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The Chubb Corporation (NYSE:CB)

Q4 2007 Earnings Call

January 29, 2008 5:00 pm ET 

Executives 

John Finnegan – CEO

Thomas Motamed – COO

John Degnan – CAO

Michael O’Reilly - CFO 

Analysts 

David Lewis – Raymond James

Matthew Heimermann - J.P. Morgan

Joshua Shanker – Citigroup

Jay Gelb - Lehman Brothers

Dan Johnson

David Small – Bear Stearns

Josh Smith

Alain Karaoglan - Banc of America Securities

Thomas Cholnoky - Goldman Sachs 

Presentation 

Operator

Good day everyone and welcome to The Chubb Corporation’s fourth quarter 2007 earnings conference call. (Operator Instructions) Before we begin Chubb has asked me to make the following statements in order to help you understand Chubb, it’s industry and it’s results, members of Chubb’s management team will include in today’s presentation forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. It is possible that actual results might differ from estimates and forecasts that Chubb’s management team might make today. Additional information regarding factors that could cause such differences appear in Chubb’s filings with the Securities and Exchange Commission. Please also note that no portion of this conference may be reproduced or rebroadcast in any form without prior written consent from Chubb. Replays of the webcast will be available through January 29, 2008. Those listening after February 22, 2008 should please note that the information and forecast provided in this recording will not necessarily be updated and it is possible that the information will no longer be current. Now I would like to turn the call over to Mr. Finnegan. Please go ahead sir.

John Finnegan

Thank you for joining us today. As you read in our press release we posted terrific results for the fourth quarter. With operating income per share of $1.60 up 10% from the fourth quarter of 2006. We had a combined ratio of 83.8 driven again by excellent performance in all three strategic business units. We had 3.8 points of cats in the fourth quarter compared to 9/10ths of a point in the fourth quarter of 2006. On nets CAT basis the combined ratio improved 2.2 points to 80. For all of 2007 operating income reached $2.6 billion making 2007 our fifth consecutive year of record earnings. During my closing remarks I will discuss our 2008 guidance in detail. First Tom Motamed will say a few words about our underwriting results.

Thomas Motamed

Thank you John. Once again we had a great quarter with $480 million in underwriting income. We continued to have excellent performance by all three SBUs as reflected in our combined ratio of 83.8. Our 2007 ex CAT accident year experience continues to be very strong in all SBUs. In addition we had favorable development in the fourth quarter of about $220 million which improved the fourth quarter’s combined ratio by about seven percentage points. Chubb Personal Insurance net written premiums grew by 4% in the fourth quarter and CPI produced a combined ratio of 91.2 including 10.4 points of catastrophe losses most of which were related to the California wild fires. In last year’s fourth quarter CPI had a combined ratio of 84.4 including 2.4 points of catastrophe losses. Excluding CATs CPI’s combined ratios improved 1.2 points to 80.8 from 82 in 2006.

CPI’s outstanding results were driven by Homeowners which accounts for 65% of CPI’s premiums. Homeowners grew 5% and had a combined ratio of 89.1 including 16.1 points of catastrophe. Given market conditions we’re not surprised that Personal Auto Premiums declined 6%. We are very pleased with our combined ratio of 90.5. Other personalized premiums increased 11% driven by our accident business particularly outside the US. The combined ratio for other personal was 99.4.

Chubb Commercial Insurance continues to produce great results with a fourth quarter combined ratio of 85.3 compared to 82.9 last year. CCI had 1.2 points of catastrophes this quarter compared with 0.7 points last year. Excluding CATs CCI’s combined ratio for the fourth quarter was 84.1 in 2007 and 82.2 in 2006. CCI net written premiums were flat in the fourth quarter. In the US we retained 83% of business up for renewal in the fourth quarter with an average rate decrease of 5% and the new to lost business ratio was .8 to 1. CSI delivered a fourth quarter combined ratio of 74.6 which is 9.5 points better than last year driven by strong performance in both Professional Liability and Surety. CSI net written premiums were up 3% for the quarter. Professional Liability had a combined ratio of 78.3 compared to 88.5 in last year’s fourth quarter reflecting significant favorable development.

Loss experience continued to be excellent. Professional Liability premiums increased 2%. In the US fourth quarter renewal retention was 88%, average renewal rates were down 5% and the ratio of new to lost business was 1.2 to 1. New written premiums for our Surety business grew 9% as we’ve told you in the past this is a very volatile line of business but we’ve had a string of excellent quarters including a combined ratio of 46.1 this quarter.

Before turning it over to John Degnan I want to call your attention to our international results. In the fourth quarter premiums outside the US grew 15% or 6% in local currencies. The combined ratio was an excellent 82.5. For all of 2007 our operations outside the US accounted for 23% of our net written premiums and produced a strong combined ratio of 85.  All in all, we are benefiting greatly from the global character of our book of business. John?

John Degnan

Thanks Tom. I’d like to begin by providing you with some insight into our current thinking about Chubb’s claim exposure to the sub-prime mortgage lending and the broader credit crisis. At the outset I should issue a caveat. As you all know the scenario is developing as we speak. It is dynamic and subject to change. As a result what I am describing today is by necessity a snapshot of what we are currently seeing. From Chubb’s standpoint the credit crisis currently has the potential to impact principally three types of policies we write in our specialty business; Errors & Omissions, Directors & Officers and Fiduciary. The types of insured’s we now expect to be impacted include home builders and developers, lenders, other financial institutions such as [REITs] mortgage brokers, mortgage insurers, bond insurers, rating agencies, investment managers and hedge funds. As we’ve done in the past on the investment banking, mutual fund and stock option back dating claims, we have been diligently monitoring case developments and claim filings relating to the credit crisis to ensure that we stay on top of the potential claims. For the reasons I’ll discuss I think we are well positioned to manage the exposures arising out of these events.

On the E&O side so far, things have been fairly quiet for us. In large part we contribute this to our underwriting strategy and prudent risk selection. In 2004 and 2005 we made a number of specific decisions that are now working to our benefit. We avoided writing insurance for the major sub-prime lending specialists. We got out of writing E&O insurance for almost all of the largest global investment banks and the top 30 global commercial banks and we exited a program of mortgage broker E&O insurance that we had been writing profitably for some time. As a consequence to date we largely have avoided the primary E&O exposures arising from these events particularly regulatory investigations involving allegedly deceptive marketing practices. Instead the few E&O claims that have been reported to us to date largely involve individual claims against investment managers that invested client funds in securities adversely impacted by the credit crisis.

We have had relatively more activity on the D&O front but there also we benefited from strategic underwriting decisions, prudent risk selection and our limit and attachment profile. The majority of the claims we’re seeing under D&O policies are securities fraud class actions against directors and officers of companies that have either had to take a charge against earnings, revalue their investment portfolio or report disappointing financial results due to the affects of the credit crisis. Once again our conscious decision to avoid writing D&O insurance for large sub-prime lending specialists and to limit our exposure to investment banks and global commercial banks has helped us to avoid some of the highest profile cases. Of the Chubb policies under which D&O claims have been reported many are Side A only policies which can only come into play if the company is not able to indemnify its Directors & Officers. A significant majority of the policies are excess only and a great majority of the policies involve limits of $10 million or less.

Finally although it is far too early to predict how these cases ultimately will pan out it is noteworthy that plaintiffs are going to have the stricter requirements for pleading [inaudible] that the Supreme Court established last year in the {Tellabs] case in order for them to move forward with their claims. In fact the first reported decision in one of these cases granted the defendant’s motion to dismiss.

Now on the fiduciary front, it’s also been quiet so far. We’re aware that there have been a number of follow on [arisa] suits filed that mimic the allegations of their companion securities class action law suits but so far we have received notice of only a couple of such suits under Chubb fiduciary policy. The policies potentially implicated have been either Side A or excess only. This also appears to reflect our decision to reduce our exposure under fiduciary liability policies for large risks. In sum, based on what we’re seeing now the underwriting actions I’ve just referred to lead us to believe that the volatility inherent in Professional Liability lines has been reduced but certainly not entirely eliminated in Chubb’s own book of business. That is borne out by our analysis of claims received by us to date. At the same time we recognize that the full contours of the credit crisis impact on insurers are not yet defined. It is an evolving process that has to be closely monitored and managed as we proceed.

The second item I’d like to discuss briefly and happily I might add is the latest of a series of favorable decisions from the US Supreme Court affecting Federal Securities Litigation. On January 15 the court issued its decision in another closely watched securities case, Stoneridge Partners. Once again the court came down on the side of defendants holding that private plaintiffs could not sue a company’s vendors for securities fraud. Even if those vendors have knowingly engaged in transactions that the company used to falsify its earnings. Because the plaintiffs could not establish that they had relied on any conduct or statements of those vendors. In so holding the court refused to extend the reach of private causes of action under the securities laws and reaffirmed that there is no private right of action against alleged aiders and abettors of securities fraud. Obviously the primary beneficiaries of the Stoneridge decision are the so called secondary actors, the vendors, suppliers, banker, lawyers, accountants, even customers who may be involved with companies that commit securities fraud. The decision provides them a measure of protection against liability for alleged securities fraud perpetrated by those they serve or with whom they do business.

As such its primary favorable insurance impact is likely to be on E&O claims including those asserted against investment banks and accounting firms in cases like Enron Securities litigation. We think the decision is much less likely to significantly impact a D&O claims environment because the typical securities fraud claim under a D&O policy usually involves directors and officers public statements regarding their own company for which they can be held primarily liable. Nevertheless even on the D&O front the decision is a positive development in that it reflects the Supreme Court’s continued rejection of attempts to expand the scope of liability under the Federal Securities Laws.

In an attempt to identify some positive development in this opinion the plaintiff’s bar has been pointing to a couple of dangling comments in the opinion that left open the possibility that the secondary actors in the investment sphere might still be open to liability. The Supreme Court curtailed that speculation last week when it denied outright the petition for [surserary] in the Enron case. Importantly it did not remand the decision to the Fifth Circuit for further proceedings consistent with the Stoneridge decision instead it left the decision below stand and affectively put an end to the securities fraud claims against the investment banks who were all major participants in structuring transactions that Enron used to misrepresent it’s financials. In that context it’s safe to say that the circumstances under which a secondary actor can be held liable in securities class actions are now quite narrow and that is very good news in the litigation arena for defendants and guarantors.

And now I’ll turn it back to John Finnegan.

John Finnegan

Now before turning it over to Michael O’Reilly, I’d like to say a few words about Mike. I know that many of you have met him will find this difficult to believe but Mike will actually reach our mandatory retirement age in 2008. So after a distinguished 39 year career at Chubb Mike will be retiring at the end of this year. For many years Mike was our Chief Investment Officer and in that role he was the architect of Chubb’s fiscal conservatism and prudent investment program which have produced both financial stability and attractive returns to carry us through the ups and downs of the underwriting cycle. Shortly after I arrived he was promoted to Chief Financial Officer and has made outstanding contributions in that role. As CFO he can be proud that he will be leaving the company in the strongest financial condition it’s ever been in. Mike isn’t leaving today; he will be with us for the rest of the year and will help with the search for his successor and with the transition. Now I’ll turn it over to Mike.

Michael O’Reilly

Thank you John, I appreciate your kind words. I spent most of my career at Chubb and it’s been a privilege to have had a hand in the success of this unique franchise. I’d like to begin tonight with a few words about our investment portfolio. As I mentioned last quarter our portfolio has not had and does not have any direct exposure to either sub-prime mortgages or collateralized debt obligations. Given recent events affecting the mono line insurers and the weakness in the real estate industry let me also make a few comments about our tax exempt bond and mortgage-back securities portfolios. First regarding tax exempts this portfolio had a market value at December 31, 2008 of $18.6 billion, 57% of these bonds are in uninsured and have an average credit rating of AA1. Forty-three percent are insured and are therefore rated AAA. Without that insurance the underlying credit quality of these bonds would still average AA3. The average underlying credit rating of the entire tax exempt portfolio excluding the benefit of insurance would drop only one notch to AA2. It is our view that even if the insurance ceased to exist the aggregate mark to market impact on our financial condition would be immaterial.

Let’s turn now to our mortgage-back securities whose total market value at year end 2007 was $4.8 billion, 98% of this portfolio is rated AAA. Even in the 42% of this portfolio which is commercial mortgage-back securities, 97% are rated AAA and only $15 million worth are rated less than AA. More details on these portfolios are posted on our website. I’m happy to report that our alternative investments have continued to perform well during this period of stress in the financial markets also.

Turning now to our operating results underwriting income was excellent amounting to $480 million in the fourth quarter and $2.1 billion for the full year. In addition property and casualty investment income after tax increased by 9% in the quarter to $331 million and also by 9% for the full year to $1.3 billion. Property and casualty invested assets increased to $37.6 billion at the end of 2007 from $35.3 billion at year end 2006. As I mentioned earlier our fixed income portfolio remains heavily weighted in tax exempt bonds and has an average duration of approximately 4.6 years. The unrealized depreciation in the fixed income portfolio at the end of the year was $397 million. Book value per share under generally accepted accounting principals at December 31, 2007 was $38.56 compared to $33.71 at year end 2006. Book value per share calculated with available for sale fixed maturities and amortized cost was $37.87 compared $33.38 at 2006 year end. That’s an increase of 13%.

For the fourth quarter we estimate that favorable development on prior year reserves was as follows. We had about $10 million of favorable development in CPI, about $35 million in CCI and about $125 million in CSI, nearly all of it in Professional Liability. We also had about $50 million in reinsurance assumed bringing the total favorable development for Chubb to about $220 million for the quarter. For comparison in the fourth quarter of 2006 we had about $135 million of favorable development for the company overall including $30 million in CCI, $60 million in CSI and $45 million in reinsurance assumed.

We have not yet completed the consolidation of our worldwide 10-K loss development schedule but we currently expect it to show approximately $700 million of favorable development from action years 2006 and prior. This represents a favorable impact on the 2007 combined ratio of about 6 points overall. This favorable development confirms our confidence both in the strength of our reserves and in the quality of our current book of business. During the fourth quarter of 2007 our loss reserves increased by $72 million. Reserves then reinsurance assumed which is now in run-off declined by $92 million. Reserves in the insurance business increased by $164 million including approximately $85 million related to currency fluctuation. For the full year reserves in the insurance business increased by $889 million including approximately $290 million related to currency fluctuation.

The expense ratio in the fourth quarter was 30.5 versus 29.9 in the fourth quarter of last year. The increase was due to premium growth outside the US in certain classes of business for which commission rates are high.

Turning to capital management during the fourth quarter of 2007 we repurchased all of the shares remaining under previous authorizations and we began repurchases under a new 28 million share program authorized by the Board on December 13. During the quarter we repurchased 9.8 million shares at an aggregate cost of $525 million. In all of 2007 our total purchases amounted to 41.7 million shares at a cost of $2.2 billion. Depending on market conditions we expect to complete the new buy back program by the end of 2008.

To provide some background for John Finnegan’s discussion about guidance let me mention four items that will affect our financial results in 2008. First we expect our combined ratio to deteriorate somewhat from 2007 levels as 2008 results are adversely affected by continued rate declines. Second in 2007 reinsurance assumed contributed $0.17 to our operating income per share. Because of the run-off of Chubb [re] we expect a much smaller contribution in 2008.

Third in 2007 we had an $0.11 per share benefit from an increase in deferred acquisition costs as a result of our switch from contingent commissions to guaranteed supplemental compensation for producers. This benefit will not reoccur in 2008. Finally these adverse impacts on earnings per share will be partially offset by the affect of our share repurchase program. Now I’ll turn it back to John Finnegan.

John Finnegan

Thanks Mike, to sum up 2007 with the fifth consecutive year of record results for Chubb shareholders. Our combined ratio in 2007 was 82.9 which as you know is far better than the industry’s average. Operating income grew a record $2.6 billion or $6.41 per share. Return on equity was 18.7%. We completed one share repurchase program and began another. We raised the dividend by 16% and adjusted book value per share increased 13%. In fact over the past five years adjusted book value per share grew from $18.21 to $37.87 a compound average annual increase of 16%.

Let me conclude with a few comments on our guidance for 2008. The market continues to be competitive as rates in both the specialty and commercial areas were down in 2007. These soft market conditions lead us to project deterioration in our combined ratio in 2008. Nevertheless since this deterioration is from record profitability levels we believe 2008 will be another excellent year. Specifically we expect operating income per share to be in the range of $5.70 to $6.10. This guidance is based on our expectation that net written premiums in our insurance will be flat to down 3%. We will have a combined ratio of 86 to 88. Investment income will grow 4% to 6% and we will have 370 million average diluted shares outstanding.

The guidance excludes real life investment gains and losses and assumes three percentage points of catastrophe losses. As you will recall we traditionally used a three point CAT assumption based on historical experience. In the wake of Katrina we increased our CAT assumption to four points in 2006 to be conservative. We revisited this issue and decided to go back to using a three point CAT assumption as this provides a reasonable provision from what we would expect in a typical year. Based on both the last five and ten year periods our median CAT loss experience has been three points. With the nature of CAT events in the long run that there may be a few individual years where the impact is unusually large, for example the World Trade Center loss. Such years drive up the average which we will continue to focus on for pricing purposes but such years do not materially affect the median or typical outcome which we think is probably a better benchmark for annual earnings guidance purposes. Thus we have reverted to a three point CAT assumption which is in line with our historical experience. I think it works out particularly well for 2008 guidance since it allows for an apples to apples comparison with 2007 results.

Of course you may incorporate your models a different assumption for CAT losses if you deem it appropriate. In terms of sensitivity the impact of each percentage point of catastrophe losses on 2008 operating income per share it’s approximately $0.20. To break down our guidance by SBU, for CPI we expect a modest increase in net written premiums and a combined ratio of 85 to 88 for the year. For CCI we expect a modest decline in net written premiums and a combined ratio of 88 to 91 and for CSI we expect a modest decline in net written premiums and a combined ratio of 82 to 85.

In conclusion, 2007 was another outstanding year. With that I’ll open the lines to your questions.

Question-and-Answer Session

Operator

Your first question comes from David Lewis - Raymond James

David Lewis – Raymond James

Quick question can you just maybe run through your outlook on pricing in 2008 versus 2007, your best guess as we’ve now entered the new year and whether the competitive pressures you think are increasing or fairly steady with the ’07 period?

John Finnegan

Let me kind of describe that as what we view from a market condition standpoint. If you look at the commercial business, in 2007 we saw rates decline throughout the year due to increased competition. There was competition for new business and it was particularly strong and some competitors actually moved outside of their typical appetite in search of that new business. There was also pressure to reduce deductibles and increase some sub limits. We also found that CAT prone property came under rate pressure. So we believe that the rate declines that we saw in 2007 and that competition for new business will carry over into 2008. So I think we’d say much of the same. If you look at the specialty business we continue to see aggressive competition. You know rates are off mid to high single-digits depending on the line of business. Fortunately we haven’t seen any change or significant change to terms and more importantly from our standpoint we’ve seen very little evidence of multi year deals. But at this point we believe that the rates will decline again in 2008 but probably at a slower pace than last year. The credit crisis might have a favorable impact on D&O pricing going forward; we’ll have to see about that. If you look at the personal lines business, homeowners continues to be competitive but quite honestly we believe we have a very strong franchise, we have broad coverage, superior claim service, great appraisal service, its made us the leader in the high net worth market. Automobile as you know continues to be very competitive fueled by the direct writers and we expect that trend will continue in ’08. So I think that sums up how we see the market and how it will behave in 2008.

David Lewis – Raymond James

That’s helpful, thank you.

Operator

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

Matthew Heimermann - J.P. Morgan

I was just hoping you could in particular with respect to Professional lines kind of walk through some of the positives and negatives because I was a bit surprised to see that you’re calling for better combined ratios for ’08 than we were for ’07 at this same time, so if you could just kind of what me….I have a sense of what I think they are but kind of put some weight to some of the judicial reforms, loss costs, vie sa vie pricing etc.

John Degnan

Let me start on the loss side, I went through in some detail in analyzing the exposure we might have to credit crisis claims, the underwriting strategies that have worked their way into our book over the last three to four years; lower limits, higher attachment points, movement toward the middle market rather than the Fortune 200 accounts although we still play there, when we do we tend to be higher excess writing a heck of a lot more Side A only coverage’s now for large publically traded accounts, getting out of the large money center regional banks, getting off all E&O for investment banks. So that’s a large contributor to the very good results that we’ve been reporting in these lines of business over the last couple of years and we expect them to continue to play out. In fact maybe even have a better impact on our loss development going forward given the way in which the claims have been developing lately. The favorable judicial climate has just been remarkable over the last three or four years. The United States Supreme Court has taken consistent positions which raise the level of pleading requirements and make it more difficult to establish class action securities certification and I venture to say if we were redoing the corporate abuse estimates today in the light of the developments in the law since the exposure both to the principals and to their insurers would have been substantially lower today than it was in the climate in which they were experiencing.

On the pricing side Tom can add to that but it may be as he intimated that the credit crisis insofar as it impacts insured’s for non insured losses will increase the demand and therefore the pricing for D&O insurance going forward but as we moved into the middle market segment of this business we’re feeling pretty good about a stable to slightly down rate environment there.

Thomas Motamed

Yeah I would agree as I said earlier we don’t see deterioration on terms and conditions multi year deals like we did in the last soft market so we think it’s a pricing issue and we think it’s going to be a little bit better than last year.

Matthew Heimermann - J.P. Morgan

So just to put words in your mouth, it sounds like if I use rate decreases which seem to be basically mid single-digits your loss trends are at least, the combination of loss trends plus some of the judicial changes that have come down the pipe in the last six months lets say is sufficient to drive a decrease.

Thomas Motamed

Our loss experience has been terrific as you see in our numbers and as we’ve told you in the past we take into account this loss experience and we need to validate it and have to mature and we’ve seen it now mature in prior accident years. This year I think for the first time we really, our 2002 and prior accident years performed well so as we look out we think we’ll have a continuation of favorable loss experience. It will be a mix in accident years. I think clearly that to achieve the guidance we’re talking about we will have to have some favorable development in prior accident years but we don’t specifically project the mix between prior and current accident years. It’s a continuation of the loss experience we’ve seen.

Matthew Heimermann - J.P. Morgan

Okay and then just one last thing probably the first of many best wishes to Michael and then a question for you which is just with respect to the, I understand the rationale for changing the CAT assumption I guess, but are there any planned reinsurance changes this year versus last year which, because I guess I’m just looking at market checks which suggest deductibles keep going which may suggest maybe now is necessarily the time to be bringing in a number like that down.

Michael O’Reilly

No we don’t think there’s likely to be any change in our reinsurance posture. Obviously we’re always evaluating what the cost of reinsurance is relative to many other things that we see going on in the marketplace, but on our CAT program specifically we think the traditional market will be down 10% or something like that and obviously we issued a CAT bond last year, we’re constantly evaluating the trade off between the conditional market and the CAT bond market and we’ll make a call as we get closer to our renewal date.

Matthew Heimermann - J.P. Morgan

Okay fair enough, thank you.

Operator

Your next question comes from Joshua Shanker – Citigroup

Joshua Shanker – Citigroup

A few questions, during the discourse on the quarter it was said that for your D&O book many of your clients have maximum limits of $10 million or less, I’m wondering if its possible that you could give a better range that we can understand for that book of business, what the large case clients might have as a total exposure or top limit and that would be the first question.

John Degnan

Generally we don’t sell D&O limits above $25 million. On the relatively few accounts on which we do, it will be a layered program and any amount above that limit would come in at a very high level in the program. Generally limits range from, for public companies; from $10 million to $25 million in the middle market of course we’re talking about limits anywhere from $1 million to $5 million, maybe as much as $10 million.

Joshua Shanker – Citigroup

Okay and in terms of the mortgage-back securities portfolio could you give us a number about what percentage are AAA potentially due to insurance wrapping?

Michael O’Reilly

Well you have to really break the thing down between the residential and the commercial. So on the residential side, the vast majority of it which you can see on our website are really [Fanny and Freddy May] US government agencies so they’re all AAA. If you look at the commercial mortgage-back piece where you’ve got a combination of AAA and AA most of the commercial, I’d say probably 75% of the commercial is really what we would call super AAA and if you look at a structure of a traditional commercial mortgage-back deal, there’s three categories right now of AAA. There’s a AAA piece called the super which has a 30% subordination. There’s a second piece of AAA which has 24% and then the final one is down around 14% or 15%. The only ones that we buy are the ones with the 30% subordination. And then if you notice on our website we’ve got a very small amount of commercial that’s rated AA and then a little tiny single slice of $15 million piece rated B AA. So when you look at our total commercial mortgage-back portfolio of $2 billion we think we’re in extremely good shape.

Joshua Shanker – Citigroup

The underlying is AAA, it’s not AAA because it has a wrapping, it’s underlying AAA.

Michael O’Reilly

Correct and this is not really like what happened to a lot of the sub-prime issues where the underlying collateral turned out to be worthless and so it was really the insurance wrap and the structure of it that got you a AAA rating or whatever the rating was. In the commercial market the underlying collateral is not going to be worthless and so there’s a lot more stability inside the structure of a commercial deal than there was in some of these residential deals.

Joshua Shanker – Citigroup

And there’s one final thing, I just thought I heard as a throw away comment John said that the 2002 and prior accident years are proving to be favorable at this point?

John Finnegan

Yes.

Joshua Shanker – Citigroup

Okay thank you very much.

Operator

Your next question comes from Jay Gelb - Lehman Brothers

Jay Gelb – Lehman Brothers

Thanks and Mike I want to extend my congratulations again, if I could touch first on the commercial mortgage-back security portfolio, how much of that, or do you have vintage years for that?

Michael O’Reilly

I don’t have the specific breakdown in front of me Jay but the stuff that we bought recently lets say ’05 and going forward has really been in that super AAA category. We’ve been in a mortgage-backed area for a long time, sort of going back into the early 1990s and back then the structures were much more solid, we were actually buying B AA rated paper back then but the recent vintages have been in that super AAA category and anything that’s not rated AAA is really going to be prior to 2005.

Jay Gelb – Lehman Brothers

Okay Mike I guess another question for you on the buy back if you finish the current authorization, that’s 26 million shares versus the 42 million you repurchased in ’07 even though you’re buying back another significant portion of the company in 2008 potentially it’s still a lot smaller than what you bought back in 2007. Is there a reason for that or should we expect maybe for you to put up another authorization toward the end of the year.

Michael O’Reilly

Well if you remember back in 2007 it was in December of 2006 the Board authorized $1 billion share repurchase for 2007 and then in the early part of the year we decided to issue $1 billion hybrid and use the proceeds of that to buy back the shares also. So that’s really why you’ve got the $2 billion in ’07 because we added the hybrid. We don’t have any plans right now to issue any more hybrid securities and so we’re really buying this back at a current income and if you think about what we’re really doing is that we’ve got about $500 million of interest and dividends to cover and so were basically going to return along with the $1.5 billion buy back about $2 billion to investors. We think that’s a pretty big slug and as we’ve mentioned in the past we’re balancing off the multiple constituencies that we’re dealing with. We want to provide enough capital to grow the business. We want to make sure we’ve got enough capital to be flexible. We want to keep the rating agencies happy. We value our credit ratings a lot and we also recognize that shareholders want the excess capital returned and that’s really what we’ve done. We’ve returned a lot of capital over the last couple of years and we’re going to continue to do that.

Jay Gelb – Lehman Brothers

And two other quick ones, first on the surety book, that was the one area that you didn’t touch on based on the potentially slowing economy here. Do you have any concerns there about less profitability and then could you also touch on what your plans are long term for your stake in Allied World given that another major investor has sold their stake back to the company.

Michael O’Reilly

Let me talk about Allied World and then Tom will make a couple of comments on surety. We started Allied World back after 911 with Goldman Sachs and AIG and we each owned roughly about 20% of it. Obviously as you pointed out AIG has now sold most of their investment back to the company. We don’t have any current plans to do anything. Obviously we’re not in a situation where we want to be a minority investor in Allied World forever but in the meantime the company is doing a very good job. We think the stock is very favorably priced and so you might see us reduce our shares on an opportunistic basis but right now we’re quite comfortable with the holding.

Thomas Motamed

On your surety question, as of now the economic slowdown has not impacted our surety business. As you know the surety business is a lumpy business, it’s volatile. But we think we have a really good book. Our construction customers in particular are not highly leveraged or dependent on bank credit so they’re pretty solid folks. I’d say number one they have good margins in their backlogs, meaning they have multi year projects so they’re going to generate positive results for the next couple of years. In the event the economy slows some more, there’ll be less new work which will affect them in the future but that’s not right now. I’d also say that the Public Works business continues to be strong and 70% to 80% of our business is in the Public Works sectors. So right now it looks pretty good growth, over time may slow and we’ve kind of budgeted for that in ’08 that we expect the slowdown in growth but the business looks pretty good.

Jay Gelb – Lehman Brothers

Thanks for the answers.

Operator

Your next question comes from Dan Johnson

Dan Johnson

I’ve got two questions please, I know we’ve been talking a little bit around the D&O limits or let’s just call them professional liability limits, can you talk a little bit about the aggregate reinsurance protection you have, whether you do that on a per policy basis, whether you’ve got an aggregate limit for that book and then I have a follow up question please.

Michael O’Reilly

We mentioned a couple of years ago that we had eliminated our reinsurance treaty related to Professional Liability and so our gross equals net right now. Now that doesn’t mean on an occasional basis for a particularly large risk we might not purchase some [inaudible] of reinsurance but we don’t have any treaty business so I think you should really think about what we write gross is what we keep net.

Dan Johnson

What year did that program end?

Michael O’Reilly

I believe 2005.

Dan Johnson

And then the other question, I’m sorry if you already mentioned this but the guidance for next year, I’m confused as to is that assuming any or no prior period reserves development.

Thomas Motamed

Our guidance doesn’t include any specific amount of favorable because we have a guidance range and it can accommodate different mixes of individual SB performance as well as different mixes of current accident year results and past accident year development. However if you look at the individual business lines I think it would be fair to say that the projected 2008 combined ratio range for Professional Liability would likely require a significant amount of favorable development. On the other hand no favorable development would be necessary to attain the combined ratios in the commercial and personal lines guidance range. And finally importantly achieving our earnings guidance range overall is not dependent on further favorable development at Chubb Re.

Dan Johnson

Okay and as we went through a bunch of those quick, so which one did you, which of the four segments was the one that probably….

Thomas Motamed

Professional Liability if you look at the numbers would suggest that to reach those numbers we will have to have a certain amount of favorable development.

Dan Johnson

Got it, great, thanks for taking my questions.

Operator

Your next question comes from David Small - Bear Stearns

David Small – Bear Stearns

Yes thanks, good evening, could you just maybe give us a little more detail on the management liability segment, maybe could you give us some, Travelers gave us some good disclosure earlier today, maybe just you could help us with financial institution, premiums for the management liability segment and maybe some claims information, how many notices have you gotten to date, maybe something along those lines.

John Degnan

We generally don’t disclose the actual number of claims we receive or the limits profile that they would implicate but I think you should assume that our experience in claims is not too dissimilar from what Travelers reported today in terms of the number of claims and policies that are implicated. About 25% of the policies are primary about 75% are excess, but very encouraging to us is the fact that about half of all the policies that are implicated so far are Side A only and as you know that Side A is less likely to be implicated where it is a securities fraud class action case. Side A is triggered only where the company is unable or unwilling to indemnify. In a derivative action typically the company may not be able to indemnify so that a Side A coverage of its primary would come in for defense costs on a derivative. But most of the credit crisis claims seem to be coming in the form of securities class action cases and there we’re encouraged by the number of policies that we have that are Side A only. Of all of the policies that have been implicated only let’s see, about seven or eight of them have limits more than $10 million so we find that pretty encouraging too. We’re aware of the 41 securities class action cases that have been filed out there that have been publicly reported in places like the D&O diary as I’ve mentioned to you because we’re out of the large money center regional banks and we don’t write a lot for investment banks, we don’t write any E&O for investment banks, we write a little bit of D&O but that often will be Side A, we’re not in several of the really high profile nasty cases, we’re not into country wide cases as far as we know. So all in all, that’s pretty much where we are. Of our premiums that are derived for in CSI from D&O about 52% of them are in public, about 20$ in private D&O coverage’s less likely to be implicated and 15% of them not for profit which are even less likely to be implicated. So those are some of the facts that underlie the sort of analysis we did.

David Small – Bear Stearns

And just in terms of the percentage that would come from FI is that something that you’re willing to disclose.

Michael O’Reilly

No, we’ve never broken that down that way.

David Small – Bear Stearns

Okay, thank you.

Operator

Your next question comes from Josh Smith

Josh Smith

Thanks, all the questions have been answered, I just had a clarification. What is the difference in your basis and your fully diluted weighed average shares outstanding for the quarter and for the year?

Michael O’Reilly

We don’t have that number in front of us, the actual number of shares outstanding at the year end was 374.6 million and that compared to 411.3 million at year end 2006.

Josh Smith

Right, it’s just over time this has gotten a little hairy with the convert and everything, I’m just, it would make it easier if you just told us what the diluted number was going forward.

Michael O’Reilly

There’s not a lot of difference in the earnings per share number between the diluted number and the other number. So you’ve got the diluted number because that’s the number that we publish.

Josh Smith

I’ve got the weighted average diluted number; I don’t have the ending shares outstanding diluted number. I don’t have the basic weighted average versus the fully diluted weighted average.

John Finnegan

You’ll have to talk to Glen on that, that’s a factual question he can define that.

Josh Smith

I can do that, thanks.

Operator

Your next question comes from Alain Karaoglan - Banc of America Securities

Alain Karaoglan - Banc of America Securities

Good evening, just one clarification Mike, I believe you mentioned that approximately $700 million was from favorable development on 2006 prior year for the full year 2007, do you have what the breakdown would be for each of the segment for the full year 2007 up to that $700 million.

Michael O’Reilly

Each of the major segments?

Alain Karaoglan - Banc of America Securities

Yes, CPI, CCI and CSI.

Michael O’Reilly

You got $70 million from CPI, $130 million from CCI, $365 million from CSI and $135 million from reinsurance assumed.

Alain Karaoglan - Banc of America Securities

Great, thank you very much.

Operator

Your next question comes from Thomas Cholnoky - Goldman Sachs

Thomas Cholnoky - Goldman Sachs

Quickly on the expense ratio you mentioned that a lot of the up tick is a function of you generating more business overseas, however with the outlook of premium volume kind of flattish to coming down and further pressures from a competitive standpoint, how much are you willing to let that expense ratio drift up before you might take some actions to control that.

Thomas Motamed

We’ve been taking a lot of actions, we have, we probably have 20% less people here than we had when I came in beginning of 2003. Our expenses including subsidiaries are down from the 2003 level. I’d say that we expect 2008 expenses to come in about where they came in at 2007 overall. So obviously if we have a significant fall off in premium you have to revisit and how fast you move but we come at it every year, we have been taking out expenses, we had another 2% out last year. So we keep working at it but you know you need some people to do the business and you want to be in a position where you gotta go work at the business these days in the cycle so you want to make sure you have enough people on the front lines. But we work at expenses all the time.

Thomas Cholnoky - Goldman Sachs

Okay so if your international business continues to grow one would expect your expense ratio to continue to climb them holding all else constant.

Thomas Motamed

Yes I would say that if mixed, if expense ratio time, [inaudible] part of it is mix of business, personal versus other, commercial and specialty personal has a higher expense ratio, part of it mix of geography and you know certainly our expenses have gone up overseas. It’s a function of the commission rates and some of the very attractive businesses we have are higher but our loss ratios are much lower. We’re willing to live with that. If that’s the only cause of an increase in expense ratio that’s not the issue.

Thomas Cholnoky - Goldman Sachs

Right, no that’s fine, thank you.

Operator

Now for closing remarks I’d like to turn it back over to Mr. John Finnegan.

John Finnegan

Thank you all for joining us tonight. Have a good evening. 

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Source: The Chubb Corporation, Q4 2007 Earnings Call Transcript 

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