Chubb Limited

Good day, ladies and gentlemen, and welcome to the Chubb Limited fourth quarter year-end 2018 earnings conference call. Today's call is being recorded. There will be a question and answer session at the end of today's prepared remarks. You may press the start key followed by the digit one to place your line in the queue. For opening remarks and introductions, I would like to turn the conference over to your host, Karen Beyer, Investor Relations. Please go ahead. Thank you, and welcome to our December 31, 2018 conference. fourth quarter, and year-end earnings conference call. Our report today will contain forward-looking statements, including statements relating to company performance and growth, pricing and business mix, and economic market conditions, which are subject to risks and uncertainty. And actual results may differ materially. Please see our recent SEC filing, earnings release, and financial supplements, which are available on our website at at investors.chubb.com for more information on factors that could affect these matters. We will also refer to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplement. Now, it's my pleasure to introduce our speakers this morning. First, we have Evan Greenberg, Chairman and Chief Executive Officer followed by Phil Bancroft, our Chief Financial Officer. We will then take your questions. Also with us today to assist with your questions are several members of our management team. And now I will turn the call over to Adam.

Good morning. As you saw from the numbers, we reported core operating income in the fourth quarter of $2.02 per share. The quarter was marked by greater volatility from elevated natural catastrophes around the world, from a variety of perils, and from increased property loss activity in the U.S. On the other hand, we had strong premium revenue growth, enjoyed improved commercial PNC pricing globally, and produced record net investment income. Core operating income was $935 million. and included $506 million of after-tax CAT losses, compared with $1.5 billion of income last year, which included a tax benefit of $450 million and CATs of $331 million. Simply to give you a sense of underlying strength, excluding CATs and the tax benefit, core operating income per share in the quarter was up 6.5% over prior. Our published PNC combined ratio was 93-1 and included 8.5 points of CATs on the combined. On the current accident year basis, excluding CATs, the combined was 88-3 versus 86-4 prior year. The accident year was impacted in the quarter by elevated large loss activity in our U.S. commercial property portfolio. In both our major account and E&S businesses, well as in our middle market division and this added about 1.4 points to our combined ratio from what we can see this is simply volatility or variability in a short period result not a trend we also continue to experience elevated losses in our US homeowners book which we have discussed in some detail with you we are on track with the pricing and product, and underwriting strategies that we outlined on last quarter's call. Given the state-by-state regulatory nature of this business, it will take some time to show through in the results on a run rate basis. On the plus side of short tail activity, our combined ratio in the quarter included a strong contribution from our crop insurance business, as well as positive pre-tax prior period reserve developments. which benefited by $130 million from a one-time reinsurance settlement and our legacy A&E runoff liabilities. Premium revenue growth in the quarter was 5.8% in constant dollars, and FX then had a negative impact of 1.6 points, bringing the published growth to over 4%. The pricing environment overall improved over the third quarter in a number of our businesses. And this momentum continued into January with much better tone and actual rate movement compared to the fourth quarter prior year. In fact, in terms of price movement globally, this was the best and most broad-based quarter of the year and the best in several years. We were also seeing more dislocation in certain markets, and that means opportunity. For the full year, our growth was 4.4%. Geoeconomic environment notwithstanding, I expect we will, at a minimum, maintain that range in constant dollars and with some natural variability quarter to quarter. There is a great deal of optimism and positive energy across the company. Net investment income in the quarter was $903 million. It was up about 3.5% and contributed to net investment income for the year of $3.6 billion. Both were records. Our results are being driven by strong positive cash flow and higher reinvestment rates that now exceed our current book yield and are beginning to benefit from an improving interest rate environment. Core operating income for the year was $4.4 billion, or $9.44 per share, up 18% on a per share basis from $17. Earnings were split. between PNC underwriting income of $2.6 billion and adjusted pre-tax investment income of $3.6 billion. For your information, pre-tax CAT losses for the year were $1.6 billion, about $700 million more than we planned for when calculating our expected CAT amount. Our earnings led to a core operating ROE of 8.7 for the year. or 9.8 on an expected CAT basis. For the year, the PNC combined ratio was 90.6 compared to 94.7 prior. And on a current accident year basis, excluding CATs, the combined ratio for the year was 88% versus 87.6 prior year. Book value per share was down about a half a percent, and tangible book per share was flat. unfavorably impacted by the mark-to-market effect of rising interest rates and foreign exchange. Adjusting for the mark, book intangible per share were up 2.7 and 5.8, respectively. Bill will have more to say about investment income, book value, CATs, and prior period development. Turning to growth and market conditions, commercial PNC pricing and underwriting for the business we wrote in the quarter was as good or better than what we saw in the third quarter and overall for the year, and materially better than this time last year. The industry, and Chubb is no exception, is experiencing margin pressure in numerous classes, and an improving rate environment, particularly in the U.S. and the London wholesale market, is important. I hope it continues to improve and spread because rate is needed in other markets. I mentioned at the opening that we began to see some signs of dislocation on the margin in the market, as some carriers curb their appetite for certain lines of business by reduced line sizes or exiting from markets altogether. That's another marker of affirming or market correction. In North America, the positive pricing trend in the third quarter continued. in fact improved in several areas, particularly in our major accounts retail and ENS wholesale divisions. Overall rates in North America were up about 2.5%, the same as last quarter, while renewal price change, which includes exposure, was up 4%. Retention of our customers remains strong across all of our North America commercial and personal P&C businesses. Renewal retention is measured by premium of nearly 92%. In major accounts and specialty, which doesn't include agriculture, premiums were up 5%. Rates for major accounts were up over 3%, with risk management rates up less than 1%. While excess casualty rates were up 10%, property was up 12%, and public D&O was up 8.5%. In our Westchester specialty business, rates were up 4.5%. In our North American middle market and small commercial business, premiums overall were up over 4.5% in the quarter, our best growth in many quarters. New business was up almost 14%, with a meaningful percentage of that coming from growth initiatives. Renewal retention in our middle market business was 90%. middle market pricing, which includes rate and exposure change, was up 2.5%. In our U.S. small commercial business, premium revenue continued its positive growth momentum, with net premiums up almost 30%. In our North America personal lines business, net premiums in the quarter declined 2.5%. In the quarter, we added California to our existing homeowners' quota share treaty effective 10-1, and this impacted growth by 4.2 points. Excluding premiums paid to reinsurers, premiums were up 2.3%. Retention remained very strong at about 96%. Homeowners' pricing was up 7.5% in the quarter, which included, again, both rate and exposure change. Our North American agriculture business had a very good year, highlighted by a full-year combined ratio of 75.5%, which was about flat with prior of 74. Our crop insurance business is a great franchise, and we are the clear leaders. Turning to our overseas general insurance operations, a $10 billion business, as I mentioned, we experienced excellent growth this quarter in our international P&C divisions. Net premiums written for our international retail division were up 8% in constant dollars, and FX then had a negative impact of 4.5 points. This compared favorably to year-to-date constant dollar growth of about 6%. Growth was broad-based. Asia Pacific and Latin America grew 10% and 8.5% respectively, while the continent was up over 5%, and UK Ireland was up 4%. We benefited from our growth initiatives and improved price environment in certain markets, particularly London and Australia. Net premiums for our commercial PNC lines overall, international retail, were up 8.5% in the quarter, with strong growth in particular coming from our middle market and small commercial initiatives. Net premiums for our London market wholesale business We're up 12% in the quarter in constant dollars. This business is growing again on the back of improved pricing after several years of shrinking. It's an excellent example of how Chubb is nimble and can quickly take advantage of changing and dynamic market conditions. As for pricing conditions outside the U.S., rates in our international retail and London wholesale business vary by line and by country. Overall rates in our retail were up 4%, the best in some time, though concentrated in a few countries and lines of business. For example, property was up 5% and professional lines were up 7%. Rates in our London wholesale business were up 10%. International personal lines, premiums were up 8.5% in constant dollar, driven again by Asia and Latin America with growth of 19.5%, and nine and a half, respectively. And finally, our Asia Life Insurance business had an excellent year, with premium revenue of $2.4 billion and earnings of over $100 million. John Keogh, John Lupica, Paul Crump, Juan Andrade, and Ed Clancy can provide further color on the quarter, including current market conditions and pricing trends. In summary, Chubb performed quite well despite a quarter of greater short-tail volatility. We have a good momentum, and it's continuing to build in terms of executing on our growth initiatives and taking advantage of an improving pricing and underwriting environment in the U.S., London, and a few important territories. Our organization is optimistic about the year ahead, and we are off to a good start. With that, I'll turn it over to Phil, and then we're gonna come back and take your questions. Thank you, Evan.

We completed the year with a strong balance sheet and an excellent overall financial position with total capital of over 63 billion. Even with significant catastrophe loss payments, our operating cash flow was quite strong at 1.6 billion for the quarter and 5.5 billion for the year. During the quarter, we returned $654 million to shareholders, including $336 million in dividends and $318 million in share repurchases. For the year, we returned over $2.3 billion to shareholders, equaling 54% of our earnings, including over $1.3 billion in dividends and over $1 billion in share repurchases. Also during the year, We issued 2.2 billion of debt in the European markets, paid off 1 billion of debt that matured throughout the year, and redeemed 1 billion of hybrid securities, which together reduced our annual interest expense run rate by approximately 47 million. Net realized and unrealized losses for the quarter were 958 million after tax, which included 383 million of losses in the investment portfolio, reflecting the widening of credit spreads on corporate fixed income securities late in the quarter, partially offset by declining interest rates. Since December 31st, the mark-to-market gain on the portfolio is in excess of $900 million. We also had unrealized losses of $205 million related to the annual review of our retirement benefit plans, a mark-to-market loss of $263 million on our variable annuity portfolio, principally driven by a decline in the equity markets, and a $95 million loss from FX. Since December 31st, the mark on the VA portfolio is a gain of $65 million. Since the CHUB acquisitions, we have reduced our dilution on tangible book value per share from 29% to 9%, an improvement of 20 percentage points. Since December 31st, the dilution improved to 6% based on market movements in the portfolio. If we had included the fair value mark on our private equity portfolio in our operating income, as others do, core operating ROE for the year would have been 9.5% compared to the reported 8.7%. Our adjusted net investment income for the quarter was above our expected range due principally to higher private equity distributions and higher reinvestment rates. While there are a number of factors that impact the variability in investment income, including interest rates and private equity distributions, we now expect our quarterly adjusted net investment income to be in the range of $880 to $890 million. We had favorable prior period development in the quarter of $253 million pre-tax or $202 million after-tax. This includes pre-tax favorable prior period development from our legacy runoff exposures of $22 million, comprising adverse development of $108 million, principally related to asbestos, offset by a favorable reinsurance settlement of $130 million. The remaining favorable development of $231 million was split approximately 60% from long tail lines, principally accident years 2013 and prior, and 40% from short tail lines. On a constant dollar basis, net loss reserves decreased $661 million for the year, reflecting the impact of catastrophe loss payments and the impact of favorable prior period development. On a reported basis, the paid-to-incurred ratio was 102% for the year. After adjusting for the items noted above, the paid-to-incurred ratio was 93%. Our core operating effective tax rate for the quarter was 17.1%, driven in part by catastrophe losses which were incurred in lower tax jurisdictions as previously disclosed. Our full-year operating effective tax rate was 14.4%, in line with our range of 13% to 15%. For 2019, we expect our annual core operating effective tax rate to be in the range of 14% to 16%. There has been a report that the tax deductibility of our intercompany debt will be affected by the provisions of the tax law that impact hybrid debt. That is not true. I'm now turning the call back over to Karen.