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Chubb Corporation (



Q4 2010 Earnings Call

January 27, 2011 05:00 pm ET


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


Jay Gelb - Barclays Capital

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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

The Chubb (


) Q3 2010 Earnings Call October 21, 2010 5:00 pm ET


Good day, everyone, and welcome to The Chubb Corporation's Third Quarter 2010 Earnings Conference Call. [Operator Instructions].

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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 third 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 third quarter 2010, which are available on the Investors section of Chubb's website at

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 November 19, 2010. Those listening after October 21, 2010, should please note that the information and forecast provided in this recording will not necessarily be updated, and it is possible that the information will no longer be current. Now, I will turn the call over to Mr. Finnegan.

John Finnegan

Thank you. Chubb had an excellent third quarter across the board. Our combined ratio was outstanding. We continued to produce significant growth in book value and a strong return on equity. In addition, aided largely by historically high retention rates, we had a modest increase in premiums in a very competitive market. And we continue to return capital to our shareholders through dividends and an active share repurchase program.

Operating income per share for the third quarter was up 8% to $1.69. Annualized operating ROE for the quarter was 15%. The combined ratio was an excellent 86.2%. And the combined ratio, excluding caps, improved to 84.1% from 84.6%. For the first nine months, operating income per share was $4.22. x cats [catastrophes], our nine-month combined ratio was 83%, an improvement of 2.4 points over the same period last year.

We produced an attractive annualized operating ROE in the first nine months of 12.7% even with a relatively high 7.1 points of cats. In addition, our investment portfolio continued to perform extremely well. Property and Casualty investment income after taxes for the third quarter of 2010 was $317 million, which was flat compared to last year in a lower yield environment. We also had net realized investment gains of $54 million before tax. At September 30, our net unrealized appreciation before tax stood at $2.6 billion, an increase of $700 million over June 30. These operating and investment results produced a GAAP book value per share of $52.41 at September 30. That's a 6% increase since June 30 and 11% increase since year end 2009 and a 15% increase compared to a year ago. Our capital position is excellent and Ricky will talk about the progress we have made in our share buyback program.

As you recall in July, we affirmed 2010 operating income per share guidance in the range of $5.15 to $5.55 per share. Based on third quarter results and a positive outlook for the fourth quarter, we are increasing guidance for 2010 to a range of $5.75 to $5.85 per share. I will elaborate on the revised guidance in my closing remarks. We continue to underwrite in a balanced fashion, seeking growth where we can get it but insisting on pricing terms and conditions that are designed to achieve an acceptable level of underwriting profitability. We continue to invest conservatively and we continue to actively manage our capital as evidenced by our share buybacks and dividends. This combination of underwriting discipline, conservative investing and active capital management is the formula that continues to define Chubb and produces superior results for shareholders.

This afternoon, we also announced some important management changes at Chubb. As previously indicated, John Degnan will be retiring on December 31 after a distinguished 20-year career at Chubb, most recently as Vice Chairman and Chief Operating Officer. This is John's last conference call and he leaves big shoes to fill. We have a great team in place, but I know we will all miss John's insightful observations on the market place, claims and public affairs. The good news is that our quarterly conference calls will now be much shorter. Fortunately, John has agreed to continue at Chubb as a senior adviser to me on a part-time basis. Although all of the details have not been finalized, I expect that John will be involved in areas such as special situation claims in government affairs in which he has amassed much expertise.

As we announced this afternoon, upon John's retirement at the end of the year, Paul Krump will become President of Commercial and Specialty Lines reporting to me. In addition, the Accident business will report directly to Paul. Dino Robusto will become President of Personal Lines and Claims and will continue to oversee IT, Communications, Corporate Development and Innovation. He will also report to me.

Harold Morrison will continue as Chief Global Field Officer and additionally will become Chief Administrative Officer, overseeing human resources and administrative services. Howard will report to Paul and Dino. The executive committee will include Paul, Dino, Harold, Ricky Spiro and myself. Paul, Dino and Harold are all seasoned executives, having been with Chubb for more than 20 years each. They all earned their way up through the ranks and they've had a major role in Chubb's operational success over the past several years. While John will be tough to replace, I'm very confident that we have a terrific team in place that is well qualified to step in and lead Chubb to even greater success in the years ahead. And now, John Degnan will discuss our operating performance in more detail.

John Degnan

Thanks, John. Since this is my last earnings call, I'm especially pleased that we had such a good quarter. Let me give you some of the key details about that. Chubb Personal Insurance net written premiums increased 4%, with about a 1% positive impact of currency fluctuation. CPI produced a combined ratio of 85.4% compared to 81.6% last year. But cats were 3.7 points in 2010 whereas the impact of catastrophes actually improved the combined ratio by about a point in the third quarter of 2009. So excluding cats, CPI's third quarter combined ratio was 81.7% this year, almost a point better than last year's 82.6%. Homeowners premiums were up 2% and the combined ratio was an 81%. Personal auto premiums increased 7%, driven by growth outside the U.S. and the combined ratio was 91.7%. In Other Personal lines, which include our Accident business, premiums were up 7% and the combined ratio was 94.2%.

At Chubb Commercial Insurance, premiums were flat or down about 1% x currency. The combined ratio was an 89.1% compared to last year's 90.5%. CCI's third quarter included cat losses of two points compared with 2.6 points in 2009. So excluding cats, CCI's third quarter combined ratio was 87.1% in 2010 and 87.9% in 2009.

In the U.S., CCI renewal rates were down 1% compared to flat in the second quarter. We have one of the highest quarterly U.S. retention rates we've had in many years, 87%, contributing to a new to lost business ratio of 1.2:1.

At Chubb Specialty Insurance, net written premiums were also flat and the combined ratio was 83.3% compared to 83.6% in the third quarter of 2009. Premiums for Professional Liability were down 1% and the combined ratio was 89.3% compared to the 90% in last year's third quarter. Average U.S. renewal rates for Professional Liability were down 2% compared to down 3% in the second quarter. Renewal retention in the U.S. was 88% and the ratio of new to lost business was 1.1:1. For surety, net written premiums were up 7%, driven largely by growth outside the U.S. and the combined ratio was 40%.

Overall, market conditions in the third quarter were largely unchanged from the first half. We continue to see competitive pressure on rates. But on the other hand, the repercussions of poor economic conditions continue to abate slightly, and we had some improvement in exposures and endorsement activity. Overall, the market environment continues to be very challenging.

Just one final word for me on credit crisis claims. Credit crisis losses continue to develop consistently with our prior observations about them. The number of new claims in this category continues to dwindle, and managing these losses now is a question of dealing with a known quantity of claims rather than speculating about the number we will actually receive. Nothing has changed our conviction that we are appropriately reserved for the accident years in which the claims have been made.

In closing, I'll miss these earnings calls. Not so much the internal prep sessions. It's been a privilege to work for over 20 years for a company in whose values I believe and in whose successes, particularly over the last eight years, I have been able to participate. And finally, thanks to all of you for consistently keeping us on our toes over the years during these calls. With that, I'll turn it over to Ricky Spiro.

Richard Spiro

Thanks, John. As you can probably tell by now, we are very happy with our financial performance in the third quarter. Looking first at our operating results, underwriting income was strong, amounting to $399 million in the quarter. Property and Casualty investment income after tax of $317 million in the quarter was flat compared to last year's third quarter in a challenging investment environment. Net income was higher than operating income in the quarter due to net realized investment gains before tax of $54 million or $0.11 per share after tax. Our net realized investment gains before tax included $18 million of gains on our alternative investments portfolio and $36 million of realized gains from the sale of securities. Unrealized appreciation before tax at September 30, 2010, was $2.6 billion, an increase of $700 million from the end of the second quarter. This substantial increase was due to the overall improvement in the global capital markets during the quarter, which led to strong performance across all of our asset classes.

Turning to our investment portfolio, the carrying value of our consolidated investment portfolio was $43 billion as of September 30. The composition of our portfolio remains largely unchanged from the prior quarter. The average duration of our fixed maturity portfolio is 3.9 years and the average credit rating is Aa2. We also continued to have excellent liquidity at the holding company. At September 30, our holding company portfolio included $2.3 billion of investments, including $900 million of short-term investments.

Book value per share under GAAP at September 30, 2010, was $52.41 compared to $47.09 at year end 2009 and $45.43 a year ago. Adjusted book value per share, which we calculate with available-for-sale fixed maturities at amortized cost, was $47.25 compared to $44.37 at 2009 year end and $42.31 a year ago.

As for reserves, we estimate that we had favorable development in the third quarter of 2010 on prior year reserves by SBU as follows: In CPI, we had about $40 million, CCI had about $90 million, CSI had about $65 million and Reinsurance Assumed had about $5 million, bringing the total favorable development to about $200 million for the quarter. This represents a favorable impact on the third quarter combined ratio of about seven points overall. For comparison, in the third quarter of 2009, we had about $205 million of favorable development for the company overall, including about $65 million in CPI, $30 million in CCI, $100 million in CSI and $10 million in Reinsurance Assumed. The favorable impact on the combined ratio in the third quarter of 2009 was about seven points, the same as in this year's third quarter.

During the third quarter, our loss reserves increased by $7 million. Reserves in our Reinsurance Assumed business, which is now in runoff, declined by $35 million. Reserves in the Insurance business increased by $42 million during the quarter. The impact of currency fluctuation on loss reserves during the quarter resulted in an increase in reserves of about $65 million. The impact of catastrophes reduced reserves by $120 million, reflecting payments on prior events and lower levels of catastrophes in the third quarter.

Finally, I want to give you an update on capital management. During the third quarter, we repurchased 10.2 million shares. The aggregate cost of our repurchases was $555 million or an average of $54.63 per share. For the first nine months, our average repurchased cost per share was $51.94. As of September 30, 2010, there were 6.6 million shares remaining under our current repurchase authorization. And as we said during our last earnings call, our intention is to complete the repurchase of all of these remaining shares by the end of the year. We will review our 2011 capital management plans with our Board of Directors in December. And now, I'll turn it back to John Finnegan.

John Finnegan

Chubb performed extremely well in both the third quarter and the first nine months of 2010. Here are the highlights: For the third quarter, we had operating income per share of $1.69 and an annualized operating ROE of 15%. For the first nine months, we had operating income per share of $4.22 and an annual operating ROE of 12.7%, even with seven points of cats. Our x cat combined ratio for the first nine months is an impressive 83%, which was 2.4 points better than the same period last year. Book value per share increased 6% in the three months ended September 30 and was up 11% since year end 2009 and 15% since September 30, 2009. We're maintaining a strong capital position and are well on track to completing our current share repurchase program by year end.

With the board's initial buyback authorization in December 2005, Chubb has repurchased shares representing 37% of its market capitalization at that time.

Let me conclude with a few comments on the revised guidance we announced in today's press release. Based on our excellent third quarter results and our outlook for a strong fourth quarter, we are updating our 2010 calendar year operating income per share guidance to a new range of $5.75 to $5.85 from the previous guidance range of $5.15 to $5.55. This revised guidance is based on operating income per share of $4.22 in the first nine months and our forecast of a range of $1.53 to $1.63 for the fourth quarter. This revised guidance is also based on an assumption of 322 million average diluted shares outstanding for the full year.

Finally, our revised guidance assumes two percentage points of cats for the fourth quarter, which would result in 5.8 points of cats for the calendar year. This compares to the full year cat assumption of seven points included in our previous guidance, the reduction being due to lower than expected cats in the third quarter. The impact on operating income per share of each point of cats in the fourth quarter is about $0.05. That concludes our prepared remarks. I realize that they were shorter than the past, but that's a reflection of a quarter with excellent results and the fact that market conditions haven't changed much from three months ago. With that, we'll open it up to your questions. Operator?

Question-and-Answer Session


[Operator Instructions] And we'll take our first question from Keith Walsh with Citi.

Keith Walsh - Citigroup Inc

This is for John Finnegan. I guess we've seen several hundred community banks failing since 2008. There's been a lot of news flow recently around the FDIC pursuing insurance claims against the banks and their employees. In fact, you guys were named in the Colonial Bank story recently. If you can help me frame this issue, as the FDIC plays catch up on the financial crisis, and what other coverage lines can be brought into play besides D&O?

John Degnan

Let me take a stab, this is John Degnan. I know your question was directed to John Finnegan. But I'm going to take a stab at it, then John will add anything he wants to talk about it. Let me talk a little bit first about our community bank book, Keith. We consider a community bank to be one that's no larger than $1 billion in total assets. We have D&O policies for about 10% of them. 94% of our book is private or closely held and only 6% are listed on the stock exchange. The average limits are $3.2 million for the private book and $5.9 million for the public book. Given the size of those banks, we're not particularly concerned whether they're private or public because we underwrite their financial condition in light of the fact that a failure of one of these institutions could trigger a regulatory claim against the directors and officers. We have not yet seen significant claims activity in the community bank arena to date. And we're not overly concerned about the developments that have been taking place over the last couple of weeks in so far as they pertain to community banks, although the lender liability portion of the coverage for community banks does in fact include errors and omissions, which could be implicated in a claim against the community bank for mishandling of foreclosure documentation like robo-signing. But our exposure in that connection to the community banks is not thought at the moment by us to be significant. On the other hand, our exposure to the 10 largest mortgage services that might be implicated in claims like that is also, from an E&O perspective, thanks to the underlying strategies we've had for the last couple of years, is minimal with the exception of one account, which has one $15 million exposure. And to date, we haven't seen a claim from that account. And then finally, it's a complicated set of issues here, and it is early to be projecting what the outcome is, but with respect to -- not to the foreclosure documentation problems but to the implication of the securitized loans, you should realize that purchasers have been putting back or attempting to put back defective mortgages for several years now and they're contractually able to do that if they can prove that there were defects. That by itself though does not cause a loss to either the purchaser or the originator depending on the quality of the underlying asset. And as far as we know, and certainly our experience has been that there has not been significant insurance related claims activity to that point. And then finally, while the securitization agreements can, as people have pointed out, contain recourse against the originator and others for fraud, there are a number of other intermediaries that would be potentially implicated, including investment banks and lawyers and accountants. And as such, this would be largely an E&O matter where we have little to no exposure to those entities due to the underwriting actions we've taken. And I know that was a long answer, but you invited me to give you a...

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