Chubb Limited (CB) Q2 2017 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to the Chubb Limited’s Second Quarter 2017 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. For opening remarks and introductions, I would like to turn the conference over to Helen Wilson, Investor Relations. Please go ahead.

Thank you, and welcome to our June 30, 2017 Second Quarter Earnings Conference Call. Our report today will contain forward-looking statements, including statements relating to Company performance, investment income, pricing and business mix, economic and market conditions and integration of the Chubb Corporation acquisition and potential synergies and expense savings. All of these are subject to risks and uncertainties and actual results may differ materially. Please refer to our most recent SEC filings and earnings press release and financial supplements, 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 these non-GAAP financial measures to the most direct comparable GAAP measures and related information are provided in our earnings press release and financial supplement, which are available at investors.chubb.com. In particular all references to 2016 underwriting results will be on as it basis which excludes the impact of purchase accounting adjustment related to the merger. Now I would like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Phil Bancroft, our Chief Financial Officer, then we will 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 quarter, we produced strong earnings that were driven by world-class underwriting and record investment income. After tax operating income for the quarter was $1.2 billion or $2.50 per share compared to two and a quarter per share prior year up 11%. For the six months of this year operating income was up 13% from 2016. Our combined ratio for the quarter was simply excellent, 88% compared to 90.2% last year. And it benefited from a substantial improvement in the expense ratio of about 1.5 point as well as lower catastrophe losses. Total P&C underwriting income of $808 million was up 20%. The current accident year combined ratio excluding catastrophe losses for the quarter was outstanding at 87.5%, again almost 1.5 points better than the last year, driven by integration of related expense savings that benefited both the expense ratio and the loss ratio. Those savings plus a loss adjustment expense reserve release mitigated a rise in the underlying current accident year loss ratio of 1.2 points. Given the market conditions and the fact that we are in a multi-year soft insurance market, these results are truly distinguishing and clearly demonstrate the benefits of our global capabilities. Our portfolio construction and underwriting management, hallmarks of our Company, they also speak to the quality and talent of my outstanding colleagues around the world, our culture of excellence and craftsmanship at all levels of the organization. Net investment income for the quarter was a record $855 million, above the guidance we gave you last quarter and up about 5% over prior year. Philip will explain why we exceeded recent guidance. Chubb’s strong earnings produced a good operating ROE of about 10% for the quarter while for the six months period per share book and tangible book value have grown 4.4% and 7.6% respectively and they have increased about 12.5% and 20% since the merger closing in January of last. Phil will have more to say about investment income, book value, cats and prior period reserve development. The commercial P&C market is with a few exceptions soft globally, though conditions vary depending on territory, line of business and size of risk. Most areas of the commercial P&C market are soft and highly competitive as many companies reach for growth. As noted in the prior quarters, large account business particularly shared and layered remains very competitive, though pricing maybe beginning to bottom. On the other hand, middle market business with the exception of commercial auto continues to grow more competitive by the quarter. Wholesale remains more competitive than retail, particularly in short tail lines. In wholesale certain stressed casualty classes are beginning to get rate, not enough to produce adequate returns, but nonetheless improving. Globally new business has been hard to come-by and what simply can be described as a hungry market. Competitive new business conditions are ameliorated for us to some degree when it’s about more than rate and we bring the power of the organization to bear for a client or producer. In the quarter 11% of North America retail commercials, P&Cs new business and 6% of our international new business came from cross-selling and the power of the organization. Also our total capabilities in terms of product, service reputation, ability to serve many different types of insurance customers, our deep distribution capability and extensive geography reach means our optionality or ability to capitalize on opportunity is exceptional, it will only improve with time. I will point to a few examples later. With that as backdrop, the good news is for the business we wrote the trend for pricing improved, rates were essentially flat or the rate of declines slowed in comparison to recent quarters. And in some stress classes we were able to achieve rate, such as U.S. commercial auto, Australian property and [D&O] (Ph), Mexican auto where we are large players and U.S. ENS casualty. In U.S. D&O class that needs rates as we noted on our last call, pricing for the business we wrote went flat. As we projected revenue growth for the quarter continue to trend better on both the publish basis and when adjusted for merger noise. In fact this was our best quarter since the merger in terms of growth. However, with the exception of our risk management business which had nice growth and continue to benefit from a flight to quality and capability, we wrote less new business trading new business growth for better terms and we lost business for price we weren’t loosing by a few points. Our overall renewal retention in the quarter was steady and that was true among the various lines of business with the exception of one that we have discussed before, which is North America property and casualty coverage for real estate related risks. The tough class where Chubb has been leader. In the quarter, P&C net premiums written globally were flat in constant dollars. Foreign exchange had about a 0.5 percentage point impact, adjusted for merger related underwriting actions in reinsurance P&C net premiums were up over 2.5%. As a reminder the impact from these merger related items has and will continue to ameliorate as we move through the year. Rate movement for the business we wrote in the quarter varied by territory and market segments. Renewal rates were down about a 0.5% in our U.S. middle market business, with exposure change a positive 1%. In our U.S. major accounts business, renewals pricing was down about a 0.5% and exposure change with an additional negative 0.5%. In our international retail commercial P&C business pricing was down one, again overall these were the best rate results we have seen in quite a few quarters for the business we wrote. By major class of business beginning with North America, retail general and specialty casualty related pricing was down about a 0.5%. Financial lines pricing was down about a 0.5% with D&O flat and property related pricing was down one. Internationally, general and specialty casualty related pricing was down 2%. Financial lines pricing was flat and property related pricing was down 3%. The UK commercial P&C market remains highly competitive, but overall we achieved better pricing with rates mostly flat. The continent of Europe on the other hand became marginally more competitive. In Australia we achieved meaningful rate in property and DNO a rationale sign for what is a very competitive market. The balance of Asia and most of Latin America largely remain status quo in terms of pricing trend. Now with that as context, let me give you some more detail on revenue results for the quarter. In our North America commercial P&C business, net premiums were down 1.3%. Normalizing for merger related underwriting, net premiums were up about 1.5% and the renewal retention ratio for retail was at 88%. Overall new business writings for North America commercial lines were up about 3.5% over second quarter 2016. Again with the exception of risk management, we wrote less new business than prior year. The trade we are not happy to make, but we will take all day long to secure adequate underwriting terms. In our North America personal lines business, net premiums written were up 2%. Excluding the six point impact of additional reinsurance growth was 8%. Rates were up 2% and exposure change added 3%. Retention remains very strong at about 95%. Turning to our overseas, general insurance operations, net premiums written for international retail P&C business were up about one and a quarter in the quarter in constant dollars and over 3% excluding underwriting action. As a few highlights, Asia-Pac, Asia-Pacific commercial P&C business was up 9% on the back of Australia and New Zealand. Japan P&C was up 12%, Latin America [A&E] (Ph) was up 11.5% and international personal lines were up over 9%. Mexico continues to be a bright spot for us, up strong double-digits overall for the quarter. John Keogh, John Lupica, Paul Krump, and Juan Andrade can provide further color on the quarter, including current market conditions and pricing trends. We are in good shape with the remainder of our integration activity, operationally and financially, all areas of integration are on-track or ahead of schedule. As you saw in the press release, we have now increased the total annualized run rate savings we will achieve by the end of 2018 to $875 million, up from $800 million, which is up from the original $650 million when we announce the merger. These savings are directly contributing to our margins in the phase of declining rates and continuing loss cost trends while giving us room to invest in our competitive profile, including our technology, our talent, new lines of business and future operating efficiency. We are investing substantial sums, talent and time in positioning this Company to be a leader in a digital age, because the economy globally is digitizing. This includes our organization structure, cycle times of change, expertise and skill sets of our people, data and analytics, robotics, the front-end customer experience to the customer back-end claims experience and the very definition of the products we sell. This is not just strategy, we are quietly executing. In closing, we are operating in a highly competitive P&C market and navigating it well. There is no other Company better diversified and positioned with the breadth of capabilities, culture, talent, broad distribution and presence around the world that we have today at Chubb. We have built and are building a revenue machine. Governed however by our underwriting discipline and it gives us great confidence and optionality in uncertain times and makes us more relevant to our customers and business partners. The entire organization is intently focused on execution, we are optimistic about our ability to continue to outperform. With that, I will turn the call over to Phil and then we will back to take your questions.

Thank you Evan. Chubb’s overall financial position grew stronger in the quarter as we continue to generate substantial capital and positive cash flow. We have a very strong balance sheet to support our business around the globe with total capital exceeding $63 billion. We grew our tangible book value per share by 4.3% in the quarter. Concerning tangible book value per share growth, you will remember that at the close of our merger the initial dilution to our tangible book value per share was 29%, since then we have reduced that dilution to about 10%. Among the capital related actions in the quarter, we returned $667 million to shareholders including $332 million in dividends and $335 million in shares repurchased. Year-to-date though June 30, our share repurchases have totaled 475 million. Investment income of $855 million was a record and was $20 million higher than our expectations. Half of that increase was due to higher than estimated private equity distributions and the other half from increased call activity in our corporate bond portfolio. Net realized and unrealized gain for the quarter was $747 million pre-tax and include a $588 million gain from the investment portfolio primarily from decreases in interest rates and gains from our private equity portfolio. We have also had $116 million gain from FX and an $80 million gain in our variable annuity reinsurance portfolio. Net loss reserves increased $226 million for the quarter. The pace of incurred ratio in the quarter was 99%. Adjusting for cat losses and prior period development, the ratio was 95%. We had positive prior period development in the quarter of $170 million pre-tax, about a $144 million after-tax. This include a $43 million pre-tax of adverse development related to our run-off non-A&E casualty exposures, which is included in corporate, and $57 million pre-tax favorable development relating to our industrial accident workers’ compensation coverage from the 2016 accident year. The remaining favorable development was split 40% long tail lines principally for the 2012 and prior accident years and 60% short tail lines. Our catastrophe losses in the quarter were 200 million or a $152 million after-tax compared to $390 million or $311 million after-tax in the prior year. Catastrophe losses this quarter were primarily from U.S. weather related events. Integration realized and annualized run rate savings are ahead of expectation. Total incremental integration related savings realized in the quarter were a $105 million leading to total inception to-date realized savings of $554 million. On an annualized run rate basis, savings through June are $775 million. As Evan noted, we now expect to achieve annualized run rate savings of $875 million by the end of 2018 up from our prior estimate of $800 million. We are also expecting integration and merger related expenses to be $903 million up from our prior estimate of $809 million. As we disclosed in our press release the benefit of these integration related savings is reflected in our combined ratio. Our combined ratio in the quarter reflected the incremental impact of integration related savings of $104 million, a $45 million benefit related to the harmonization of the Company’s pension and retiree healthcare plans and the release of loss adjustment expense reserves of $30 million. These favorable items was partially offset by increased spending to support growth and the impact of salary increases and inflation. We noted in the fourth quarter of 2016 that we expect the incremental annualized impact of our U.S. retirement plan harmonization to be approximately $100 million pre-tax. Through six months we have realized $80 million, the remaining $20 million is expected to be recognized in the second half of 2017. The operating income tax rate for the quarter is 16%, which is at the low end of our expected range, principally due to a higher level of catastrophe losses occurring in the U.S. we expect our annual effective tax rate to remain within 16% to 18% range for the remainder of the year. I will turn the call back over to Helen.

Thank you. At this point, we will be happy to take your questions.

[Operator Instructions]. We will go first question to Ryan Tunis, Crédit Suisse.

Hey thanks. I guess my first question was just thinking about these merger related underwriting actions in reinsurance. I guess at this point, it’s a pretty substantial number and I guess the way we see it, so far it feels like it’s only shown up in the form of lower net written premium, I’m wondering if that’s the right interpretation or there is other price if that we are seeing it, whether it’s like the was the cat load lower this quarter than it would have been as you not done that. Is there a meaningful free up in capital or is it actually serving as a pretty major tailwind on like the expense ratio and a loss ratio just any help on that would be useful? Thanks.

Yes. Well first of all you wouldn’t be able to see it in the cat load, because we don’t give guidance. So you don’t actually know what our cat load is, but as an example we have told you this before, first of all you get the annualized impact of reinsurance it has to run its course. So we bought a quota share treaty last year, Northeast quota share it’s also in our Qs and Ks. And we bought that and we were very clear - I’m giving you one example, in third quarter last year that the trade-off of premium versus buying straight cat access on a risk reward basis made much more sense to us and that did lower our cat profile as one example. Secondly, merger related underwriting actions both for concentration exposure on a per risk or a cat basis as well as portfolio that haven’t met our underwriting standards of making a reasonable underwriting return. When you look at the accident year loss ratio it is benefiting and that it is in fact flat year-on-year. That’s illogical when you think about rate and trend. Mathematically, it’s not possible, if you are mathematically on us. However, what ameliorates that what ameliorates it is expense savings and also underwriting actions that we have taken merger related that help to ameliorates that. I hope that answers your question.

That’s helpful. And then I guess my follow-up is just on some of your commentary about the competitive environment. I think you said shared and layered remains competitive though pricing is beginning to bottom. On the other hand middle market is becoming more competitive. I guess at this point in the cycle, what do you think is driving that the economy and what do you think it’s going to take for the middle market in particular I guess to reach the bottom and the new business to become more attractive? Thanks.

Yes. Well, large account and shared and layered has been competitive for longer. I mean, they have been both rate and trends that’s be gridding on for a few years between the wholesale market feeding it and the direct retail market and reinsurers. All participants have been involved in the competitive environment there and it has been going on. At some point, what happens? Losses start coming in, broader terms and conditions, they start catching up to pricing and combined ratios rise, you see it. It’s not hiding itself. And that eventually causes rates to begin to flatten out. Not necessarily in a place to that [equip] (Ph), but the first thing I have to do start flattening out. So market wares itself out at some point. In the middle market, the middle market is always more orderly than the large account particularly shared and layered. And that began late, that has just only began in the last number of quarters to become more competitive where companies are trying to reach for growth. Economic growth is reasonably slow and companies are reaching for more growth, because they don’t have another way to go and as you are seeing EPS and that will go for a little while. It is my sense. I don’t see a catalyst excepted really combined ratios underwriting cash flow. So Ryan, I can’t forecast the future, I sit with a crystal ball, but my sense is, it’s more competitive and it will remain that way for a little while.

Okay. Fair enough. Thanks for the answers.

Our next question comes from Elyse Greenspan, Wells Fargo.

Good morning. My first question is on the premium growth. I appreciate all the color in terms of merger and the reinsurance. Evan you mentioned obviously the increase reinsurance to place last year starting in the third quarter. So when we kind of tie together your commentary about the market and how you see the business. Are we reaching the point when the third quarter of this year on an ex-currency basis, we should start to see your growth in that premium written?

You know we don’t give forward guidance, but I don’t see a reason why the trend that we are seeing in our underlying growth doesn’t continue and merger-related underwriting actions will continue to ameliorate as the year goes along. And you are correct there was a large - last year not only did we buy it, we also did an [un-urged] (Ph) premium transfer that also impacted net written premium at that time. So you are correct it was more penalty last year.

Okay, great. And then in terms of revenue synergies, first off if you could just get a number for the quarter? And then second, Evan I know in the past you had kind of tied your long-term view just to kind of give a ballpark figure to at least being equal to level of expenses for the deal in terms of revenue synergies. The expense saves has been increased, does your view on revenue synergies also increased, and if you can just talk high level about the revenue synergies that have come about to-date compared to your expectations?

Yes, and remember what I spoke to was a - I don’t have my exact words in front of me, but that we have revenue, we would have expense saves that translated to operating income and that we would have income from additional revenue opportunities that would approach some proportional either equal or within a range. I haven’t changed my view on the revenue side, we haven’t really top stated that frankly to look forward in the next two or three years about that. All things being equal, the revenue synergies that we have projected remain on-track. We are growing the small commercial business, we said that would take years to occur. That is happening. We said that we would gain in middle market around the globe and small commercial around the globe. That is on-track. We have been planting the seeds for that and placing and building operations in targeted markets around the world that will feed that growth. We said cross-selling and that by really important cross-selling the strength in the organization, bringing more products to the distribution in North Americas fast middle market capabilities that we haven’t shut and that is happening. We are driving that and we can measure that, whether it is cyber insurance, environment liabilities, specialty casualty, international coverages for middle market companies, we are seeing that. We can measure that. And on the other side of coin, the governor in a little it for us is underwriting, because it’s a soft market with a lot of headwind and that’s what governs it the other way. Sometimes you get more joy through the effort, sometimes you get less, we stay steady.

And the number of…

And we told you that 11% to the new business and 6% of new business and I think Phil.

We have for the quarter a 110 million of gross written premiums that relates to that.

Okay, perfect. And one last question. Can just give a little bit of color on what will be adverse development within your North America personal line segment in the quarter?

Yes, I’m going to give that to Paul Krump, who was waiting for you to ask that question.

Good morning Elyse thank you Evan. Let me unpack this a little bit for you Elyse. The second quarter PPD amounts reflects unfavorable vast development from a combination of prior period tax, wreck marine and auto liability. Let me just dispose the wreck margin quickly, because that was one single claim. When you think about of cats, that was about a third of the amount and the third was coming from auto liability. Recall Elyse that we brought together legacy ace, firemen’s fund in Chubb and in doing so we have integrated the reserving processes for all three companies and we have also then brought together a far more credible data than we previously had available for automobile. And that data has caused us to increase our expectations slightly on some portions of the book. Now recall, though that this is over several actions years and just that about a third of the amount of PPD is the raise in the auto. So it’s very much a de-minimums amount and I think it’s important to note that that data pegs our thinking about pricing and our underwriting moving forward.

We will go next to Kai Pan, Morgan Stanley.

Thank you and good morning. First question on the cost savings target and where is the - Phil can you could talk more about where the $75 million additional cost savings come from and how much you plan to reinvestment in that business, how much do you think can flow through that bottom line?

Yes well, you are already seeing it flow through the bottom line substantially and we are investing in the business as I gave you on the commentary. Where it comes from is spread broadly across the organization, its fundamentally not in the underwriting units or in sales and marketing, its more in support operations and it is personal cost related, it is outside services related, it is IT related and it’s to some degree real estate related.

Okay. Then my second question and follow-up on the reserve side. I also had a personal eye in the North American commercial business also see a year-over-year slowing down in terms of reserve releases. Just wondering if you can provide additional sort of color on that?

Yes, it was a positive reserve release, which speaks to strength of our reserves. Our prior period reserve development has variability, it varies by quarter. It depends on the reserve studies that we do in the quarter and which we do, we study all major lines through the year and quarter-to-quarter though this variability depends on what you did study. Again our reserves are strong, the first quarter I will remind you was essentially flat with prior year, I think it was down $10 million or $15 million bucks. I can’t predict the future, I don’t know future trends, frequency and severity versus the inputs we use to create our reserves in any given line of business. But again, what I’m very comfortable with this, our reserves are quite strong.

Thank you for that. And if I may just one, quick one. You see unfavorable releasing unallocated claims, handling expense contribute to the loss ratio improvements the one point. Is that one-off?

Well, it can be. Yes, we studied it every year and/or more than once a year, we look at what we put away for future claim development. And so like any other reserve, we study that and this quarter, the actual projected and what we have seen as trend versus what we are holding reserve, resulted in the release. I can tell you, last year when we did second quarter review, we also had a reserve release then on unallocated loss adjustments expense. But I can’t predict the future of that, it’s not like well, it’s just as, you are going to harvest a reserve release in UA area, you don’t know that, you can’t project it.

Great. Thank you so much.

Our next question comes from Jay Gelb, Barclays.

Good morning. I was hoping, you could comment on the recent favorable trends that’s been identified in the slowdown, in the number of law suits being filed in state courts and whether that would have a positive trend on Chubb’s loss cost inflation?

We have seen the same thing that is slowed, we read the same headlines you read and we see that out there. We haven’t noticed it, particularly in our casualty loss costs development. Though, I can say that in general casualty in particular reserve releases have come from trends lower than we projected, so that is a fact. On the other hand, when you look at litigation related to directors and officers, there is no improvement in that area, and in fact frequency and severity have worsened. The article that you read refer to general litigation of nuisance suits and others in that where Americans would freely reach for a legal remedy to any misfortune that came to them, that there is a decline in that. That you don’t see in directors and officers.

I appreciate that. And then more broadly given all the back and forth we are seeing from the administration, on various topics. I thought, you could help us out by updating us on your views around tax and trade?

You want to get me in trouble. Don’t you? My views remain as they were. For our country and for our economy to reach its full potential which it is not right now. We need tax reform, we need infrastructure, the state of infrastructure in our country is shameful, and is a competitive disadvantage and we are somehow lackadaisical about that. I can tell you, I travel around the world, you go to China, you go to other countries that are growing near economies and will grow their economies more rapidly than us, their infrastructure is far superior and that is a tax on us. Regulation, deregulating is so important. An awful lot of this requires legislation and we need an administration that is focused, that is working with Congress and we need a Congress that comes together to address these issues of our country. There is just no doubt about it. When it comes to trade, I stand firm, our country has benefited substantially, in particular NAFTA and it is a competitive advantage to our country. And that agreement is up for negotiations right now to modernize it. And I’m hopeful and I believe there are so many in the administration who understand it that it is important for us to modernize it and to recognize the benefit to our citizens that all three countries gain parties to NAFTA from NAFTA. It makes a competitive North America in a global marketplace.

Thanks very much.

We will next to Sarah DeWitt, JP Morgan.

Hi, good morning. I wanted to ask a question on the agriculture business. How you are looking in that business, it seems like through conditions are worsening. So any color you could give on what is going on there would be helpful?

I’m going to turn it over to solve it to farmer John Lupica.

Yes thanks.

But you are obsessing in that about the western part of the Corn Belt and not the eastern part.

Yes, Sarah thanks. It’s John. So yes our early focus this year was on winter wheat and the growing conditions for the spring crop that you mentioned. Right now the winter wheat appears to be in line with our expectation, which is good news. And then the planting acreage may have dropped a little bit, but we expect that to show itself when we see the final revenue come out from the spring crops. And as for the spring crops, as you know we are in the midst of the growing season now. So we don’t have final, final look at it. The weather was a bit wet early in the season, but late in the summer we have seen the Western Corn Belt get hot and dry. So we are watching that. We can certainly use some rain outlast. The Eastern Corn Belt is doing terrific, and that looks to be in better shape. So right now we are watching the pattern. There is nothing out there that leads us to believe that we wouldn’t have anything about an average year. And I will just remind you, last year was just one of the best we had ever seen in this business.

Great, thank you. That’s helpful.

We will go next to Ian Gutterman with Balyasny.

Great, thanks. If I could start Phil with just a follow-up on [indiscernible], first that 30 million shot in PPD or is it just from the regular loss ratio and then secondly was it concentrated in any one line which is spread across all the different segments.

First of all we consider that current accident years, not in PPD. Paul would you say there was any concentration?

That segment North American commercial.

Yes North America commercial, but [indiscernible].

Okay make sense. I guess as on personal lines growth the 8% sort of adjusted is a pretty strong results, obviously it sounds like a decent part of that is rate and exposure, but it seems like there are some maybe accelerating unit growth as well. Can you just talk about what is driving that, its obliviously a tough time at least on the auto side. I know it’s a smaller part of the book, but for peers are you finding opportunities to take business from people or is it mostly the home driving I was just curious?

First , I would say this to you. our auto book is not a huge book, we are not a general auto market rider and we are earning in underwriting profit in automobile. We had unit growth in the quarter, we wrote double-digit number of new policies. Some of that is multiple policies on a customer and so we would say high-single thousands or mid-single thousands of new policy count. We are trying to get a handle better data on buying policies backed in customers in aggregate and making sure we have that exactly right, so I don’t wanted to misspeak about that. But we are gaining grip and our growth is coming in all three areas, we are getting it from the mass affluent, we are getting it from the higher segments of high net worth, all the way up to very high net worth both number of customers, but as well their own exposures grow as they acquire more assets, homes, et cetera and we are up selling there. I’m pleased with the progress we are making in personal lines, I can tell you as you get it, it’s like talking about small commercial, it comes in small bites, it take a long time to effect change that really shows in numbers in a significant way, but I like the way our marketing in sales is organized in our field operations, I like how we are being able to now begin to target county-by-county of the United States, where our target market is and beginning to put in place the capabilities in the sales and agent process to be able to target those customers to go after. That’s not a six months project, that’s multi-year project to really shows itself, but we are doing that. I like what is going on in our branding, I like what is going on in our new product capabilities as we rollout coverages and farm and ranch and cyber and directors and officers liability, not for profit in a better way. I like what we were doing in our service in underwriting, to the very high net worth and being able to underwrite them between admitted in E&S and global in a better way and we can do even better. The game plan we have put in place, if anything we are just crystallizing or focus on it, we are operationalizing better, we have more talent that we brought into high net worth from both inside and outside the organization. We have restructured, so that we can get a better focus on individual markets and as well speed of how we may change, but at the same time, this is a filed product state-by-state, rating product changes and system changes take time. I love the future ahead of us in that line of business.

Got it, thanks. If I can ask a quick one on commercial, just you sounded a little bit, I don’t know if optimism is the right word, but certainly less pessimistic on where rates are. Is it fair to say though that even if this is a sign of a bottom, we are still trailing loss trend. I’m not trying to ask you for guidance. As I’m looking ahead beyond this year, there is still probably pressure on margins before any improvements that you make from mix or other changes?

Absolutely Ian. Look, I would say this. What we saw in pricing? I don’t if one robin and makes a spring. So I can’t tell, number one. Number two, but look, I recognize it for what it is and its better than we have seen on our book in a number of quarters, number one. Number two, it was on our book of business. And the business were not writing new or that we are losing. I said it in the commentary, I’m going to underline, we are not losing for a couple of points. So it is a hungry market out there. When we look at terms and conditions, we lose for terms and conditions that we find, it will go across the board that make us shake our heads that are just final irresponsible or dumb. And so we see the market continuing. On the other hand, we do even see in the market generally pricing in a number of classes bottoming. But it’s at a level that absolutely will not earn and underwriting profit.

Completely understood. Thank you for the comments.

We will go next to Paul Newsome, Sandler O'Neill.

Good morning. With exposure assuming to be improving broadly. How do you think we should think about the portion of exposure increases in your book of business that acts like rates versus that which is actual exposure or increases? I’m just trying to think about the impact…

I know what you think. But Paul, I’m curious, where do you see exposure improving?

Well, maybe it’s my hope that the economy improve in the U.S.

Okay. but be careful, don’t witch cast here, because I’m not sure you are seeing it. I don’t see exposure growth improving. I see it flat and in some cases down actually than what we saw say a year ago. I think the economy is solid, but I don’t think it’s exciting, just kind of taking a long. The way to think about that is, there is an element and it varies by line of business. Exposure growth for instance in personal lines, a portion of the exposure growth just subsidize rate and a portion of the exposure growth is truly just a one-for-one trade-off. In commercial lines, it’s a mix also. To be able to tease that out to you and give you a rule of thumb or point estimate, I can’t do it, but you are correct about the elements.

Fair enough. Thank you.

I realize it’s not a satisfactory mathematical answer to you, but you are not on to the wrong.

I can only ask.

Of course you can. And I can only try to answer.

Thanks. That was it.

We will go next to Brian Meredith with UBS.

Hey, thanks. Two quick questions here. First one, I’m just curious, was there any favorable or unfavorable impact from currency on operating earnings this quarter? And what do you think it’s going to look like here going forward given some of the weakness of the dollar?

It was minimal, it was about $4 million on operating earnings.

Okay. And if we look at where we are today, is it benefit?

I don’t think there could be any substantial benefit. Let’s see what happens.

You know it depends, tell us the currency, give us the basket and we will have a better idea, but it’s bouncing around.

Got you. And then second question, I’m just curious we are hearing more and more talk about distribution changes going on in the U.S. around the small commercial side and people planning for it. When you look at the small commercial business and your entry into it, are you planning on or your thoughts on direct distribution capability?

Change is coming. I listen to a lot of loud talk these days, that I tried to say in my commentary, we are doing an awful lot, but we are going about it quite right. I think this helps better speak than a lot loud chatter. And I do think some of the talk is ahead of the reality at the moment. But with that said, change is coming. And we are not alone as in terms of carriers improving their capabilities, because of what technology brings that will lead that change. It’s around data, it’s around straight through process, it’s around data that improves the customer experience, while at the same time improving your ability to select risk and to do it quickly i.e. in seconds and to be able to then straight through process business. It’s claims on the other end, almost certain co-boarded claims that can be settled the same way. These capabilities will improve the intermediary ability to sell and service the business at a lower cost, to take that cost out it will speed the process. But at the same time those same capabilities will be delivered through new clients at the intermediary, dot-com type intermediaries, where potential customers are buying other services and products and its natural that it at that time they consider insurance, you are licensing your business your small business, you are setting up the accounting and financing of your small business. It’s a time that you will consider insurance as an example, there will be many like that. You taking out a loan for your business and technology enables those other forms of distribution. The customer will buy it from a desktop, the customer will buy it from a mobile device, they will buy it any time anywhere and they will service it anytime anywhere. This is not futuristic in the sense of measuring it in years from now. It’s on our door step, this is the next two years or shorter, it will be iterative, it will only get better and better and better. There won’t be one winner, there will be a number of them.

Okay, so you see aggregate is continuing to kind of gain share here at least have success in the U.S.

Define aggregator to me.

I mean something like a continuous dot-com in the UK and the personal line side perhaps something here in the U.S. just seems like it hasn’t really caught traction here in the U.S.

Well you know maybe I can see single source distribution with other financial services, I can see those who offer multiple choice, for those who simply want to shop insurance. I’m agnostic, I don’t see any one of them as winners, I see multiple winners, because I don’t think there is one kind of consumer out there, one kind of buying behavior out there and I think there are going to be other compelling options who are you to use in terms of buying that you haven’t had as a choice now to-date. That’s what I say.

Thank you.

We will go next to Jay Cohen, Bank of America Merrill Lynch.

Thank you. I just want to get an update on the life insurance business, it looks like both the earnings contribution and revenue growth is slowing there, and I’m wondering if you could talk about what is happening?

Yes, the VA business are run-off, variable annuity business. We told you earlier I think it was in the fourth quarter that we adjusted our models and took our earnings and as a result put up our reserve that took down our earnings year-on-year. So quarter-on-quarter was around about $15 million to $16 million a quarter just coming off because of that change, right. And then our international life business is actually growing. You know Jay what I would do is if you look at Page 18 of this supplement, you will see that while the GAAP premium is down 3% , 3.5% the overall production in the quarter is up 8% if you include deposits and it’s up 14% over the six months. So we are starting to see strong growth in the production for the overall international life book.

We would look at production more than GAAP premium.

Got it. Helpful. Thank you.

This is a kind of FAS product that’s being sold.

Our last question comes from Meyer Shields, KBW.

Thanks very much for squeezing me in. Evan, can you compare the list of business within reinsurance now to two or three years ago. Is that changing?

Say that again Meyer.

I’m wondering whether, obviously the premium volumes in global reinsurance are coming down. So it’s the mix opposite?

Well. I’m just trying to add it up before I give you a complete answer, because everything has been coming down. Casualty is down, risk property is down, cat has been down. The mix is probably pretty steady, maybe it’s biases a little more towards the risk lines than the cat lines.

Okay, that’s helpful. And then finally, can you just get a quick explanation of what will be adverse development in the corporate segment?

It’s the run-off business, the Brandywine run-off business is in the corporate segment.

Right. So it was the business that was put into Brandywine in about 1995, there is a number of casualty lines where we had development.

We don’t have a run-off division, that we sort of put things we don’t like. This is the Brandywine run-off. And also Chubb had as well run-off A&E. And we study the loan, what we call LTE other than, it’s other than asbestoses environmental which are third and fourth quarter. This is the other lines that would be like sexual molestation, et cetera, and it’s a run-off of that and that’s where charge was taken.

Okay. Thanks very much.

You are welcome.

All right. Thank you everyone for your time and attention this morning. We look forward to speaking you to you again at the end of next quarter. Thank you and good day.