35 million in CPI, $40 million in CCI, $125 million in CSI and $15 million in reinsurance assumed. The favorable impact on the combined ratio in the Q4 of 2009 was about 7 ½ points. Favorable development for the full year 2010 totaled about $745 million compared with $760 million in 2009. In both years, the favorable impact on the combined ratio was about 6 ½ points. During the Q4 of 2010 our loss reserves increased by $42 million, including an increase of $82 million for the insurance business and a decrease of $40 million for the reinsurance assumed business, which is in run-off. The impact of currency fluctuation and loss reserves in the quarter resulted in an increase in reserves of about $110 million. The impact of catastrophes reduced reserves by $47 million reflecting payments in prior events and lowered levels of cash in the Q4.

Finally, I want to give you an update in capital management. During the quarter we re-purchased 8.1 million shares at an aggregate cost of $473 million. For all of 2010 we repurchased 37.7 million shares at an aggregate cost of $2 billion and our average cost per share was $53.31. During 2010, we completed both the 25 million share repurchase program we announced in December 2009 and the additional 14 million share repurchase program we announced in June 2010. Given our strong capital position and the attractive economics currently available from share buy backs, we announced the new 30 million share repurchase program last month. We began to buy back shares under the new authorization in December, and at December, 31, 2010, we had 28 ½ million shares remaining under our current repurchase authorization.

For your information, going forward, we intend to move our annual board review of our share repurchase plan from December to January. We will therefore announce our plans regarding 2012 repurchases in January 2012 concurrent with the release of our 2011 year end financial results and our initial 2012 calendar year earnings guidance. This revised timing will enable us to have more complete financial information available at the time of our buy back decision. It will also allow investors to make a more informed assessment of our capital management plan at the time we announce it.

For purposes of our 2011 operating income per share guidance, we have assumed that we will complete our recently authorized 30 million share repurchase program by the end of January 2012. We have made the additional simplifying assumption that the 28 ½ million shares remaining under our current share authorization will be purchased on a pro-rata monthly basis over this 13 month period so that approximately 26 million shares are assumed to be repurchased in 2011. Of course, the actual execution of and pay for the buyback will depend on overall market conditions, portfolio investment opportunities, opportunities for profitable growth in the property and casualty insurance market, and other factors. And now, I’ll turn it back to John Finnegan.

John Finnegan

Thanks, Ricky. Chubb performed extremely well in both the Q4 and the full year. Here are the highlights: for the Q4 we had an operating income per share of $1.69 in annualized operating ROE of 14.5%. For the full year we had an operating income per share of $5.90. These results were achieved through disciplined under-writing and a focus on bottom line profitability. For Q4 we had a net income per share of $2.02 and annualized ROE of 15.7%. For the full year we had a net income of $2.2 billion. On a per share basis that income was $6.76, an increase of 9%, making it the second highest net income per share in Chubb’s history. Excluding catastrophes and prior period development, our 2010 accident year Ex-Cat combined ratio was an outstanding 90.4. Book value per share was up 11% for the full year and we continued to actively manage our capital by returning $2.5 billion to our shareholders through share repurchases and dividends.

In development of 2011 guidance we assume that the insurance market will show some positive growth due to continued improvement in the overall economy. As such, we expect some positive exposure growth, especially in our standing commercial business. On the other hand, based on our Q4 experience we have not assumed any improvement in the overall rate environment. Overall, we are projecting low single digit rate growth for the year compared to the flat growth ex currency we saw in the 2010 calendar year. On that basis, we expect operating income per share for 2011 to be in the range of $5.35 to $5.75. This guidance is based on our expectation that net rate improvement growth will be 0%-2%. We will have a combined ratio of 91-93 for the year based on our combined ratio of 91-94 for CPI, 94-97 for CCI, and 85-88 for CSI. Property and casualty investment after tax will be down 2%-4%.

Finally, we’re assuming 291 million average diluted shares for the year. Our guidance assumes 3 ½ percentage points of catastrophe will be losses compared to the unusually severe 5.7 points of cats we had in 2010. The 2011 assumption is based on our actual long term average annual cat-losses of 3 percentage points adjusted outward by approximately half a point to take into account what looks like higher than usual cat-losses in the Q1 largely as a result of the Australian floods.

In terms of sensitivity the impact of each percentage point of catastrophe and losses in 2011 operating income per share is approximately $0.25. At the mid-point of the guidance range our projected operating income per share for 2011 is down $0.35 from our actual operating income per share of 2010. This reflects the expectation that the negative impact of a margin deterioration and lower investment yields will more than offset the positive impact of our share repurchase program and lowered expected catastrophe losses.

In summary, Chubb posted excellent results in 2010 in a less than optimal economic and PNC environment. Looking ahead, we expect 2011 to be another challenging year for the industry. Nevertheless, we believe our superior underwriting expertise, strong capital position, prude investment philosophy, and excellent credit ratings will enable us to generate solid returns in any economic environment and to capitalize on business opportunities as they arise. With that, I’d be glad to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions.) And first let’s go to Barclay’s Capital, Jay Gelb.

Jay Gelb - Barclays Capital

Thank you, I want to touch base on the guidance for 2011. Can you give us a sense of how much if any reserve releases are included in that combined ratio outlook?

John Finnegan

You know Jay, as we said in the past, we don’t have any – we run these things under a number of different scenarios which have different accident and mixes and different SBU contributions, so we don’t really have any specific favorable development number. What we’ll say is to make the numbers we’re talking about, under almost all scenarios it would require some degree of favorable development in 2011, albeit a lesser level than we enjoyed in 2010.

Jay Gelb - Barclays Capital

Okay, and then in terms of the outlook for premium growth, premiums were up overall 1% for the full year in 2010, and for the outlook for 2011 to be flat up 2%, if rates declines are essentially the same pace, but exposure is better, wouldn’t premium growth be better?

John Finnegan

Yeah, good question Jay. I think that if you really get it on an apples to apples basis, you make one adjustment we were really zero in 2010 on an excurrency basis, and right now, based on where rates are, we have no currency impact in our zero to two, so you’re talking about a one point improvement, so we’re somewhere between our Q4 result of a three point improvement and flat for the year last year. You know, we start the budget process in December; we did have a good Q4, so there’s a decent chance that our Q4 momentum will continue into 2011, and that our growth will be a few points higher than is reflected in our guidance.

But you know, in terms of impact and earnings guidance, it varies a few points in actual versus forecast, non rate related growth would have very little impact on profitability. So maybe there’s more momentum there than we have in our guidance; again, we started about a month ago. We hope that that’s true, but what we have now is up about a point from the high end of the range of the calendar year last year, a little bit below Q4.

Jay Gelb - Barclays Capital

Alright, thanks John.

Operator

Let’s move on to Vinay Misquith with Credit Suisse.

Vinay Misquith -- Credit Suisse

Hello, good evening. Two questions, the first on capital management; your operating leverage is below historical averages and seems that it can take out more capital from the operating subsidiary, which I don’t think you’ve down Q4. Just wondering how you look at that and what is the maximum debt to capital you would be willing to run at by being more excess capital from the cat subs?

Richard Spiro

Okay, hey Vinay, it’s Ricky. How are you? Let me answer your second question first. We’ve stated publically in the past our debt to capital targets are between 20 and 25%, that’s on a reported basis. We’re currently running a little north of 20, so that’s sort of the range. I’m not going to give you a specific number, that we’re willing to list to it with. As it relates to capital management, you know, it’s a little more complicated. I’ll make a few observations.

If you look at our earnings on a net income basis as an example for 2010, plus the dividends that we paid out in return to shareholders, you know that number totaled something like 2.5 – I’m sorry, if you look at our share repurchases plus the dividends that we paid out to shareholders, that totaled about $2.5 billion in 2010. We made about $2.2 billion so there is a – we did pay out about $250 to $300 million more than we earned. Secondly if you look at our guidance for this year, 2011, you get to a similar answer using the midpoint of our guidance with the dividends that we are expected to pay, and in fact, in that scenario we actually have a bigger gap. So we are, we think, eating into our excel capital position.

It’s a little more complicated, as I said, because there are a few other factors that are involved when we think about our excess capital, it’s not just looking at ratios like bring the surplus or debt to cap, the models that the rating agencies and some of the cat models, as you know, are constantly changing. Without going into all of the details, the bottom line is capital requirements are going up so we’re continuously dealing with that, but having said all of that, we still believe we’re in a significant excess capital position both on our own models and on the rating agency models.

We believe in capital management. If we don’t have a better use for excess capital, you know, we will continue to return it to our shareholders.

John Finnegan

You know, Vinay, just putting the two together, I think Ricky explained it well. I don’t think there’s any play in the leverage, we’re in a good excess capital position, we’re generating significant earnings and doing big buyback programs, and we’ll come out of the year presumably in a strong excess capital position. Adding to leverage would be the last thing we need to do, you know, additional share repurchases. What at the maximum could it be? $200 or $300 million, it’s a small number, even if we wanted to go up the scale a little bit. You know, we’re in a strong capital position without adding any leverage, so I don’t think that’s going to be a trigger point in terms of what our share buyback levels are.

Vinay Misquith -- Credit Suisse

Okay, that’s a great answer. The second question is one the market to market on the municipals; could you say that your 3% market to market loss this quarter was broader end of these, which were down more like 5 to 6%, would you say that that’s because of the quality of your portfolio? And if you could just give me a sense of how you value it, do you use third parties to value your municipal bond portfolio? Thank you.

Richard Spiro

Sure. The first question, the difference – why our portfolio dropped around 3% and the broader markets were higher, I think the Barclay’s municipal bond index probably dropped something close to 5%. You know, the quality of our portfolio and the mix of our portfolio is part of it. The main driver, frankly, is we have a shorter effective duration than the broader market. So we’re at around five years, I think that the market index is at around eight years, and as a result when you have a movement in interest rates, our portfolio is going to move a little bit less than the broader market. As it relates to how we value our portfolio, 100% of our tax exempt securities are level two securities, and our priceline independent, nationally recognized pricing service; we obviously vet their pricing methodology and we’re confident that it’s the best and most accurate way to price our portfolio.

Vinay Misquith -- Credit Suisse

Okay that’s great. Thank you.

Operator

And let’s next to go Paul Newsome with Sandler O’Neill.

J. Paul Newsome - Sandler O’Neill

Good morning. Thank you for taking the call. Just a follow up; everything on the asset side is available for sale, right? There’s nothing in it held for maturity?

Richard Spiro

That is correct.

J. Paul Newsome - Sandler O’Neill

And then maybe you could just touch a little bit more on the international exposure that you have, and give us a sense of – we’ve had a couple of quarters now of cat losses for you guys – just how you’re measuring that exposure and how we should think about these things when we’re (inaudible) or –

John Finnegan

Are you talking about our catastrophe exposure overseas? Not our market exposure?

J. Paul Newsome - Sandler O’Neill

Catastrophe exposure.

John Finnegan

Yeah, you know, I think that sometimes people focus on our personal lines operation for the US and not the fact that we’re a widespread operation for commercial and specialty and also that well over a quarter of our revenue comes from overseas, so it wouldn’t be unusual to have overseas losses. We have more overseas losses now than we used to have because we have greater overseas revenue, but certainly the percentage of premiums are cat losses in the US have been higher than our cat losses overseas. You know, the impact of overseas cat losses, now it’s like anyone else’s (inaudible).

But for example, last year we had a big Chilean earthquake loss, and 2011 it looks like we have a good sized Australian loss. On the other hand, in 2010 we experienced almost no loss in the severe European wind storms, the New Zealand earthquake, and the UK winter storms. So it’s just like the US; manageable cat losses are the result of a combination of sophisticated cat exposure management but also a lot of good fortune. Even those countries where we suffered significant losses, the size of these losses seemed in line with our market share, that was certainly the case with Chili last year.

You know, based upon industry losses of $5 to $10 billion and one to two point market share in Australia, I’d say our estimate at this time, and it’s just preliminary, put us right in that zone.

J. Paul Newsome - Sandler O’Neill

Is there any way for us to sort of do something similar that we do in the US to kind of judge ahead of time if you have particular exposures in a particular country?

John Finnegan

I don’t know. I don’t know really what you do in the US, so I’m not sure.

J. Paul Newsome - Sandler O’Neill

We have statutory statements that can look at sort of by states, and do all sorts of market share analysis. Is there something analogous for that in your disclosures?

John Finnegan

No, not in our consolidated statement I don’t think, no.

J. Paul Newsome - Sandler O’Neill

Okay, thank you very much.

John Finnegan

Sure.

Operator

Matthew Heimermann, JP Morgan Chase & Co., please go ahead.

Matthew Heimermann - JP Morgan Chase & Co

Hi, good afternoon everybody. Two questions; first just on I guess this is for Paul, but the exposure rep? Could you give us a little color, if we’re looking into next year, how much of it you think is kind of payrolls, how much of it is maybe capacity utilization, inventories going up, how much of it is actually just potentially greater demand for a limit, just to give us some color around the potential exposure changes?

Paul Krump

Sure Matthew. As we think about this year, we try to look at the trajectory of what actually took place last year, and we put in a little bit of growth. More in the CCI area, quite frankly, than in the CSI area. As I mentioned, some of the CSI areas are still under some pricing pressure, and because of that we’ve been repositioning and reprofiling some of the deals but you know, we’re seeing some nice upticks obviously in the sales area and in the payrolls for worker’s comp; and I touched on the plant equipment. So we’re clearly easing off the bottom.

Matthew Heimermann - JP Morgan Chase & Co

Okay. And is this kind of the areas that we’re seeing pickups here pretty consistent with what you would have expected based on past economic recoveries?

Paul Krump

Yeah, they really are, Matthew. It’s a little bit difficult for me to touch on, or to draw a huge conclusion from worker’s compensation. You know, we’re only 2% of the worker’s compensation of marketplace; we specialize by niche, by state, by size of risk, so I don’t think that our work comp book is comparable to the industry. Clearly AM Best has put out some numbers; just if you look at the loss ratio ours are 21 points better on a five year argument than the industry, and the last full year, 2009, we were clearly 19 points better. So we’re doing things very differently in the work comp area. As respect to general liability, we’re seeing some of the payroll or the sales figures come up here in the manufacturing business and the retail business as well.

Matthew Heimermann - JP Morgan Chase & Co

Okay, that’s helpful. And then for Ricky, I guess it looks like when I was looking at yields for the quarter they actually look like they picked up sequentially, and I was adjusting for – this was trying to adjust the cost, so just if you’ve got any color there, and also just with the $400 million maturity next November, just for modeling purposes, should we assume that gets refinanced?

Richard Spiro

Well, as far as the $400 million maturity in November, I can’t commit on our plans for future financing, so I really can’t give you any guidance there. The slight tick up in yields, you know if there wasn’t an uptick in Q4, treasury rates and some of the reinvestment rates, to be honest, I don’t know if that was the reason for the slight increase, but that’s the only thing I can point to.

Matthew Heimermann - JP Morgan Chase & Co

Okay, you didn’t change duration dramatically?

Richard Spiro

No, duration is the same, I think 3.9 it was last quarter.

Matthew Heimermann - JP Morgan Chase & Co

Okay. I appreciate it. Thanks.

Operator

Let’s go to Keith Walsh at Citi.

Keith Walsh - Citigroup Inc

Hey, good evening gentlemen. A couple of questions; first one, thinking about network premium guidance of flat plus two. Can you explain how audit premiums impact that, if there is any impact within that? And then further on that, when you think about audit premiums on the downside, back on ’09, what actual impact did audit premiums have to your total net written or net earned premiums? And I have a follow up. Thanks.

Richard Spiro

Okay, how audit premiums work basically is the insured sits down with their agent and they talk about what auditable exposure base to give us, and they think about the various classifications of their workers. In most states there’s some 600 different worker classifications, so they’ll think about their work force and where those payrolls are going. So the first – if you think about it as the deposit premium is based on what they actually give us, so their optimism or pessimism about their businesses comes in to play there, so that’s part of the exposure.

Most people, not surprising I guess, are passing on traditionally payrolls that are a little bit pessimistic to what they turn out to be, say over the last 25 to 30 years of my experience here, we’ve seen audits bring on about a half a point of growth or top line work comp revenue, so I’d like to see it come back to those kind of levels. It can vary a little bit from time to time, but right around a half a point to a point.

Keith Walsh - Citigroup Inc

And what was the negative impact on the nine from audit premiums that you saw on your financials?

John Finnegan

It can’t be more than half a point at most; in Q4 we had a nice move and a nice swing, and maybe we’re slightly positive, but we’re talking slightly here. So you’re talking one class of business and one business unit. On 2011 even a half a point would be high. Probably a quarter point would be more like it, and we didn’t break it out that discreetly.

Keith Walsh - Citigroup Inc

Okay, and then just thinking about the ROE for the franchise. I think I’ll take from your commentary that you do have some reserve release built into your numbers for 2011. If I use the midpoint of your guidance it looks like it’s sort of an 11 ROE franchise right now, and as we take our reserves, it’s probably more like a 10. Is that the reality of what we’re looking at here, for Chubb for the next couple of years?

John Finnegan

The accident ROE right now is 10 plus, so I don’t know. I don’t know how you – they have to get out and do the calc and take out the capital and things like that, so I think we get a little higher than 11 for the year if you did that. But I hear the accident year is more in the lines of 10 to 11.

Keith Walsh - Citigroup Inc

Great, and what would you think your cost of equity of your franchise is, approximately?

John Finnegan

I’m not going to give you a number, you can do the calculation. It all depends on what you think the equity risk premium is these days.

Keith Walsh - Citigroup Inc

Okay, thanks a lot you guys.

Operator

Let’s go to Morgan Stanley, it’s Greg Locraft.

Gregory Locraft - Morgan Stanley

Hi, good evening guys. I wanted to just look at the Australia loss and understand a little bit more granularity there, how you came to the estimate. I totally appreciate it’s very, very early, but can you maybe just expand a little as to what you think the industry wide loss will be, and perhaps how you’re getting to the 75 to a 100 in terms of lines or whatever you feel would help us think through that loss?

John Finnegan

The industry losses, we’ll have to see, but what you see in the press today are numbers that range between $5 and $10 billion of insured losses. Relative to how we came up with the number, clearly as you indicate it is early, but as soon as the flood waters receded and power was restored, we were able to get out to a lot of our commercial risks and some of our larger personal lines of risk and based on the visual inspections, the photographs we had, we were able to make some assessments.

The more complicated component is to try to figure out what else can come in, obviously it’s still early, so there you know we’re taking some projections of a run rate of what we thing might still come in and based on the type of losses that we’ve seen, how we would project them forward. Now obviously we’ve had many years of experience in this, and as you well know, we typically have been very accurate with our cat ranges, so despite this being early, you know, we thought it was adequate time to bring out the range of $75 to $100 million.

Gregory Locraft - Morgan Stanley

Okay, great, and did you include anything in the southern part, or the southeast part of Australia, or you mentioned that it was Brisbane that really caused the number to skyrocket, but it seems that it’s pushing even lower than that. Is this a holistic look?

John Finnegan

This is in the aggregate, although the push after Brisbane to the south, we received very little claims there and we have much less exposure. Our exposure is mainly in and around Brisbane, and in the aggregate a little bit more commercial than it is personal right now.

Gregory Locraft - Morgan Stanley

That’s actually interesting. Why is that? I would have thought the opposite. I would have thought more personal than commercial.

John Finnegan

It’s in line with our writings and our premium shares. We write some good commercial premium, obviously, in our three offices in Australia, and it’s in line with the market share.

Gregory Locraft - Morgan Stanley

Okay, great. Thanks for the help there. One other totally separate question, I just wanted to throw it out there because I do get this question sometimes, and we don’t get to talk to you guys that often during the quarter. So just posing the question, what if interest rates go up sharply? How does this impact your business? A very broad general question, but you know, maybe just the scenario of interest rates going up 200 basis points. What would that mean for the Chubb Corporation?

Richard Spiro

Well I’ll answer it from the investment portfolio side, we have the duration of our portfolio of four years, so you know, every hundred basis point move in interest rates would reduce the value of our portfolio by about 4%, so the math would be with a 200 basis point movement, it would be 8%. But again, you also have to think that in a scenario when that occurs, you’re also then going to be reinvesting at a higher rate, and over time that investment income will help.

As I said on prior calls, we do have an intermediate maturity bond strategy, so we’ve got bonds that are running off that we can reinvest over every year, and so you know, the impact would be – the value of our portfolio, and everyone else’s by the way, a 200 basis point move in interest rates would impact the entire industry, but offset by a higher reinvestment rate.

John Finnegan

After all, each investor will have an opinion of how they trade up value versus the ongoing business. From a management perspective, a somewhat higher interest rates are positive, right? Unrealized appreciation goes away over time, as bonds mature. Higher interest rates take it away more quickly, but give you back much more earnings power.

So in answer to the prior question, that accident year business for right now, 200 basis points higher looks a lot more like 13, 14, and 15 than 10, 11, and 12. So I think that’s a positive. And the second factor is unless you believe interest rates only move in isolation, presumably one of the driving forces is more economic activity, more inherent inflation, which builds in much more business over time, so it’s probably reflective of a better business environment for the company and for the industry as a whole.

Gregory Locraft - Morgan Stanley

Thanks for the answer, great answer.

Operator

Let’s now go to Bank of America, and Matt Palazola.

Jay Cohen – Bank of America

Hey, it’s Jay Cohen here, thank you. A couple of questions, I guess first is you’re looking at the specialty business and back into an accident year loss ratio, kind of this quarter versus a year ago quarter, it looked like it improved really quite a bit. The surety business was pretty stable during that time, so presumably you’re booking a substantially lower accident year pick on the professional liability business. I’m assuming some of that is reduction in your assumption of credit crisis claims, given the trend there. So can you talk about why the loss ratio came down quite a bit? Just given the backdrop of lower prices?

John Finnegan

Yeah, Jay, let’s break that up. It’s a good question. Let’s break it up into a few pieces. Let’s take the calendar year 2010 and what happened to professional liability accident year results. For the year, our accident year professional liability was about 98 versus 104 for accident year 2009. So that was sort of – that’s really the difference for the calendar year. Now, you’re right – largely, rates did go down some, but in 2009 we had a huge what we call financial cat load for credit crisis which had a tremendous amount of claims. So the benefit was related to let’s clear the credit crisis claims and the number of D&O share (inaudible) were lower.

Now in Q4, comparing Q4 is the biggest gap. That gap breaks to about 10 points, that’s really almost entirely due to the fact that Q4 2009 we ran 108 combined ratio for professional liability. We had some adjustments to the year, and also we had a number of crime and fidelity claims which flowed through in Q4 last year, so it was a very unfavorable quarter. This year in Q4, our loss ratio is about the same, it is really the same that it’s been in all four quarters of this year.

We had a seasonal positive adjustment of a point or so in expense ratio, and that gave us a slightly better accident year combined for Q4, but the year over year difference in Q4 going up to 10 points is almost entirely due to the huge uptick in Q4 of last year’s professional liability.

For the calendar year, we’ve been telling you all year that we have a better year, accident year, calendar year 2010, our accident year professional liability is running better because we assumed much lower losses from the credit crisis and big public D&O claims.

Jay Cohen – Bank of America

Yeah, that makes sense. Thank you. Next question, Ricky, the unrealized gain that you cited, that’s a pre-tax number, I’m assuming?

Richard Spiro

That $1.7 billion? Yeah.

Jay Cohen – Bank of America

Okay, thanks, and then last question, and again it’s back on the specialty business. It doesn’t look like, I don’t want to read too much into this, but it doesn’t look like the favorable development we’ve been seeing has pretty steadily slowed from the end of last year. Should we be reading anything into this? Is there anything underlying that you guys are seeing that’s causing that favorable development to slow?

John Finnegan

Well, you know, Jay, we actually made some comments at the beginning of last year that look like the comments we made this year related to guidance. That we weren’t picking up specific favorable development level, but that we expected favorable development, but we expected to make our maybe targets that we had some favorable development albeit at lower levels for 2010.

As it turned out, we didn’t come in much lower, but the mix was different. We were right about professional liability in the second half of the year, it did decline, and we expected that. Still pretty substantial level though, eight or nine points in specialty; but it was made up for this year by unusually high, probably historical high favorable and commercial business, and very favorable in the personal lines business.

I just think as we go over time, you can’t keep getting six or seven points of favorable development every year, that’s unusually high. I think professional liability had some terrific years, 14, 15 points on their book. The years in which we’ve gotten most of the favorable development, you know those 2003 to 2006 years, they’re just running off.

So I think what you hear in our comments this year as we go forward into 2011 is that we’ll probably need some favorable development to meet our target. It could come in a different mix of accident and other favorable, but that will be less than we saw in the past, and professional could be less than we saw in the past, although I’m not ready at this point. I don’t know if where we were in Q3 and Q4 is too high or too low; I think over time it’s still pretty high, and it’ll be tough to sustain out of a long period of time.

Jay Cohen – Bank of America

I’m sure most people assume it’s going down anyway, so it fits with expectations anyway. Thanks for those good answers, thank you.

Operator

Let’s go to Josh Shanker at Deutsche Bank.

Joshua Shanker - Deutsche Bank AG

Yeah, thank. I actually just want to follow up with what Jay was saying. Paul made a comment about rates being down in professional lines, market renewal rates, about 3%, and it is for renewal business. I wonder if we can talk about the competitive dynamics in that space post credit crisis in terms of how much business you’re renewing as the rates go the other way, and you sense that this is an attractive business for you to be operating in right now.

Paul Krump

Sure Josh, as John mentioned, there’s some valid reasons that you’ve seen some rate declines in the public D&O space, the decline in the securities class action and the economy is obviously a bit better than it was; clearly the stock market is better. So you know, I’m not sitting back saying that I’m surprised you’re seeing some rate declines in public D&O, I just think that quite frankly they are a little bit overblown, and we are very mindful here at Chubb that there tends to be a systemic loss of that with some regularity in the public D&O space.

I mean, we’ve been doing this for decades, we’ve got a lot of experience, a meaningful sized book, so what we’re doing right now is really honing our pricing tools, because they help us know is this a top tier account, is this a middle tier account, is it a bottom tier account? When do we need to back away, when do we need to reposition or when do we want to try and go out early and hang on to some of it? So we’re pretty into the ebb and flow there.

Joshua Shanker - Deutsche Bank AG

And are you – would you say that the business flow is steady? Or that you’re declining some business now, at this juncture in the marketplace?

Paul Krump

Well, let me just give you a little bit of a statistic, one of the things we try to look at here is how much new business is coming on to the portfolio. Right now in the professional liability space, the portfolio last year had about 14% of its total writings from new business, if you back that up just a few years ago, that number was almost double. So that gives you a sense that we’re being very rigorous in how we’re writing new business. Clearly as an underwriter you know your renewal better than you know a new piece of business, so you have to be mindful of that.

John Finnegan

Josh, I’d say at any one time you know, the rate movement isn’t necessarily reflective of the attractiveness of the business, you know. Two years ago, we were getting 20 points of rate, and D&O fi, but that was for a reason. You know FI had collapsed. We were running combines well over 100. Now more recently, the experience has been much much better, so D&O FI is a flat business now.

Well, is it a better or worse business? Hard to say. You know public still has been very profitable, you know to some degree sometimes we think the competiveness is overdone a little, but they are reacting to what’s been a positive trend in lawsuits and claims in that area. So you know, if aggressive is tough, but professional liability and D&O public tend to be very profitable businesses for us.

Joshua Shanker - Deutsche Bank AG

And are there new competitors out there, when you say competitive, or is it the same people you’re competing with?

John Finnegan

There are new competitors, but that’s not really the – they force down the prices because they get into some of the excess layers, but they’re not really the people that every day we’re competing with. It’s the same old crowd.

Joshua Shanker - Deutsche Bank AG

Well thank you for the answers.

Operator

And let’s go to Goldman Sachs, and Mike Nannizzi.

Mike Nannizzi – Goldman Sachs

Thank you, I just wanted to ask a question about CCI. It looks like if we calc’d right the accident year underlying combined at about 93 for the year. In your range all in, so including development and what you think that might be next year, 94 to 97, what is driving that difference? It looks like rates weren’t declining that much, so I’m just trying to understand, how do we go from underlying 93 to a big all in 94, 97? Is it the storm, the Australian storms that make the big difference?

John Finnegan

I’d say, one I’m always a little surprised, you know, I read write ups from the analysts talking about margin pressure and not getting a rate and growth trends keep going up, and yet people seem to be surprised when our combine ratios are projected in a lump. I mean, aren’t we really seeing a traditional margin compression sort of cycle? You’re right, rates are only down one, but I think that most people think that loss trends continue to go up and while we’ve seen some recently favorable loss trends I think most of the lines of business over time loss trends go up.

So I think you would expect to see some margin of impression but when you look at it, I’d say that we’re talking about, we expect the deterioration in our businesses next year, the commercial and personal, due to margin compression and also due to less favorable development. It’s a mix of those. I would say that in an era when you have one point rate declines in a commercial business, which is the one that is most subject to predictable loss trends, that wouldn’t be unexpected to have two, three, or four points of loss trend increases. Which would easily get you another three points in combined ratio.

Throw in a mix and sort of less favorable development. As I’ve mentioned, favorable development in commercial was at an all time high this year. It’d be hard to believe that we could sustain that. You put the two of them together and I think that’s where you get the number.

Mike Nannizzi – Goldman Sachs

Okay, I mean that makes sense but my 93 that I’m talking about is excluding any favorable development, so an underlying 93 excluding calc and favorable development.

John Finnegan

I’ll roughly do the math for you. The sort of deterioration in ExCat combined ratio is somewhere in the 5-5 ½ point ratio to the midpoint, and that’s what you’re trying to book keep to to add up in margin compression and low favorable development. That make sense?

Mike Nannizzi – Goldman Sachs

Yeah. I think so.

John Finnegan

Take out favorable and so you take out the ExCat and the other cats and you’re talking about five points. You have to determine with that deterioration how much of that is margin compression in the acts of the year, how much of it is low favorable development.

Mike Nannizzi – Goldman Sachs

Thank you. I think right there before you mentioned the Australian cats, do you know how much of that is rolling up into your 94 97 commercial, or is that—I would imagine that is part of that number as well?

John Finnegan

Well, I wouldn’t look at it as a—it depends if we’re looking ExCat or cat, see that’s the problem. See we had a lot of cats this year so it would depend on whether you’re comparing an ExCat number to an ExCat number. If we go into the year basically looking at a three point cat assumption that would add a cat load to commercial somewhere in the 3-3 ½ point area and you know, we threw up the 3 ½ with the Australian floods which means we’re pursuing maybe two points higher in the first quarter than we would normally; divided by four gets you your half and a little bit of that is more loaded to commercial so we adjusted. But that’s just an assumption, so you get in that 3-3 ½ cat load area for commercial. It doesn’t have a huge impact on the number by any means.

Mike Nannizzi – Goldman Sachs

And then just one, if I could. On your guidance, it looked like personalized up 5-10% depending on the sub-category and then commercialized specialty would be about flat, and then your guide in said zero to two. Is the offset of that the rate that you’re talking about in specialty and commercial or is there something else?

John Finnegan

You’re talking about growth rate for the businesses?

Mike Nannizzi – Goldman Sachs

Yeah. So I guess if personalized do this next year, what they did this year,

John Finnegan

You say if they don’t break out of the growth rate for 2011, right?

Mike Nannizzi – Goldman Sachs

No, no, no. The commentary seemed to indicate that trends were in place. That this year was a year of growth and that initiative seemed to be in place to status-quo, at least that was my interpretation.

John Finnegan

I would say that when we talk about exposure improving we’re primarily talking about the commercial business. So that’s the area where we’re talking about exposure improving and helping growth. The specialty business, I don’t think we could make that judgment.

Personalized, I think we’re seeing a little better from that. It’s an offset in personal you’re seeing, that more endorsements, more activity, but how the market remains…I mean everyday you pick up the paper could make it a terrible low level so I don’t think you could count on explosive growth in the home-owners area.

Mike Nannizzi – Goldman Sachs

Okay, thank you.

Operator

And we have Bob Glasspiegel from Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

Good evening. John, it seems like you and Paul are describing the commercial like the opposite of the cereal business, you’re putting more in the package for less cost, right? You’ve got rate declines and exposure growth. Why is exposure growth a good thing, and if you push the math, minus one, rates, plus exposure growth, you’re not building a lot of inflation on the number to get to that five and to allow less reserve release.

John Finnegan

I don’t know where reserve release goes in. I would say that CCI’s results have been excellent, so yeah, at least through this year. You know, we didn’t have many more costs going into that cereal box, you can see by the numbers, but obviously over time if rates to go up and you have inflation and cost trends it will help the margin compression. What was the second question?

Robert Glasspiegel - Langen McAlenney

I would also add on there, your point about exposure, remember that—let’s just take property for example. You’ve got your property marine book; you’ve got your package book, which is about half property. When we get an exposure increase that really means that the values that those buildings planned equipment go up. Very few losses are total losses. It’s not the equivalent of a pure rate increase but clearly it is better for us to have an exposure increase than an exposure decrease.

John Finnegan

Exposure adds premiums just like adding a new customer would add premiums. You know if you have customer that insures one factory and he insures two factories with you, you add a factory, it’s like getting another customer with the factory. If he doubles the value of it, it’s like getting another customer with it.

So it’s premium growth on which you would anticipate benefiting by the profit margin on your business. Which, you know, on an average sense, is somewhere between five and ten points but on a variable argument is somewhat more significant. I mean, taking most of the expense ratio out, so exposure growth is adding new business, it’s adding premium growth and it’s a positive.

Robert Glasspiegel - Langen McAlenney

Okay, don’t quite follow but I appreciate your answer, thank you.

John Finnegan

Okay, we’ll take one more question.

Operator

Okay that’ll come from Adage Capital, Ian Gutterman

Ian Gutterman - Adage Capital

Thanks. I did suspect a personalized discussion, you said the action era around a 98, did that have any remaining sort of credit crisis in it, or is that a clean number to start off of?

John Finnegan

We have a cat load in all of our accident year assessments and professional liability. Going into 2009 though, we were in the middle of all the action from 2008 and we certainly knew we were going to have some significant activity going on, so our financial cat load was higher than it might normally be in a normal year. We still always anticipate some “cat activity”; it certainly has some in it.

Ian Gutterman - Adage Capital

Okay, I guess there was a normal cat limit in 2010, so I want to start running forward my estimates in future years, I can use 2010 as a normal year and base my pricing and exposure from there?

John Finnegan

You know, I’m not sure – the business is so lumpy in terms of there have not been that many normal years. You had the 2002 disasters, pretty clean 2004 and ’05; stock options 2007, mutual funds and 2008 credit crisis, 2010 turned out to be not a year of all sorts of new discreet activity, and 2010 under default wouldn’t be a normal year I wouldn’t think.

Ian Gutterman - Adage Capital

Right, okay fair enough. On the other personalized business, obviously you’ve had good growth there. One thing that was a little surprising as I was looking through the numbers for the year was your expense ratio was up a couple of points. Normally I think when a business is growing you get expense leverage. Is there some sort of nix thing going on there, or something that would explain the higher expense ratio?

Dino Robusto

In the other personal is the accident and health which carries a little bit of a higher expense ratio, so as we’re growing that portfolio outside the United States, that’s where you’re seeing the impact.

Ian Gutterman - Adage Capital

Okay, so A & H has become a bigger mix of the other total personal, you’re saying?

John Finnegan

As you look at our overall expenses, Ian, you know you have to keep in mind you can’t just look at nominal. Mix does have an impact. Mix of businesses, personal has a little bit higher commission load than some of the other business, and work comp, for example, which has a low commission load. Accidental has a high commission load, but lower loss ratios. Overseas tends to have higher commissions than the US, and overseas is growing faster. So you know, there’s a mix of that, and when you get into particular lines it can be greatly affected by how that mix moves.

Ian Gutterman - Adage Capital

Okay, great, and my last one. In Australia; can you just tell us a little more about what your business is there, maybe how big it is, what types of lines you write. Does it look much like the US or is it a different strategy, different approach?

Paul Krump

I’ll start with commercial, and then toss it over to Dino. It’s a very similar book to what you see in the United States. I mean, it a package book business, it’s property, obviously there’s no comp, there’s less auto actually, there. But you know, we’re writing the exact same kinds of industries, quite frankly, that we write here in the United States, and a lot of service industries and it’s been a highly profitable business for us.

When you go over the CSI side of things, you know it’s a similar book of business. We actually were the ones who brought D&O and kidnap and ransom, those kinds of lines to the Australian market, so we’ve enjoyed a long history there of writing similar things to what we write here in the US.

John Finnegan

Why don’t you talk a little about personal lines?

Dino Robusto

So in personal lines it’s essentially the same thing. We target the high net worth customer in personal lines Australia. We use essentially the same policy forms as we do here. We hallmark masterpiece coverages and we marry it with the high quality of services that we offer here so it’s essentially a similar target-market strategy for us in personal lines.

John Finnegan

Probably a little more commercial to personal over in Australia than in the US.

Ian Gutterman - Adage Capital

Okay, and probably just a ballpark size of your business there?

Richard Spiro

About 8 million.

Ian Gutterman - Adage Capital

Okay, because I guess I was a little bit surprised by when you talked about the 5-10 billion industry, I just hadn’t heard numbers that high. I’d seen up to six, I think, from AIR. I was wondering if maybe you had a different set of exposures than other people might have. So it doesn’t sound like you’re heavily exposed to like, the coal mines or some of the other…

Richard Spiro

We’re not involved in the energy business in Australia.

Ian Gutterman - Adage Capital

Okay, so it’s just more the traditional type losses.

John Finnegan

The common-wealth countries have always been our strongest countries over-seas, so we’re a big player in terms of the Australia market. We have huge market shares but nor do we have huge market shares in the US. We’ve been highly profitable and it’s by far our biggest Asian operation.

Richard Spiro

They write flood a little bit differently in Australia on the commercial side of things so we have a slightly different strategy. We do more quota share business, more layers of property there just because of that, so here in the States you’d see a lot more flood exclusions or flood sub-limits. In Australia they’re, up to now, oftentimes offer full-flood but that may be changing.

Ian Gutterman - Adage Capital

That would be a good thing. Okay, thank you guys.

John Finnegan

Thank you very much, and thank you for being on the phone call. Have a good evening.

Operator

And with that we’ll conclude our conference call for today, thank you very much for your participation. Have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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