Good day, and welcome to the Chubb Limited Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] For opening remarks and introductions, I would like to turn the call over to Karen Beyer, Senior Vice President, Investor Relations. Please go ahead..

Thank you, and welcome to our June 30, 2020, second quarter earnings conference call.

Our report today will contain forward-looking statements including statements relating to company performance and the impact of the COVID-19 pandemic and its economic and other effects, pricing and business mix, and economic and market conditions, which are subject to risks and uncertainties, and actual results may differ materially.

Please see our recent SEC filings, earnings release and financial supplement, which are available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today 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 I'd like to introduce our speakers today. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Phil Bancroft, our Chief Financial Officer.

Then we'll take your questions. Also with us to assist with your questions are several members of our management team. And now it's my pleasure to turn the call over to Evan..

tax payers, our industry, and the economy more broadly. First and foremost, I believe the industry can and should take pandemic risks along with the government. This is apparel that can be covered to a greater degree than we do today, as long as the tail exposure covered by the government. It is our job to figure out how to do that.

We can do more than simply play an administrative role where we belittle ourselves and we're less relevant and we can or should be. The framework we announced has attributes that we believe will make for a successful program. It accounts for the different needs of small, medium and to a modest degree large businesses.

Premium for small business will be affordable and they will be paid quickly. Large companies would pay a fair and risk adjusted price to both the government insurers, for pandemic cover and a program built on free market principles. The government gets paid for the use of its balance sheet, not a handout to larger companies.

Our framework has incentives for broad participation by the industry and by committing insurance industry capital and providing opportunity for increased risk sharing over time as direct and secondary markets develop the pandemic burdens shouldered by the government will ultimately be lessened to a degree. This is an important issue for our nation.

We look forward to contributing to the dialogue as policymaker’s work to refine the most effective solution. Before I turn the things over to Phil, I want to say a few words about an issue that concerns all of us, and that's the persistent challenges arising from bigotry, racism and racial injustice in society, particularly for black people.

The events that unfolded across our nation these past few months has focused our attention on what we should do as citizens and as a company. We characterize Chubb’s culture is an inclusive meritocracy.

We earnestly strive to achieve an environment where all colleagues feel comfortable to perform to their full potential and are recognized for their contributions. It's a never ending work in progress, and we can do more. We developed recently shared with our employees an action plan to which we will hold ourselves accountable.

The plan has a few simple objectives. We do want to enhance our individual and collective understanding of racism in society and strive within Chubb to be anti-racist in our behavior as individuals and as an organization. We want to actively support each other.

It starts with more frank dialogue between our employees of color, particularly black colleagues and our white college to create better understanding and awareness about the realities of racism.

We will hold leaders more accountable for curating and leading an environment of inclusion and we'll eliminate policies and practices that potentially create bias and inhibit our ability to create greater racial mix of our workforce at all levels of the company. This is an enduring process, not a momentary event in time.

We believe we have a responsibility to do our part with candor, open minds and a commitment to change. In closing, our company is very strong. Our balance sheet is in excellent shape, in fact, outstanding shape, and we are operating well around the globe during very difficult times. Our underlying strengths are enduring.

We are capitalizing on favorable market conditions as we simultaneously navigate the extreme headwinds and uncertainty created by COVID-19. With that, I'll turn the call over to Phil, and then I'm going to come back and take your questions..

Thank you, Evan. Our financial position at quarter end is exceptionally strong. COVID-19 is an earnings event for Chubb, while our balance sheet remains in excellent shape.

Our balance sheet features a $112 billion, AA rated cash and investment portfolio with a duration of four years and consistently conservative approach to loss reserving and total capital of $70 billion. We are a balance sheet business operating in extremely uncertain times, and we have maintained a conservative level of capital.

Our operating cash flow for the quarter was $2 billion, and our liquidity on a global basis continues to be excellent. In the quarter, we returned $353 million to shareholders in dividends.

Adjusted net investment income for the quarter of $857 million pretax was below our guidance range, mainly due to foreign exchange, lower rates on our floating rate obligations and an acceleration of prepayments in the mortgage loan portfolio.

We remained consistent and conservative in our investment strategy and do not expect to materially adjust the portfolios asset allocation. We intend to maintain a high-quality bias and conservative duration.

Fed easing actions have inflated asset values causing a disconnect with underlying credit conditions, so that many classes of debt appear mispriced. We will continue to focus on risk adjusted returns and not reach for yield. Well, there are a number of factors that impact the variability in investment income.

We now expect our quarterly run rate to be in the range of $850 million to $860 million. Turning to book value. Our share book and tangible book value were up 4.9% and 7.2% respectively in the quarter.

Our core operating loss and dividend payment were more than offset by net realized and unrealized gains for the quarter of $3.1 billion after tax, including $2.7 billion in our investment portfolio, $410 million from favorable foreign currency movements, and $110 million mark-to-market gain in our variable annuity reinsurance portfolio.

The gain in the investment portfolio is due mainly to the narrowing of credit spreads in our corporate bond portfolio and the decline in interest rates. At June 30th, our investment portfolio was in a net unrealized gain position of $3.4 billion after tax.

Our net catastrophe losses for the quarter were $1.8 billion pretax or $1.5 billion after tax as previously announced and are further detailed in our financial supplement. Our net loss reserves increased $2.7 billion in constant dollars, including the significant catastrophe losses and adverse prior period development.

The paid-to-incurred ratio was 59% reflecting the catastrophe losses. We had unfavorable prior period development in the quarter of $75 million pretax or $52 million after tax. This included a charge for U.S. child molestation claims of $259 million pretax or $205 million after tax as previously announced.

The vast majority of these losses were reviver statute-related. Excluding this charge we had favorable prior period development in the quarter of $184 million pretax split approximately 79% in long-tail lines principally from accident years 2016 and prior and 21% in short-tail lines.

Our core operating effective tax rate for the quarter of 15.3% was impacted by the high level of catastrophe losses. Through six months, our core operating effective tax rate was 16.5% slightly higher than our expected 14% to 16% range. We now expect our annual core operating tax rate to be in the range of 15% to 17%.

With that, I'll turn the call back over to Karen.

Thank you. At this point, we're happy to take your questions..

[Operator Instructions] And we will take our first question from Michael Phillips with Morgan Stanley. Please go ahead..

Thanks. Good morning, everybody. Evan, thanks for all those comments especially on the BI stuff, and appreciate that. I guess, can you talk about the impact that COVID and shelter in place is having on your acquisition expense ratio? And then longer term, maybe you've made some good strides in your expense ratio in general, even prior to COVID.

So kind of how we should think about a good run rate going forward from there?.

Yes. Let's see, the acquisition ratio benefits fundamentally from a mix of business change. You had consumer lines that, that as I said had a negative growth to them and they run a higher acquisition cost than commercial P&C does, and we're growing underneath, as you could see commercial P&C at a rapid clip, and it has a lower acquisition ratio.

The OpEx ratio did benefit reasonably well in the quarter from COVID related shutdown, and I expect that we'll continue to receive benefit from that as we go forward in future quarters. And so overall I think the expense ratio will continue to benefit in future quarters. How much and to what degree, I'm not going to prognosticate or give guidance on..

Okay. No, thanks. That's helpful. I guess, second question on COVID and frequency benefits on commercial lines.

Can you talk about what specific lines maybe benefit the most from frequency benefits? And then with some of the reopenings we've seen recently, has there been any change in trends, certainly on the frequency that you've noticed an uptick on because of the reopenings?.

Commercial lines, fundamentally most classes of business in traditional property and casualty benefit to a degree and it varies by line of business from the COVID shutdown on one.

On the other hand, we took a massive charge to recognize the COVID related claims that will arise, but excluding that the frequency when you take those away, the frequency and severity and most traditional lines will benefit because, and are benefiting at least to this point in time because commercial activities are down.

And that would be both in the short tail lines, as well as in the long tail lines, but it varies by class. Obviously in professional lines to a lesser degree than say in general casualty or an excess casualty. And as you know, our policy has always been. We recognize bad news early and we're very slow to recognize good news.

And so any of the benefit we might be seeing short-term right now for the most part from the reduction in economic activity, in the shelter in place and the lack of social activity around the world. We're very slow to recognize that and will be because we're in very uncertain times and we don't know what the future is going to bring.

Secondly, what I would add is that overall through commercial P&C for the most part; we are achieving rates that are in excess of loss cost trends. And again, we're in uncertain times and we're conservative in our approach..

Thanks, Evan. I appreciate it..

And we will take our next question from Elyse Greenspan with Wells Fargo. Please go ahead..

Hi. Thank you. Good morning. My first question, Evan, follows up on your response to the last question. You guys are getting a lot of price, 14% within your North America commercial book picked-up pretty nicely from where you guys were last quarter.

Can you just give us a sense of where last trend is within that business, and just as we think – and I recognize you give us some guidance on the premium side and you don't like to give forward guidance, but as we think about price up in the teens and depending upon where your loss trend is just trying to get a sense of the potential for margin improvement within that North America commercial book?.

No, I understand. And Elyse, I'm not going to give you much satisfaction in that question.

We don't give forward guidance on that as you know, and I'm going to rest on the statement that in most commercial lines areas, we are not all, but most we are achieving rate in excess of the loss cost trend which is reasonable to achieve a proper risk adjusted return in those classes, and it is needed.

As far as where the exact frequency and severity of loss is and trend is over the last number of months. It's very difficult to tell because, and we measure it typically quarterly, but at this point we measure it monthly and because of the economic shutdown, you really can't see what the actual is though it's lower.

We do though price on anticipation or reversion to the mean as the economy opens back up and activity returns to normal. And I'm – I think I'm going to leave it at Elyse..

Okay. That's helpful. Then I had a couple of other numbers question unrelated to North America commercial. The last couple of Q2, you guys had LPTs on the book that had due typically to higher loss ratios.

Was there any LPTs on the book this second quarter?.

There were, and as you know, we write LPTs virtually, most quarters it's just the amount of it varies by quarter. And this quarter we did have LPTs as we do in most quarters..

Okay..

And it was within a reasonable range of what we wrote last year in the second quarter. Last year was a pretty big quarter for LPT. This year we wrote a number of transactions as well..

Okay, great. And then within North America commercial your retention went up to 84.5, it had been trending in the high-70s.

Does – was there anything specific to the second quarter or just as we think about maybe kind of a change in retention in terms of that book on a go-forward basis?.

No, it's more of a – the difference this quarter, I would attribute more to a change of mix of business then – and what we wrote then, then I would to a major shift in the retention net to gross..

Okay. Thank you, Evan. I appreciate the color..

You're welcome..

And next we’ll hear from Ryan Tunis with Autonomous Research. Please go ahead..

Hey guys. Good morning. I guess, following-up on that last one in North America commercial, there's clearly some cross currents there, so the structured transactions, some COVID frequency benefits but there's about 0.7 points of year-over-year, underlying loss ratio improvement.

Evan, is that a fair representation of what you think the relationship is right now between rate and loss trend? Maybe around 0.7 points in North America commercial? Or is it higher than that you think moving forward?.

As I said, Ryan, I'm not going to prognosticate future. We just don't provide guidance that way. I made a couple of comments that I think they're probably important to you. Number one, that we are achieving rate next in aggregate and excess of loss cost trend.

Secondly, we are – we haven't noticed a major change in trends, but on the other hand you're masked by all of the COVID related impact. Number three, we have COVID-related benefit from the economic shutdown.

Given the period of great uncertainty we're in, we are very slow and fundamentally haven't recognized good news while we took what we think is a reserve to ultimate for COVID-related losses. And so in this period of time, I think you're – and it is our policy. We were conservative in our balance sheet management.

And in periods of great uncertainty puts a point on what is our normal policy directly and if there's favorable news, to recognize it in a prudent way late..

Understood. And I guess my follow-up is, can you just talk a little bit about the COVID charge that you took? It's obviously conservative.

If you ever have to add to it, what do you think the reason would be? Would it be another outbreak later in the year? Like give us a sense of why – the degree of conservatism around that loss selection?.

Its, we didn’t know it in a in a conservative way. We pitched it right up the middle. We've modeled what we think and we took from what we know of – at others, economists will project from various organizations. We projected what we think the economic patterns are going to look like.

We projected what we think the – from the best we know at the time what the health situation is and will be and how the two work together. And therefore, based on all the information we know today, we modeled both top-down and bottom-up, particularly short-tail losses, longer tail.

You have to model more top-down and based on what we know of prior events and history and how things work. And so we used all that based on our – on the picture of economic and health as we can see it going forward from this pandemic event to project a loss to ultimate. Did we get it precisely right? God knows.

And is there risk around it? Of course, there is because you tell me, what's the next six or nine months precisely going to look like? No one knows. There's great uncertainty. But we did our best within uncertain times to try to reflect the ultimate loss on our balance sheet, our liabilities.

Hello?.

And next we will hear from Paul Newsome with Piper Sandler. Please go ahead..

Good morning and hope you're all well. I was wondering if you can talk about how the business interruption claim issue has evolved, not necessarily just in the U.S. but outside the U.S.

It looks like to me at least that the courts are trending in the industry's favor so far in the U.S., but I don't have a great sense of how that's happening outside the U.S.

and how that might differ from the U.S.?.

Yes. Paul, it's very early days. The U.K., for example, as you know, and you're following, I'm sure, is in a process that is very interesting where the regulator has stepped in.

And to avoid, like we have in the U.S., just a free for all of lawsuits and a waste of expense and time and money, they've kind of stepped in and interacting to represent the policyholders, all of their arguments in one place before a panel of judges with the industry presenting its arguments.

And that one's going to unfold, and it's a very rational process. And by the way, if you haven't followed it, I would tell you, it really is worth doing. It's admirable how they're going about it. And that will unfold over a period of time and come to a conclusion from what I – if I recollect properly, by around year-end.

In other countries such as Australia, et cetera, it's bubbling. And you have a number of court cases that are just proceeding to test the veracity of the wordings that are – and better against regulation that is quite different than in the United States and then where the most activity is.

And that will be on the longest, most prolonged period of time to resolve is in the United States..

And then my second question, we've seen a lot of rate increases in the reinsurance business. Has the....

Sorry.

Can you repeat that?.

I said, we've seen a lot of rate increases in the reinsurance business. I was wondering if the changing market environment had changed your view on the fairly narrow approach you take in the reinsurance business overall..

Yes. In the main, we're pretty steady about it. We buy reinsurance fundamentally to be able to provide limits of liability beyond what we're – what we want to expose our balance sheet to. We buy it for protection of volatility where it makes sense. We measure all reinsurance. So we do it for fundamental business purposes.

And we buy reinsurance in a manner where we measure the risk/reward and the proper risk-adjusted pricing. That's what we're willing to pay for protection. And so those fundamental principles lead to a pretty steady approach.

At the same time, obviously, when rates are not adequate to earn a reasonable risk-adjusted return, we shrink exposure as a company. When rates are adequate for – to earn a proper risk-adjusted return and may increase to a point where they justify greater volatility, we will increase our net exposures.

And we do that alongside how we purchase reinsurance..

I am sorry. I was thinking more about the actual reinsurance business that you have and whether you might be interested in..

Oh, I'm sorry. I'm sorry. Yes, I got it. Yes, we are more active and – in our reinsurance business. It is a greater growth area for Chubb now. We have like our E&S business, particularly in London, where we have been disciplined and shrunk for a number of years because we weren't getting paid to take risk.

We are getting paid more adequately to take risk in a number of classes, and that is growing by the quarter. And therefore, we're leaning into that. And our reinsurance business, from what we can tell today, will continue to expand as we go forward..

Thank you very much..

You’re welcome..

And next, we will hear from Greg Peters with Raymond James. Please go ahead..

Hi, good morning. Just FYI, Evan, there is a little bit of feedback that we're hearing throughout the call. So I'm not sure what's going on there, but it's – we're hearing it..

Yes, I'm hearing it, too. And I hate it..

Yes. We do, too. So it's mutual..

Can you still hear the answers? Can you still hear well enough, though, to get the information?.

Yes, yes, yes. It's coming through. It's just there's a little feedback somewhere in the system. So in your prepared remarks, you offered to have some of the other executives provide some commentary around conditions, pricing, et cetera, in the respective segments of the business. And I was wondering if you could follow through with that offer..

Love to. Thank you for asking. I'm going to start with John Lupica on major and specialty, and then I'm going to have Paul Krump do middle..

Sure. Thank you, Evan, and thank you, Greg. Let me give you a little more color on what we're seeing in major and specialty. I'll start really with rate and premium retention. And on our major portfolio, we're looking at over 16 points of pure rate increase. In Westchester, our E&S business, we're looking at 18 points of rate increase.

And in Bermuda, our high excess business, as you know, we're looking at 48 points of rate increase.

And when I break that down into just some segments on the retail side, our primary casualty risk management business is getting some of its best rate in the history of that organization at 8 points of rate and the adjusted premium retention ratio of 97.5% and I take into account one large front to trade.

In our excess casualty book, we are getting 48 points of rate and achieving 111 points of premium retention. And as Evan noted, in our property business, we're getting 21 points of rate with 109 points of pure premium retention.

And in our financial lines, again, another note in the retail business that Evan had noted, 18 points of rate and 103 points of premium retention. And we're seeing the same in our E&S lines of business. Our property business is getting 18 points of rate with 103 points of premium retention.

Casualty book is getting 31 points of rate with 87 points of premium retention. And our financial lines is getting 17 points of rate. So as you can see, pretty healthy rate environment and premium retention inside of the retail and E&S marketplace..

Paul Krump?.

Hi, Greg. Good morning. I’ll start out with amount of prop. Evan had mentioned getting over 18 points of rate there. Our retention in that line of business is 95%, so just excellent. As respect to package, we're getting 6 points of rate and 97% retention. In our excess umbrella, we're getting over 20 points of pure rate increase and 94% retention.

Auto has got 11 points of rate on it in the last quarter, 99% retention in our professional lines, as Evan mentioned, is at 14.5% and there, we're getting 98 points of retention.

As respect to terms and conditions, briefly I tell you that obviously, a lot of these rate increases were tightening terms and conditions, I'd say in particular, we're pleased with where deductibles are going and how much they've increased.

We've also been able to trim down some of the sub-limits for the cat perils of flood and quake as well on excess umbrella, we've been working on attachment points and that's been going extremely well also..

Here you go, Greg, more than you ever asked for..

Well, it's never enough. So if you take the – all of those businesses that were just summarized with rather robust rates, what percentage of the total premium are we talking about, just to put this in perspective because not all of your business is getting these type of rate increases..

When I add in the international areas that are achieving the – that are in a similar hard market condition, it's over 50% of our premiums globally. I mean all the business, not just commercial P&C inside of our total business..

Okay. Thank you. And then obviously, it begs the question when we're hearing about the substantial rate increases.

What's the commercial customer response to this because this is far exceeding inflation trends with the rest of their business and a lot of your commercial customers are experiencing pressures because of COVID and the economic slowdown or whatever you want to call it? I have to believe you're getting a lot of customer pushback, or maybe you could give us some perspective around that..

We're not. We're actually – there is a lot of goodwill between us and customers. Look, why is this occurring? Because loss cost trends, even when they're benign, have far exceeded premium rates charged for a prolonged period of time. Rates have gone in one direction, while loss costs have continued to rise.

And so industry results overall are severely elevated and many lines of business just were so inadequate in pricing, and it varied by company. If you were trying to gain market share at that time, well, you're – it's coming home to roost. And it will continue to come home to roost for a period of time.

If you are more disciplined and shrunk exposure at that time, then it had less impact on you. But rates are now moving in a direction where over time, they'll achieve adequacy, and there are lines where adequacy is achieved.

And there are lines where, given loss cost trends and then you have on top of that, things like social inflation that have exacerbated trends means that rates need to continue to move higher. Well, the other dynamic about all of that is that companies are pulling back and capacity is less available. Chubb is stepping up. We're offering capacity.

We're consistent to our customers. We're there. We're not in and out. We've been consistently speaking to our customers that, "You know what, this is not going to last. The good times of rates going down or premiums going down is irrational and it's not going to last, and that we will remain consistent.

It's the market that will wane and wax." Well, they understand and see that. And by the way, as we can get more adequately paid and as capacity is shrunk, we've actually stepped up with bigger lines and bigger solutions and more creative solutions to customers. And so we're consistent in that service in – during the shutdown period.

There is no company that has been more available to dialogue and to be on the front line with customers and respond on a moment's notice globally than has Chubb. So I would actually say our reputation and our image and all of this in the goodwill with customers has been building.

And yes, I understand the notion that insurance pricing is going up when all of this is going on with COVID. But that trend, which is very rational, was occurring before COVID ever began. And to deploy the capital, you've got to get paid adequately. And capital, risk capital is precious..

Thank you for the answers..

You’re welcome..

And we will take our final question from David Motemaden with Evercore. Please go ahead..

Thanks. Good morning. Just a quick numbers question on the current action in your loss ratio ex-cat in North America commercial. Just in the past, you've talked about the impact that some of these large structured transactions have had on the loss ratio.

I think in 2018, 2019, in those second quarters, it was around 100 basis points of an elevation in the loss ratio.

Just wondering how I should think about that impact this quarter within North America commercial?.

Yes. It had an impact on it. I can't give you an exact basis point number. It's one of those so we could probably take off-line with you. But it had on – it hadn't – we wrote LPTs fairly consistent in the neighborhood of what we wrote in aggregate last year. So we – and they have an elevated impact on it. That's all..

Year-on-year, Evan, the impact was 70 basis points..

Thank you, Phil..

Great. Thanks Evan and Phil, that’s helpful. And then just a question. So the recent GOP stimulus, that includes some liability shields for businesses and health care providers. Just wondering how you're thinking about this.

How important this is for you and the industry? And outside of this going through, just wondering what sort of underwriting actions you're taking to mitigate the future liability claims that you may be getting..

I think that this kind of liability safe harbor that the Republicans are proposing as part of the bill is so important to our nation. We have – we right now confront such economic headwinds between – toggling between – trying to manage the health crisis and open up an economy.

And the burden on business, all businesses throughout the United States today is extreme.

To add on to them, the additional expense and burden of liability exposure when for those who are practicing the right protocols in protecting their employees and customers and then trying to open up the economy, to ascribe to them the burden of liability and cause them to be more cautious.

We foist on them an additional economic expense and which ultimately benefits, frankly, one industry, and that is the legal profession, the trial bar, I think would be a travesty and a shame. And I think that is the wisdom to try to remove some of that and create certainty for business in an environment of tremendous uncertainty.

And not only do we applaud it, we support it actively as a company and not for the benefit of the insurance industry, to the benefit of all of our society right now. We need to open up this economy.

We need to control this health crisis better than we are and, my God, not believe that living at home and working from home is the normal – the new normal for America. That don't make any sense to me. With that, thank you very much..

And that will conclude today's question-and-answer session. I would now like to turn the call over to Karen Beyer for any additional or closing remarks..

Thank you all for your time and attention this morning. We look forward to speaking with you again next quarter. Thanks, and have a good day..

And this concludes today's conference. Thank you for your participation. And you may now disconnect..