Good day. Welcome to Chubb Limited second quarter 2018 earnings conference call. Today's call is being recorded. During the question and answer session, please press star one should you wish to ask a question. For opening remarks and introductions, I would like to turn the call over to Helen Wilson, investor relations. Please go ahead.
Thank you. Welcome to our June 30th, 2018 second quarter earnings conference call. Our report today will contain forward-looking statements, including statements relating to company performance and growth, pricing and business mix, digital and distribution initiatives, and economic and market conditions, all of which are subject to risks and uncertainties. Actual results may differ materially. Please see our most recent SEC filings, earnings press 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. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Philip Bancroft, our Chief Financial Officer. We'll take your questions.
Also with us to assist with your questions are several members of our management team. Now it's my pleasure to turn the call over to Evan.
Good morning. Chubb had a very good second quarter with core operating income of $268 per share, up over 7% from prior year. Our results were driven by excellent underwriting and investment results. We produced strong premium revenue growth globally, with contributions emerging from a number of our growth initiatives. At the same time, rates continued to firm in a number of important property and casualty-related product lines. P&C underwriting income of $824 million benefited from contributions from current accident year results and positive prior year reserve releases. Both our P&C combined ratio of 88.4% and our current accident year combined, excluding CATs of 88.1%, were excellent. Year-over-year, CAT losses were about flat. On the back of strong cash flow, net investment income of $890 million was up 4%.
Book and tangible book per share were essentially flat in the quarter, impacted by the mark from a rise in interest rates and foreign exchange. Excluding the impact of interest rates on the mark, which given we're a buy and hold investor, will eventually amortize back to us over approximately a four-year period, book and tangible were up about 0.7% and 2% respectively. Our annualized core operating ROE in the second quarter was 9.8%. Phil will have more to say about investment income, book value, CATs, and prior period development. Turning to growth and market conditions, for the company overall, P&C net premium revenue growth was 5.6% for the quarter, or 6.1% excluding agriculture, with foreign exchange having a one and a half point benefit.
A number of growth-related initiatives that are only possible because of the capabilities created by today's Chubb contributed to our growth this quarter, and I will elaborate a bit as I go on. Commercial P&C pricing for the business we wrote continued to improve in the U.S., in certain territories outside the U.S. In North America, for example, rates overall were up 3% versus 1.9% last quarter and 1% in the fourth quarter. The direction of momentum in price firming that we've been seeing now for several quarters continued. At the same time, our renewal retention rates were simply outstanding. In fact, across our entire North America commercial and personal P&C franchise, renewal retention as measured by premium was over 95%, recognition of the quality and the compelling nature of Chubb. In our U.S. Major Account Retail and E&S Wholesale division, premiums were up almost 4%.
Excluding merger-related underwriting actions which are concentrated here, net premiums were up 6%. As I noted last quarter, merger-related actions are now mostly behind us, and of the approximately $150 million, over 60% have already occurred. For major accounts, our renewal retention in the quarter was over 96%, while new business was up 29%. Let me give you some examples of both rate and its movement during the quarter in major accounts. Again, for the business we wrote, rates overall were up 5.2%. That compares to 1.9% for the first quarter and 1% in the fourth quarter. Property rates in major accounts were up 21 and a half percent. Casualty rates and risk management primary casualty were up 1%, while in U.S. exposed general and specialty casualty rates were up about 5%.
Rates for major account professional lines were up approximately 2%, with primary and first excess D&O up 2.6%, moving in the right direction. For perspective of our total U.S. professional lines book, which overall runs quite well, 15% represents those areas that are stressed and require corrective actions, which we have been taking, namely certain areas of public D&O and certain classes of professional liability for financial institutions. The balance, where 85% of the book runs well. Let's turn to our North American middle market and small commercial business, where net premiums were up almost 4.5% and new business was up 26%, the best growth we've seen from this business since early 2016. In middle market and small commercial, about a quarter of the new business came from growth initiatives put in place since the merger. In middle market, premium revenue grew about 3.5%.
Overall renewal retention was 90%, a full two points better than prior quarter. Middle market P&C rates overall, excluding comp, were up 1.7%, and exposure growth added an additional 1.2%. Property rates were up about 1.5%. Casualty-related rates were up about 3%, while package was flat. Comp rates were down 4.1 points, while comp-related exposure was up about four points. The net impact for middle market comp was essentially flat. Middle market professional lines rates were up, with public D&O up 6.3% and private not-for-profit D&O up over 2%. In middle market, rates in the quarter, with the exception of comp, were the strongest we have achieved in several years, continuing a positive trend. Growth in our U.S. small commercial business continued to accelerate in the quarter, albeit from a relatively small base. Net premiums were up 27%.
Based on the growth velocity over the last few quarters, we expect this business by year-end to have an annual run rate of over $400 million in premium. Over the next three to five years, it should be in the multibillion-dollar range. Importantly, you wouldn't be seeing that revenue if it wasn't for today's Chubb. In our North America personal lines business, net premiums were up 6.4% in the quarter. Adjusting for an accounting policy action, growth was closer to 3%. Retention remained very strong at over 96%. We continued to secure a better mix of business in personal lines with new business and renewals skewing towards true high net worth or affluent customers, as opposed to the mass affluent, which is our target customer, given the richness of our coverage and services. We are investing to digitally enable the customer service experience in this business.
For example, we introduced a mobile app. It gives clients access to a variety of digitized services, including insurance ID cards, the ability to contact their agent, notifications that alert them of approaching weather events such as wildfires and hurricanes so they can take advantage of our prevention and defense services, and an innovative Chubb at the Wheel function that tracks driver behavior and helps clients, particularly teens, be better, safer drivers. We're introducing additional functionality to the app every few months, this will become even more exciting over time. Another dimension is our digital marketing to grow our personal lines business by penetrating territories where we are underrepresented with target customers who are underserviced by mass-market carriers. We have digital marketing initiatives underway to attract prospects to Chubb and to independent agents and brokers to help them build their business with leads and improve their service capabilities.
These are all good examples of the company investing to distinguish itself in the marketplace. Turning to our overseas general insurance operations, net premiums written for our international retail business were up 10.7%, or 6% in constant dollars. As I mentioned last quarter, our growth rate outside the U.S. is increasing and should continue to do so as the year goes along. Asia-Pacific and Latin America both grew over 11% in the quarter, with foreign exchange contributing another 3% to 5%, while the continent was up over 3% and U.K., Ireland was flat. Net premiums for our international middle market and small commercial business, which is a major initiative given our capabilities today, grew 7% in the quarter in constant dollar on a base that's now about $700 million.
Expanded distribution and product, industry expertise, and technology capabilities are just some of the complementary strengths that we brought together to grow this business, which is really beginning to take hold and should continue to gain momentum. Growth, in particular, is being driven by our business in Asia and Latin America, the key focus regions for us, where net premiums were up 15% in the quarter. International A&H premiums were up 6.5% in constant dollars, driven by 11% growth in Asia-Pac, while international personal lines growth was up 10%, driven by a standout performance in Latin America with growth of 25%. Speaking of Latin America, in the quarter, we announced a long-term distribution agreement with Citibanamex, a leading financial institution in Mexico.
Under this long-term agreement, together, we will distribute on an exclusive basis to their customers Chubb's non-life insurance products through 1,500 branches and a variety of digital and direct marketing channels. The agreement encompasses a broad variety of personal and commercial P&C coverages to the bank's 12 million individual customers and 400,000 small to medium enterprises. This is another example of an important business partnership made possible because of our growing digital capabilities, which were a key consideration for Citi during their due diligence of us. As for pricing conditions outside the U.S., rates in our international retail and London wholesale businesses varied by line and region, by country within region. Overall rates were up 4%, with property up 8%, financial lines up 6%, and casualty and marine flat. In total, our global A&H business had an excellent quarter, with net premiums up nearly 9%, or 6.1% in constant dollars.
In addition to the strong contribution from international that I just mentioned, A&H net premiums grew about 8.5% in North America. Meanwhile, in our Asia-focused international life insurance business, net premiums and deposits were up 19% in the quarter. Importantly, earnings grew about 170% to $25 million. John Keogh, Paul Krump, Juan Andrade, and Ed Clancy can provide further color on the quarter, including current market conditions and pricing trends. In closing, we are achieving improved premium revenue growth in many of our businesses around the world, several of which wouldn't have been possible but for an organization that was created with so many complementary capabilities. We're continuing to achieve positive rate change momentum in a number of businesses, which is important so that we earn an adequate risk-adjusted rate of return.
Lastly, our digital capabilities are advancing in many corners of the world. We're making steady and substantial progress, from signing major distribution agreements to digitally enhancing customer service, to reimagining product and customer experience. The scale and the capabilities of Chubb have made our digital efforts, including the level of investment, possible. In sum, our organization is running on all cylinders. We're optimistic about our ability to continue to perform at a high level. With that, I'll turn the call over to Phil.
Thank you, Evan. Our balance sheet and overall financial position remains strong, with total capital of $64 billion. Operating cash flow in the quarter was very strong, totaling $1.65 billion. Among the capital-related actions in the quarter, we returned $663 million to shareholders, including $339 million in dividends and $324 million in share repurchases. Through July 24th, we have repurchased $361 million at an average price of about $132 per share. During the quarter, we also redeemed $1 billion of hybrid securities in April, and we repaid $600 million of senior debt that matured in May. Net investment income for the quarter was $890 million, slightly above our expected range due to the higher private equity distributions. Our expected quarterly investment income run rate remains in the range of $875 million-$885 million, with an upward trend as the year continues.
Book value per share was essentially unchanged, and tangible book value per share increased 0.5% in the quarter. Both were negatively impacted by foreign exchange losses and unrealized losses on the investment portfolio caused by rising interest rates. Foreign exchange, at a $457 million after-tax negative impact on book value and a $200 million after-tax negative impact on tangible book value. Realized and unrealized losses on the investment portfolio were $407 million after tax. Pre-tax net CATs for the quarter were $211 million, principally from U.S. weather-related events, and were in line with our expected level for the quarter. We had positive prior period development in the quarter of $191 million pre-tax, or $158 million after tax.
This included $236 million of pre-tax favorable development, $200 million of which was split approximately 70% from long-tail lines, principally for 2014 and prior accident years, and 30% from short-tail lines, with another $36 million related to the 2017 CATs. The favorable development was offset by $45 million of pre-tax adverse development related to our runoff non-A&E casualty exposures, which are included in corporate. Net loss reserves increased about $200 million in the quarter, adjusting for foreign exchange. The paid to incurred ratio was 97% in the quarter. Adjusting for PPD, CATs, and agriculture, the ratio was 91%. Our P&C current accident year combined ratio, excluding CATs, increased 60 basis points to 88.1, due in part to a year-over-year increase in certain large structured transactions in our North America commercial insurance business, which increased the loss ratio one percentage point and decreased the expense ratio 70 basis points.
Our core operating effective tax rate for the quarter was 14.8%. As a reminder, our annual 13%-15% range reflects the variability of where catastrophe losses and prior period development occurs. We continue to expect our annual effective tax rate to be in the range of 13%-15%. I'll turn the call back over to Helen.
Thank you. At this point, we'll be happy to take your questions.
Thank you. As a reminder, please press star one for questions. To withdraw your question, please press star two. Our first question today comes from Kai Pan of Morgan Stanley. Please go ahead.
Thank you very much. Good morning. First question on the, just following up on the professional lines. If my number is correct, you have a 10% overall premiums in U.S. professional surety. You said about 15% in distressed areas. Its overall impact probably is only less than 2% of your portfolio. I just wonder if that math is correct, and how do you feel the overall rising in terms of rising social inflation impact your loss pick, as well as the action you're taking to mitigate them?
Yeah. Kai, first of all, I'm not sure I quite got everything you said because you said surety and mentioned surety and profession. Our professional lines book is made up of substantially E&O, D&O. Our cyber business is within there. We have surety. Surety, by the way, is a separate line for us from professional lines. I don't know what you're mixing together and so that's all that math, we're going to take it offline. When it comes to the question of which I was really making the point that I hear all this about other liability claims made and conflating it to D&O. When we have talked about D&O and public D&O and some of the issues around it, what I thought was important was to put it all in perspective for everyone.
Number one, the part we're talking about is 15% of our professional lines business. By the way, other liability claims made is made up of a whole lot more than professional lines. We have environmental liability within there, and a number of other lines as well go in there. I was really trying to create perspective. On your question, our loss pegs and our loss ratios that we select and that we book, they reflect the environment as we see the environment to be. If there are trends in the environment around what you're calling social inflation, which is an interesting euphemism to me, all of that is reflected in the loss pegs that we have right now and in the loss ratios that we book.
Our underwriting actions that we have been taking, that relate around portfolio management as well as pricing, have been underway for some time and within that business, and they continue. Period.
Okay. That's great. I was referring to in the merger, like a slide deck, you combine U.S. professional and surety as a 10% of overall premiums, that you didn't break down what is exactly U.S. professional lines. That's the point I'm trying to make.
Surety is not within our professional lines number.
My second question is on the year-over-year increase of 130 basis points underlying combined ratio in North America Commercial P&C, about 70 basis points coming from those large structured transactions. I was hoping you can explain it a bit, what are those and will the impact be sustainable for the next three more quarters? The rest, 60 basis points deterioration. What's behind those? Are they non-CAT losses or other factors?
Well, the 60 basis points. I mean, first of all, let me take that part first, and then I want to talk about the rest of it. The combined ratio that we run is simply world-class. It's outstanding. At the same time, you know what the rate environment is, you know what loss cost trends are, and you have a sense of that. It's just straight math that you have to raise your loss ratios in areas where you're not getting rate and where loss cost trends, and loss ratio continues to rise. The margins are extremely healthy. When I look at the six tenths of a percent in that, I think it's pretty good, especially given the work we do around underwriting and mix change and growing other areas more quickly that have an interesting combined ratio signature to them.
To mitigate and keep it to a modest level like that. When it comes to the large transaction, let me put this in perspective for everybody. Part of Major Accounts, which is our risk management business, within Major Accounts is our risk management business. We are the largest provider of services to large corporations that self-insure their comp and casualty exposures. We provide substantial risk transfer excess coverages, and all of the services around the self-funded portions. It's a complex and it's a large business. We are the best at it and have been in it for many years. It's a core part of our franchise. By its nature, it has always had elements of lumpiness. Think about it. On one hand, large accounts which renew periodically with large premiums, we have good persistency, but you win some, you lose some now and again.
By its nature, this business also has, and these accounts have one-off transactions. We write these just about every quarter. Some quarters, they're bigger than others. This quarter, we wrote more than usual because of a larger transaction, and that's what we disclosed. By the way, we disclosed it only for the purpose of telling you the impact on loss ratio and expense ratio in the quarter. Otherwise, we wouldn't have mentioned it simply because it's part of what we normally do and write. Period.
Okay. Thank you for that. Before I let you go, I just want to say best wishes for Helen for your retirement. Thank you.
Did you say best wishes for my retirement?
Oh, that was pretty
I say, wow, Kai, you start running so well, buddy.
I'm not there yet.
I hope not.
Thank you, Kai. You're a good man.
Our next question today comes from Elyse Greenspan of Wells Fargo Securities.
Hi. Good morning. My first question, I appreciate all the disclosure on the pricing environment. As we think forward from here and in the third quarter, we start to annualize when we really started to see pricing momentum on the commercial line side next year. I guess I'm just curious for some of your thoughts, if we don't have a large CAT year this year, in addition, if interest rates continue to rise, do you think the pricing momentum can continue to improve from the improved levels that you guys saw in the second quarter?
Elyse, first of all, pricing didn't begin to move till the fourth quarter. It really wasn't the third quarter. It was very modest in the third quarter. It was fourth quarter. I think that's first point I'd make. Secondly, look, I'm going to speak in a rational way, and markets aren't always rational. The pricing trend we see should continue, and we will continue to, as a core part of our strategy for Chubb's business, to push on that. Understand that the market remains competitive, and where it's about capacity, which is a lot of the market and a lot of the players who talk, pricing is not very interesting. It's stable to slightly up or down. So much of the business, so much of what Chubb does is about more than capacity. They engage with Chubb because of capabilities and service quality.
We also have substantial portions of our business that are not subject to the same commercial cycle. In my mind, we're going to continue to insist on achieving price that is adequate to achieve a reasonable risk-adjusted return, in those classes where we need to. I think we're doing a pretty good job of it. I don't see, at the moment that ameliorating.
Okay, thank you. In terms of inflation, we've also heard some discussion about tariffs and international issues potentially leading to higher inflation as well. What's your just view on that front as well?
Well, tariffs are a complex subject. They have an interesting timing to them. First of all, many as you know right now are reporting earnings. People are saying already, "Wow, I don't see an impact of the tariffs." Many goods are purchased and contracts are signed so long in advance. To find its way into the stream of commerce, into the pipeline in a meaningful way takes time, number one. Number two, what is the actual dollar amount of tariffs today relative-
Versus what's being talked about relative to the size of the economy and relative to the size of exports and imports. It's not a large %. It is on goods, mostly on goods. The inflation impact, if it's going to occur, should be relatively modest, will occur over time. Let's see what happens in trade overall. The tariffs aren't for the purpose of simply tariffs for their own sake. They're part of a strategy to achieve what the president would say is more fair and balanced trade. We'll see what kind of outcome that leads to.
Okay. Thank you very much.
You're welcome.
We will now take a question from Greg Peters of Raymond James. Please go ahead.
Good morning. In your opening comments, you talked about operating cash flow, and if we look at the consolidated financial highlights table for the first half of the year 2018, it looks like operating cash flow is up 33%. Perhaps you could provide a little more color behind that.
Yeah, I would say there's a couple of things. We had very strong cash flow from underwriting as part of our operating cash flow, and there were a lower level of tax payment. It's just a timing, but the tax payments were down substantially, which contributed substantially to the higher cash flow in the period.
Looking at that same table, Philip, the combined ratio was actually up for the six months 2018 versus 2017. You said the underwriting is better.
Do not mix up incurred loss and paid loss.
Right. Got it.
It really is on a cash basis.
Got it. All right.
You can take that offline if you want to get into accounting detail.
No, that's fair. You talked a little bit about the digital efforts, both in your press release and your commentary. There's a lot in the marketplace around emerging technology ideas, around distribution, potential AI. I was wondering if you could just give us an update on how you're approaching your global IT budget this year versus last year, and what your view is on all these emerging distribution ideas that are coming into the marketplace.
Well, I'll give you what we've said publicly. We spend about $1 billion a year on IT, that's a substantial amount of money. A large portion of that is in new development and both in terms of improving legacy technology, in terms of infrastructure for cloud-enabled and anytime, anywhere access and processing, and in terms of new front-end capabilities, including marketing, sales, analytics, data scraping, API development, all of the things that would go into connecting externally, both with platforms and directly to consumer, and to enable the customer experience, because it's all about the customer experience. We are doing that on a global scale. We're doing it in Asia, Latin America, and the U.S. predominantly. We've been working at it for a number of years, and it is all part of digitizing this organization so that it thrives in a digital age, period.
Just like anything has to thrive in a digital age, including you as an individual. You remain analog, you are history.
Got it. Just as a follow-up to that point, when I think about what you guys have spent in terms of stuff around the mobile technology, do you think that's going to be more relevant in personal lines than commercial lines? Do you think mobile technology is going to have a role in the commercial lines business?
Well, it already does in the commercial lines business. It is personal, it is small commercial, it is micro commercial, and it's moving up into the middle market. Whereas large account business is more about the anytime, anywhere servicing of the business. Engineering, which is important to all the constituents, from individual to large corporate, that will be revolutionized over time with IoT capabilities that are installed fundamentally everywhere, from a building to goods in transit, to your home.
Great. Thanks for the answers.
You're welcome.
We will now take a question from Yaron Kinar of Goldman Sachs. Please go ahead.
Good morning, everybody. My first question relates to the North America commercial business. I think you'd answered Kai's question about the other factors driving the accident year loss ratio up. Do you think with the rate increases that you've achieved so far and what you see in the pipeline, are loss cost trends being more offset now by these rate increases? Should we see less of that pressure point coming from loss cost trends?
It's going to vary by line of business. It's all about casualty-related lines. It will vary by line. In some lines, I think the rate of increase is enough to keep pace with loss cost trends. I think in some other areas, it's not. In some of those, underwriting actions and how we manage portfolio will help to balance that out. In some, it won't. It's a combination. It's a mixed bag. You can't simply generalize.
Okay. If you had a crystal ball that you'd be willing to share with us?
No.
Okay. going to the professional liability line for a second.
Hey, buddy, if I had a crystal ball, I wouldn't be doing this.
Well, you may be doing this and enjoying it even more.
There could be that, too.
Going to professional liability block for a second. You said that about 15% of it requires some corrective action right now. How does that compare to where that block was a year ago? Based on the data you have in front of you today, do you expect that 15% to increase or decrease, stay relatively the same over the next year?
We expect it to decrease. How I compare a year ago to today, slightly down. I expect next year it will be lower.
Thank you very much.
You're welcome.
We now take a question from Jay Gelb of Barclays. Please go ahead.
Morning, Jay.
Thank you. Good morning. I was hoping to focus on a two emerging issues. The first one is on the Japan floods, which seem to be among the worst on record. Just trying to think about what the insurance and reinsurance exposure might be for Chubb there.
Look, it's still emerging. We don't know with certainty, we don't expect it to be a significant event to Chubb.
Okay. That's helpful. Then, potentially a tougher one. An emerging area-
From what I know so far, relatively modest.
I appreciate that. An emerging area of asbestos risk appears to be coming from talc-related exposure, including J&J having a nearly $5 billion judgment against it within the past few weeks. I'd like your perspective on whether you think this is a new area of potential asbestos risk for the industry and perhaps what it could mean for Chubb.
First, Jay, let me ask you a question. Did your mother use baby powder on you when you were little?
Getting very personal here.
I did not expect that.
Look. Asbestos. Asbestos has had sort of the new targets of cohorts of business every few years. That's not a new trend, a new thing to the industry. Number one. You look at, it could have been Congoleum manufacturers who made floor tiles. It was those who made motors and small motors, as you know, it was determined they had asbestos. This gets a headline because it's baby powder. There is science right now, is facts as it would seem, that are both sides. Who knows? I'm not going to speculate about it. We see what you see and read what you read, and we'll just see how the facts emerge. There wasn't, in the grand theme, when I think around asbestos, that did not startle me. By the way, this about baby powder has been around.
This is not like it just came up in the last few months. This has been out there for a reasonably long period of time.
Okay. It doesn't sound like this issue is something that's keeping you up at night?
No. My brain, no, that's crowded out with a lot of other things.
Okay. All right, my final question, if I think about how Chubb has done kind of a soft quantification of excess capital, I'm coming up with $4 billion-$5 billion of excess capital. Should we think about how that might get deployed over some period of time if acquisition opportunities aren't available?
There are organic growth opportunities. We're in the risk business. There are acquisitions to complement what we do organically, we are patient. If we have surplus capital at a point that is beyond what we and our board feel is prudent to have for both risk and to grow the company, we will return it to shareholders in some form. I think you see that since the beginning of the second quarter, we've bought back approximately $360 million worth of shares. I might say a price of about $132, and had we bought back in the first quarter, it would have been at a higher price.
That's right. Thanks.
You're welcome.
We now move to Jay Cohen of Bank of America Merrill Lynch.
We just finished with Jay Cohen. We're going to Paul Newsome, I think.
Different Jay.
That was Jay Gelb. Oh, it's Jay Gelb, sorry.
It's okay. We get confused. There's worse people I could be confused with, so. I had a question on the life earnings. We've had top-line growth for some time. This quarter, we actually saw the earnings begin to pick up pretty noticeably. I'm wondering really what's behind that.
Well, I just want to give an overarching on that and then let Philip add to that. We have grown this business fundamentally from dust. We've been saying for some time that by the nature of the life business, when you're growing it, particularly agency business, you're growing distribution and you're growing the premium pretty rapidly. By its nature, the way the economics work in that business, you're plowing back in, and until your in-force reaches a certain scale, the earnings from the in-force begin to emerge, and that begins to overwhelm what you're plowing back in to keep growing the business. We said that it was hitting a point of maturity and that you'd begin to see earnings emerge. That is exactly what is taking place. It didn't surprise us. Go ahead, Philip.
The only thing I'd add to that is that we had the very strong growth in Asia Pac. We saw higher investment income because we've begun to grow the assets under management. I think the point that Evan makes together with that is what's creating the growth. In addition, our combined North America group also has some earnings momentum.
What I mentioned in my commentary was the international life business.
Yes. I'm talking about the overall life. Yeah.
Got it. Thanks.
We now take a question from Paul Newsome of Sandler O'Neill. Please go ahead.
Good morning. A couple of questions. One, I want to briefly revisit the sort of sustainability of price increases. I think in the first quarter Chubb was suggesting that sort of month by month you were seeing modest acceleration, and that gave us a lot of confidence that as we get into the second quarter, we'd see even more. Has that sort of month by month improvement in the pricing environment continued through the second quarter?
Yeah. Well, June was the best month of the quarter.
That's good news. Then my second question is a little bit more broad.
Right.
I've got some smaller companies and such that are arguing that technology has changed such that a lot of the outsourced technology is just as good as the larger companies can produce on their own. Would suggest that for the bigger companies, that the benefits of scale have reduced because of changes in the technology over time. Do you think that that's true, or have any view on that topic?
Well, yeah. First of all, whether you build the technology or you buy it, and most of it you're buying, but you're not buying simply something ready-made out of a box. You're buying different components of technology, and you're putting them together to make them work. By the way, whether you build it or you buy it costs money. How much do you have that you can afford to spend? By the way, on what scale can you do it? Across how many geographies? How many customer areas and product areas can you do it? Then data. Who's got data? By the way, your ability to acquire data and your ability to, again, tools, put in place tools that can help you gain insight into that data.
I think while if you don't have scale, sure, you have a strategy, and sure you can thrive, whether it's analog or it's digital. You get to a certain size, and I'll tell you what, scale matters.
Terrific. Thank you.
You're welcome.
We will now take a question from Ian Gutterman of Balyasny. Please go ahead.
Hi. Thank you. A couple of mine were asked, but I'll just go to some other ones. Evan, the Citi deal you mentioned in Mexico, can you just give us, I know you mentioned the number of branches and so forth, but can you give us some perspective? Would this be one of your top three relationships in Mexico or some other way to give us a sense of the magnitude of this?
Well, I can tell you pretty clearly it's our largest single relationship in Mexico.
Got it.
Ian, the way to put it, Chubb is the second largest non-life writer now in Mexico. We were number 7 only a few years ago. We have what continues to be good growth business, and that is stable with good combined ratios. It's an agency-driven business and brokerage, and direct marketing. We have like 62 branches across the country. We have thousands of agents. That's the predominant source of the business. What we've added is a substantial relationship that will complement that, open up whole new channels of opportunity for us with our product set. We're the second-largest auto writer in the country, as an example. They have many auto customers. We write small commercial, we write surety, we write accident and health, we write middle market commercial. All of that will now also be offered through their branches and through digital and direct marketing to their customers.
It adds another dimension to what is a great business.
That sounds great. Is there opportunity to do something similar on the A&H side? Obviously, a lot of that's direct marketed as well. Is that a different channel, or is there opportunity to do that over time, too?
In the Citibanamex?
Yeah.
Oh, it includes all of our accident health.
Okay, I'm sorry. I thought you said.
That'll be distributed.
Got it.
That's distributed digitally. That's distributed with digital. Most digital, by the way, you start the transactions digitally, and in many instances, you complete them with a phone call, with a phone. They want to talk.
Right.
Whether it's small commercial or it's whatever. You're mixing and matching direct channels plus through their branches.
Got it.
All of our accident and health is actually a core product area in the strategy with Citibanamex.
Perfect. Just one on the large account business, the major accounts. I guess normally I'd be very happy to hear very high retention, very strong new business. I guess my one question is if we could dive a little deeper into sort of where that's coming from. I guess my concern is, given emerging loss trends and liability and to some extent professional, maybe I can make a case that large accounts and just given some of the outsized jury awards and stuff we're seeing, maybe it's a good time to frankly be pruning a large account book and being a little bit more careful on who you're willing to insure at this point. Can you give us some sense of how you're managing that with-
Yeah.
Still being able to grow and keep high retention?
I think you're conflating a whole bunch of different things in there.
Okay.
Casualty loss trends have been behaving pretty well. You and Paul O'Connell could give a little bit on that, but what we see is frequency trends have actually been down, and severity trends have been reasonably modest. We haven't seen some pickup adversely in casualty. We talk about, and have talked about public D&O, and I'll just put that to the side. The one thing you should know, and remember, what I said is this quarter, it's quarter in our U.S. exposed large count casualty, we got 5 points of rate. We're pressing on rate and terms. By the way, you write excess casualty in large account business, it's about attachment point.
Right.
On the terms as much or more than it is about simply price and rate. We're underwriters. We measure this all the time. With all that said in our underwriting discipline, by the way, we're presented an awful lot of business to write that we just don't win. We don't have a chance to win because of terms and rate. You offer me a book of business that I know versus a business I don't know, so renewal retention. The customer I know and that I have on the books is the better customer.
For sure. I guess my premise was it seems like we're seeing social inflation start to pick up, yeah.
If we don't like the rate, if we can't make an underwriting profit, and we don't like the rate, we're walking away.
No, of course.
Flat.
Absolutely.
Yeah.
I was just thinking more, the reason I was asking more on the large account side was it seems like we're seeing this pickup in sort of nine-figure jury awards nationwide. Again, I know a lot of it's anecdotal, but it does seem that there's a pickup, and I would have thought large account would be the place where there'd be the most concern, just because of the limits involved versus the small to mid.
What you're seeing anecdotally, we're not seeing on a portfolio-
Okay
basis. We write large, and I'm trying to relate to it, we write large limit, high limit excess out of Bermuda, and that's behaving reasonably well, although it has a long tail. We're writing in our U.S. casualty business, in our excess in particular, because you're not talking primary now. We write within the first 100 million of limit, and typically we're putting out $15 million-$25 million net. You don't have huge limits exposed to those great one-offs. Then, by the way, what you see as a jury award and what you see as ultimate settlement, keep that in mind too, Ian.
Understood. Agreed. All right. Thank you. Appreciate it.
We will now take a question from Meyer Shields of KBW.
Thanks. Good morning. Just a brief question. Administrative expenses on a year-over-year basis grew more than in the first quarter, I was hoping that you could talk a little bit about what's driving that.
Nothing in particular. Just normal operations, then I assume you adjusted for foreign exchange when you did that.
Yeah, to the best of my ability. Okay. Second question. Can you talk a little bit about workers' compensation in the U.S.? We're seeing rate decreases, generally improving profitability. I was just hoping for some insights in terms of the macro picture.
Well, the macro picture, you have record low unemployment, which actually can play, cut both ways on workers' comp. You have less experienced workers on the job, so you have to be careful. We've been seeing frequency up until now, frequency of loss has been down. Severity has been reasonably tame. Overall loss cost trends have been good in comp. I think you have to, in my own mind, the market is reacting to that. The insurers and comp has become more competitive, I think you have to be careful that you're not too aggressive, you overshoot the market. That's the bigger picture for me.
Okay, perfect. Thanks so much.
We have time for just one more person to ask questions, please.
We will take this question from Brian Meredith of UBS. Please go ahead.
Thanks. Just a couple of quick ones here for you. First, crop or agricultural insurance domestically U.S., obviously a big drop in corn prices, soybean prices given the tariffs. How far away from the kind of threshold are we where we're going to see some loss in that business or profitability be meaningfully impacted?
Yeah. Brian, I make two comments. First, the condition of the crop, and I can speak to Chubb's book only given where I know our concentrations are. The corn crop, it's too early on soybeans. The corn crop, which is our number one crop, is in as good a condition or better than last year and the last five-year average. Number two, the price drop, corn was at $3.66, I believe yesterday. I don't watch this too closely. I think February contracts were like, when we priced, were like in the $3.80 range.
Okay.
It's within deductibles. You're not at that threshold, as you'd say. When you look at soybeans
The average that farmers buy on our book is about 20% deductible. Corn, they buy a little less, closer to 15. At this moment, where soybeans was, which was $8 and change, you're right around or within the deductibles.
Great. That's helpful. Thanks. Just two quick numbers questions for Phil. Phil, other income looked a little odd this quarter. Anything unusual there? Also on interest expense, same question.
On other income, we had higher than expected PE income where we own greater than 3%. When we have a partial ownership that's bigger than 3%, we include that in other income, and that was higher than we expected. We also had higher income on our Huatai investment, our insurance investment in China. Last year, we had a one-off capital charge in Switzerland, and all that drove the change year to year in other income.
Right.
With interest expense, as we've said in the past, we have interest expense that includes both fixed and variable components, and the higher than expected expense in this quarter related to the variable component. We had more interest expense paid on collateral that we hold for clients. We also had a higher usage of various facilities that we use to manage our cash around the world.
Is that 177 number a good run rate number?
I would use a range of 170 to 175.
Excellent. Thanks. Appreciate it.
Thank you for your time and attention this morning. We look forward to speaking with you again at the end of next quarter. Thank you and good day.
Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.