Chubb Limited (CB) Q3 2015 Earnings Report, Transcript and Summary

Please standby, we are about to begin. Good day. And welcome to ACE Limited Third Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. [Operator Instructions] For opening remarks and introductions, I would now like to turn the call over to Helen Wilson, Investor Relations. Please go ahead.

Thank you. And welcome to the ACE Limited September 30, 2015 third quarter earnings conference call. Our report today will contain forward-looking statements, including statements relating to company and investment portfolio performance, pricing and business mix, economic and insurance market conditions, including foreign exchange, and completion and integration of acquisitions, all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filings, as well as our earnings press release and financial supplement, which are available on our website for more information on factors that could affect these matters. This call is being webcast live and the webcast replay will be available for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments. 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. As you saw from the number, ACE had a great quarter, with record earnings, record underwriting results and good revenue growth in constant dollars. After-tax operating income of $897 million or $2.74 per share was driven by P&C underwriting income of almost $600 million. Foreign exchange continued to the cast the shadow in the quarter, impacting our premium revenue, income and book value. Book value declined 1.5% due to FX and financial market volatility in both equity and fixed income markets. Our annualized operating return on equity was about 13%, an excellent return on shareholder capital. Year-to-date we have produced over $2.4 billion or $7.38 per share in operating income, which is essentially flat with prior year, in spite of about $85 million in foreign exchange headwind. Strong underwriting gains and 6.5% premium revenue growth in constant dollars contributed to these results. Returning to the quarter, underwriting results were again simply excellent, total P&C underwriting income growth was driven by strong underlying current accident year results, positive prior period reserve development and relatively low catastrophe losses. The P&C combined ratio was 85.9 and the P&C current accident year combined ratio excluding cat was 89.2 versus 89.8 prior year, so an improvement. All P&C divisions produced outstanding calendar year and current accident year results in the quarter. We are about two months into the conversion of the Fireman’s Fund business case paper. We are on track and in fact, ahead of plan. As of today, both business retention and financial performance are ahead of our original projections. The retention rate is measured by premium is 87%. The business we are not converting is in line with our expectations, because it either does not meet our business profile or in our judgment is under priced. If you would like more color during the Q&A, Juan Andrade has prepared to answer your questions. We produced $549 million in investment income, down about 3% on a reported basis and 1% in constant dollars, very good result given the interest rate, equity market environment and adverse FX movement. We continue to benefit from strong operating cash flow. Turning to revenue growth, global P&C net premiums, which exclude agriculture grew nearly 8% in the quarter in constant dollars, foreign exchange negatively impacted global P&C by 7.5 points, nearly equal to our underlying growth. In North America, net premiums for P&C excluding crop grew 11% and our large commercial business ACE USA net premiums grew just over 2% and our two wholesale E&S businesses, ACE Bermuda and ACE Westchester, net premiums grew about 4.5% and 2.5%, respectively. We grew 11.5% in Ace Commercial Risk Services, which serves small to mid-market clients for specialty products. Premiums in our U.S. Personal Lines business were up 86%, driven by the addition of the Fireman's Fund business. Excluding Fireman's Fund, our high net worth personal lines business grew 14%, our highest growth rate of the year as we are also benefiting from increased submission activity and new business from over 300 Fireman's Fund agents newly licensed with ACE. Premiums in our agriculture business declined 3.5% is expected, due to lower commodity prices and fund selection. The crop business is in good shape and from what we see today it appears it will be an average crop year in terms of profit and loss. Turning to our international operations, P&C net premiums in ACE International were up 9% in constant dollars, driven by Latin America with strong growth of 22%, premiums in Asia-Pacific were up 8%, while premiums in Europe were down 1% and our London-based E&S business, premiums were down 12% as we continue to shed business in the London wholesale market. In our A&H Insurance business net premiums were up about 6% globally in constant currency. A&H premiums internationally were up about 5.5%, led by Asia with growth of 15%. Premiums for combined insurance were up about 5%. Net premiums written for International Personal Lines were up 18% on a constant dollar basis. In our Asia Focused International Life Insurance business, premiums were up almost 9% in constant currency. And finally in our Global Re business, net premiums declined 9.5% due to market conditions. I want to now say a few words about current commercial P&C market conditions. The underwriting environment continued to grow more competitive in the quarter for our commercial P&C business globally. With some exceptions, price declines accelerated modestly. They were varied by class of business and geography. All of the themes we’ve been saying in previous quarters remain true. Large account business, particularly shared and layered is more competitive than midsized. Wholesale is more competitive than retail and property more so than casualty related. For our U.S. commercial P&C business, general and specialty casualty related pricing was flat in the quarter. Management, professional liability pricing was down a 0.5% and property related pricing was down 9%. New business writings in North America were down year-on-year as one would expect but it varies by class depending on the rates in terms we could secure. So in fact new business was up in certain targeted classes including specialty small commercial, personal lines, professional lines and A&H. Renewal retention levels are holding up well. For our U.S. retail business, the renewal retention rate as measured by premium was 96%. Internationally, commercial P&C insurance market conditions also grew incrementally more competitive. Again, for the business we wrote, casualty rates were down 3%, property was down 7% and financial lines rates were down 1%. Generally speaking, pricing is not keeping pace with loss cost trends. They would vary by lines in geography. We continue to execute strategies to ameliorate to the extent possible the impact of pricing on our combined ratio through a combination of mix shift, targeting classes with better margin, portfolio management that informs underwriting actions, including tighter individual risk selection and pricing actions in more stressed areas. John Keogh, John Lupica and Juan Andrade could provide further color on market conditions and pricing trends. While the main event to talk about today in quarters to come, I’m sure is our merger with Chubb. I want to fill you in on where we stand. We’re on track with obtaining all necessary regulatory approvals in order to close hopefully early in the first quarter of ‘16 as we had announced. We received necessary U.S. Antitrust Clearance. As you all saw and we expect to announce an overwhelmingly positive response from both companies’ shareholders following tomorrow’s extraordinary general meetings that will be held by each company. Although the voting continues, based on the 80% of these shareholders who have cast their votes today -- to-date, approval of all Chubb related proposals is running in the very high 90s. We're making very good progress in our integration planning process. Things are moving very well with executives on both sides, working in teams to represent all lines of business and support areas around the world addressing leadership, organizational structure, roles and responsibilities and resource requirements. We are also establishing teams to work on future growth initiatives. Chemistry between both sides is excellent. Communication is good and we are building a detailed roadmap for integration that will allow us to hit the ground running when we close. We are learning more about each other. And I think the admiration for each of the people business and culture has only grown stronger. By way of a few examples, ACE people starting with me have a greater and growing appreciation with Chubb’s renowned global claims and risk engineering capabilities, its U.S. branch and agency distribution system and its training capabilities. Chubb people have a greater appreciation for ACE’s product breadth, global operations, risk appetite and insights and speed at which we move. Senior leadership is also working separately as a team to help facilitate cultural integration. Lastly, I will tell you that the reception we received from the agent and broker community, as well as from our customers has been very supportive, very positive. For example, members of our senior management team from both ACE and from Chubb, including me, were intended in attendance two weeks that the Council of Insurance Agents & Brokers, or CIAB meeting in Colorado Springs, it was an energy and an optimism in the room among our teams that signal to our important distribution partners how excited we all are about our two companies coming together. They all recognize the complementary nature of our companies. Frankly the more we know and the more we learn about each other, the more bullish we are on the value creation opportunities we can create for our customers, our business partners, our employees, and our shareholders. With that, I'll turn the call over to Phil and then will come back and take your questions.

Thank you, Evan. In the quarter investment income of $549 million benefited from our strong cash flow, private equity distributions and call activity from our corporate bonds. Year-to-date cash flow has essentially offset the impact of FX on our cash invested assets, which are down $140 million on a reported basis and up $1.2 billion in constant dollars. Our average new money rate is 2.9%, versus our current book yield of 3.6%. For the past 12 months, our operating cash flow was $4 billion. As I said on previous calls, our strong cash flow has offset the impact of lower reinvestment rates and we expect this trend to continue. Our cash flow for the third quarter was $808 million. There are number of factors that impact the variability in investment income including the level of interest rates, prepayment speeds on our mortgages, corporate bond call activity, private equity distributions and foreign exchange. We currently expect our quarterly investment income run rate to be $540 million. Net realized and unrealized losses were $1.16 billion after-tax. This included losses of $309 million in our investment portfolio, primarily due to widening of credit spreads on our corporate bonds, a $313 million loss from the mark-to-market impact on our variable annuity reinsurance business, and a $548 million impact on book value from foreign exchange. FX impacted tangible book by $345 million. Our investments remain in an unrealized gain position of $1.3 billion after-tax. Since September 30, we have recovered a substantial portion of these marks almost $450 million, including a positive mark on investment portfolio of $200 million. Our net loss reserves were up to $212 million adjusted for foreign exchange and our paid-to-incurred ratio was 94%. We had positive prior period development of $210 million pre-tax, with about one-quarter from short-tail lines and three-quarter recorded from long-tail lines from accident years 2010 and prior. This included $76 million of adverse development for legacy environmental liability exposures in our Brandywine run-off of operation, which is included in our North American segment. As a reminder, we conduct our environmental review in the third quarter and our asbestos review in the fourth. The prior period development also included the positive impact from the release of $79 million from an individual legacy liability case reserve in our Overseas General and Global Re segments. Pre-tax catastrophe losses of $72 million came from a number of worldwide investments and events, including $22 million from the explosion in Tianjin, $5 billion from the Chile earthquake and the balance of other events, including U.S. flooding and Asian typhoons. In the quarter the Fireman's Fund business made a one-time contribution of three-quarters of a point to the improvement in the combined ratio due to the underwriting gain from the portfolio assumption. However, note the Fireman's Fund contributed only $20 million to operating income with underwriting gain substantially offset by purchase accounting. On the other hand, foreign exchange negatively impacted operating income by $36 million. As you can see on page 4 of the supplement, our A&H constant dollar operating income was down $6 million compared to last year's quarter. We had positive reserve development of $8 million in last year’s quarter and negative development of $5 million this quarter. Excluding development, earnings growth was 6.1%. This business continues to perform very well. Also on page four of the supplement, you will see life operating income is down $8 million. This is principally due to the runoff of the VA reinsurance book. We are finalizing our plans for our $5.3 billion debt issuance in connection with the Chubb acquisition. We will make an announcement in the near future. I'll turn the call back to Helen.

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

[Operator Instructions] We will take our first question from Cliff Gallant with Nomura International.

Good morning.

Good morning.

Great. Two questions. The first one was in -- and thank you, Phil for the $22 million loss number for the Tianjin loss. So, I was curious. When we see events like that in the news from an insurance claim perspective, how should we think about what losses like that? How does it differ from an event that we might see in the U.S.? And then my second question that I just -- was really sort of the -- you volunteered one and ready to speak about the conversion rates of the high net worth business at Fireman’s house, I would love to hear a more detail about it, how was the approach different between -- how Fireman’s was running and you guys are? And are there any lessons there that will be applicable as you integrate another high net worth business?

Yeah. So, your first question, I don’t know how to answer your first question because I don't know what you're asking really so. Can you be more specific or rephrase it? I mean, it’s a man-made natural. It’s a man-made disaster that occurred in an urban center. The only difference I’d say really between that loss occurring in China that anywhere else has to do with the regulatory environment and how you enforce the accumulation of toxic chemicals or other combustibles in an area like that. And so the risk management generally, an infrastructure of a more developing country versus developed country. But other than that, if that’s what you are getting at there is an answer, but other than that I’m not sure I understand the nature of the question.

That is a good answer. I appreciate that.

Again, on personal lines before we dive into it, what would you like to know?

Well, what is the conversion rate of the business of Fireman’s today? What downs have you had, has there been any surprises? And again, are the lessons applicable that you will apply when you look at the Chubb book?

Yeah. Before Evan gets into that with you, I want to make sure you understand something about the Chubb book versus the Fireman’s Fund. In the Fireman's Fund, it is a conversion. We are literally, having to convert the customer from the policy they had with Fireman's Fund, the statutory paper to ACE’s paper. We did not buy the insurance company. We bought the renewal rights to the business. When you put Chubb and ACE together, there is going to be no conversion. They will -- the customers will remain on the paper they were on. With that, let me turn it over to Evan.

Thanks Kevin. Cliff, what I would say really to start is a couple of things. I would reinforce the fact that our premium retention is running at roughly around 87%, which is really better than the expectations then we had when we did this deal. Secondly, and as Evan mentioned, when we look at the total return aspect of the underwriting income from this business, it is also running better than what we expected. I think in the six or so months as we close this deal back on April 1st, we've been able to successfully integrate over 500 new colleagues from the Fireman's Fund. We are very pleased with the talent and the skill that they have brought. We’ve created two new centers one in O'Fallon, Missouri and one in Bethlehem, Pennsylvania, that are really deepened our ability to provide even better claim service, even better operation servicing capabilities to our customers. In addition to that, we have also on-boarded about 357 new Fireman's Fund agents that were not appointed with ACE prior to all of this. Those agents were associated with roughly over 400 storefronts and that has generated some of the very positive momentum we're seeing in the quarter from a new business standpoint as well. So all of that so far so good. We have received tremendous support from our distribution, both the fund distribution, as well as the ACE distribution and all of this, and is frankly, one of the reasons why we are seeing the retention rates where they are. Regarding the business that that we are not retaining, as Evan pointed out, there is really a couple of specific reasons for that. One of those is really some of that business is not meet our target client strategy, meaning that it’s truly not high net worth business, so we are doing some selective re-underwriting their. I would say second category is business that we don't believe is adequately priced for the exposure particularly in some cap prone area. So, therefore, you see some of the business that we are not retaining, which again, all of that has been built into our models and really has been contemplated into financials.

Okay. All right. Thank you very much.

You’re welcome.

And we will take our next question from Michael Nannizzi with Goldman Sachs.

Thanks. Just on the North America P&C business, the expense -- it looks you get about 210 bps of improvement year-over-year about two-thirds of that was expenses in acquisition in particular and second quarter in a row that that's been down year-over-year? Is there something changing there, reinsurance or some other attribute that's driving that acquisition ratio down or is that not something that we should think is should continue?

Well, it’s going to continue. It’s going to continue for a period of time. We have a mix of business change and we do have selectively in that mix of business more reinsurance and the biggest impact to all of that has to do with Fireman's Fund business that we picked up.

Got it. Okay. Okay. And so that -- and on the other third being the underlying loss ratio, is it fair to assume that that’s weather or lack of weather or is that potentially some mix shift as well?

Well, you see current accident, there is -- you see current accident year ex cat. So you understand how it looks without cat losses within it. We told you that there was some improvement due to the Fireman's Fund and when you adjust for that you can see how the loss ratio is very stable on year-to-year.

Okay. So on apples-to-apples if you were to control for those shifts then pretty stable that’s?

Yeah. Sure.

Yeah. Okay. And then, I also saw you -- ACE recently purchased…

I’ll let you know, let me just say one thing is you know what’s, it’s up a little bit, that’s a combination on one hand, you got price and trend and on another hand, you got mix changes and I do expect overtime, all things equal. You expect the loss ratios to rise a bit.

Got it. Great. And then last, CoverHound, the company mentioned that it had taken a stake or in their release that ACE has taken stake in that company? Can you talk about and I think -- if I remember, the release mentioned some business through Fireman's Fund or that was being placed? Can you talk about like strategically what benefit that provided and is there also some opportunity with the new Chubb book to leverage that relationship as well? Thanks.

Yeah. No. I am not going to talk much about it, the only thing I tell you is, I think in your mind you linked Novato, California with San Francisco, California linked Fireman's Fund and CoverHound, because we didn't put any linkage, but there is no linkage between Fireman's Fund and CoverHound. We are not doing any personal lines business with CoverHound and we have -- we really have no plans to. We like CoverHound. We like what we see in terms of their technology and their development and their algorithms to match customer to the right insurer. And they’re very thoughtful people and stay tuned as to what more over time we may do with CoverHound.

Great. Thank you.

You’re very welcome.

And we will take our next question from Ryan Tunis with Credit Suisse.

Hey, thanks. I guess my first question is just on the life segment. Obviously, you’ve had this headwind from the VA run-off, I guess the last couple of years. But it sounds like international life insurance growth still remains pretty strong. I’m just wondering if there is any visibility on where you might and when you might see that crossover, where growth from either USA, A&H, international life might be enough to kind of offset that headwind?

Yeah. That’s a really -- that’s a good question. And we look at that over time. The international life business was in a loss making position because it was green field and we were continuing to invest to grow it to build it because building distribution, agency distribution is costly. So we kept plowing into it. And it crossed over last year, this year into a positive earnings position. Its earnings over the next year, two and three will accelerate significantly and will overcome that number. Our projections are over the next five years so it has to happen year-by-year but that it will be a meaningful -- international life will become a meaningful contributor to ACE’s earnings.

And I guess just to try by meaningful $100 million, more than that or …

To be meaningful in ACE, it has to have 100 -- it has to be in the 100 -- you have to have hundreds of millions to be meaningful to ACE.

Okay. Understood. And then I guess my second one was, I guess, just on professional lines in combining the two companies. And whether it’s right or not, I think we think about Chubb as writing more primary layer professional lines business, ACE writing a little bit more access in large case. And I guess, how do you think about the opportunity longer-term integrating those two businesses? And is that the type of process that could cause near-term disruption because of any customer overlap?

No, not that much, very little. As we look at it, I think, you got it partially right. I mean, we look at it this way. Chubb is so strong in middle-market and small customer professional lines business. And there, of course, it's not shared and layered business, you're right in it, ground-up. In the shared and layered, the large account business, ACE is a very meaningful primary writer, as well as an excess writer, as well as an individual DIC writer, which is major on site A coverage, Chubb, as well writes in the large account space. We don't see an overlap by the way when we -- to the degree we are able to look at our concentrations of customer. We don't see an overlap that gives us concern and we don't see an overlap of significance.

Okay. That's helpful.

The franchise balanced between the two, one is more large account brokerage oriented, one is more agency and middle-market oriented, though they’re both in each of the space that way and it’s just going to enhance it.

Got it. Got it,

Is that Ryan?

Yeah. That’s it. Thanks, Evan. I appreciate it.

You’re welcome.

And we will take our next question from Josh Stirling with Sanford Bernstein.

Hi. Good morning and thank you for taking the call. So Evan, I was hoping I could start with the big picture question of strategy if you don’t mind. I know you take a long-term view of the business. And I’m wondering if you can walk us long-term how you are thinking about growth. I mean if we look back the past decade you’ve organically had a lot of products, you done both on acquisitions, entered new markets and you took advantage more recently of a hardening market to accelerate the topline. But now the market softening and you’ve got Chubb to digest, I’m wondering how we should think about growth as we look out to next five or 10 years. And looking at the portfolio today, given all you build, what do you think of long-term run rate for growth would be, either the number you are shooting for internally or what we should think of as a sustainable target? Thank you.

Yeah. I’m not putting out a long-term growth target but I’m going to give you a picture. And I appreciate the horizon you are taking of 5, 10 years and ideal just within the five year period right now. We are already putting together teams to focus on what we see as meaningful growth opportunities, target opportunities. Chubb has approximately 4,500 agents in the United States because of the deep relationship with it. Chubb has industry verticals in the middle-market with deep product capability based on insights they have into those customers cohort. They have done a lot of study and a lot of work on, very thoughtful. Our ability to add and we can see it a middle-market oriented specialty products to the Chubb core portfolio to enhance industry verticals, grow them to enhance general market customer. Those customers in many instances in the products were contemplating together were already buying those products. And in many cases, those agents are already selling those products. It is not doing it for Chubb or that agent is not selling it to that customer, someone else is. And we see a whole lineup of that on one hand. Number two, the small commercial space is an area of very big marketplace, and it's an area that ACE’s has been endeavoring along in a specialty way. Chubb has been contemplating, and Chubb brings traditional product capability that ACE doesn't have. ACE brings specialty product capability and some technology that Chubb doesn't have. And Chubb bring distribution that is awesome to be able to move into that space. We see a very large opportunity that way. And two other things on the U.S., when we think about it. In the upper middle-market area, ACE doesn't have a good traditional product offering in commercial auto and risk transfer comp. Chubb brings us capability in that area that will enhance our presence. Now, you have to be mindful of underwriting cycle and sometimes it will be a greater opportunity than others and it is one of the death valleys that are a few of them of the insurance industry, so we have to be very careful. I make those comments, so you understand we are well informed about all that, we are underwriters. But that is a real opportunity for us to begin tiptoeing into. In the personal lines area, stay tuned. That’s a $41 billion, we can tell marketplace and we’ll have between us somewhere around $5 billion of that. There are a lot of customers out there who are not buying high net worth product, though they have the need of the coverage’s and the services that are provided. It’s a long-term to grow that and get them out of the traditional writers that they are with, into something, into a product that more meets their needs and they are not really price conscious. They just don’t focus on it. But the stay tuned is also about masterpieces. It’s been a leader in the industry, in that industry. It really set the course. And it maybe time in a reasonable period of time to reveal masterpiece 2.0 and that's on our radar screen. When you get internationally, ACE has endeavored along both in brokerage and agency distribution as you know. We've grown both large commercial and we have grown middle-market commercial business on the continent in the U.K., modestly in those and in Latin America and Asia. Chubb colleagues that we will be adding bring us a lot more capability to add resource and industry verticals and product to our distribution on and to our -- and to bring enhanced distribution and to enhance our presence in that market. And we see it in a meaningful way and there are three or four or five countries right now on our radar screen that were building plans to move into. So I think the growth will start to show. You know, it takes time to put in place. I think it will find a way, without gaining it in anyway to reveal to show you the progress. It won’t be right away. And -- but I think over the medium term, you look out couple of years, you’re going to see meaningful additional revenue streams that the two of us as one company will be able to get that the two of us independently would never get. And over five years, I think it’s going to be very meaningful revenue that will throw off we’re underwriters, we’re looking for margin. It will throw off meaningful margin.

That’s great. That’s great Evan. Thanks for being so comprehensive. If I switch here just briefly, sort of the other side of the coin, integration and sort of operating risk management, sometimes good deals sort of flounder from lack of attention of details once you close [Technical Difficulty] but ultimately, I'm wondering as you think about the history of the industry, you think about other deals that went sideways. What are the big risks for integration and leveraging franchise that you guys are aware of and that you are sort of managing around it to try to avoid them?

I can't point with specificity to what I -- knowing what the failures are. I don’t know them intimately of others. I can give you my own sense of it though. And that is that somehow you make a large acquisition and when it closes, it's like victory. I did it, we’re done. Frankly, from the day we announced or I should say the day after we announced it, we dove right into what it’s going to take to integrate with deepened integration planning. Really it is about detail. It’s about understanding and causing all your colleagues to understand and everyone to conceptualize and then bring it down to a fundamental day-to-day action plan that you can execute, what are your expectations as to the true resource required, what is the organizational structure look like and who are the right people for it. And what is the right cost to improve that kind of a business or that kind of a service organization. And it has been and it is a drains-up exercise that we are going through. You want to get it done reasonably quickly. You can't linger on it where you’re internally focused too much. And then you got to get on from the day you close with the implementation of it. And you can't lose your appetite or your passion for the detail of it. And we’re looking at the detail all the time. And everyone is as we plan it and we know we've got short time so we have to begin executing. And that execution takes time. And it takes you -- when you run the cycle, it takes you two years to get -- to get other than mop up done. And you have been -- you have to be relentless. You can't lose your focus. You can't get bored with it. You got to know what has to happen and you've got -- and it takes leadership to lead people. It’s a long march and you’ve got to lead them from the beginning to the very end and you got to be intimate with it. And at the same time, you've got to -- you've got to in parallel well, create for your organization the vision of why you're doing it because you're doing it for the greater good, you're doing for the efficiency, you're doing it to be competitive, you’re doing it so you can invest and you’ve got to leading to it and show it because in parallel, you've got to move on growth opportunities and show the positive. At the same time, you're working on what is a difficult process of integration. And it takes a wide bench of managers and the managers or the team that has to leave it. And that team is inclusive. It's not we and they. Very quickly it is not ACE and Chubb, it is just Chubb. And it is all of us and it's getting people’s mental mind around that that you are -- that that’s what you’re doing with, we are all colleagues, let’s just get it done together. That’s the whole deal.

Okay. Thanks for the color. And good luck for the next quarter’s job.

Got it.

We will take our next question from Jay Gelb with Barclays.

Good morning. I want to follow up on that common, Evan, on the high net worth market. I just want to clarify, are you sizing the high net worth personal lines market at around $40 billion, of which the commodities Chubb would have $5 billion currently?

Go ahead, Juan.

Yes. So Jay, thanks for that.

You may correct me.

The U.S. personal lines market is roughly about $250 billion. I think the last estimate that was out there from Conning and a few others estimates high net worth to be roughly in the $80 billion range. What we’re referring to in the $40 billion range is really a sweet spot in our target clients so what we’d like to go after. And so when we think about our true client strategy of being high net worth, ultra high net worth customers that’s really how we’re sizing that market.

Okay. Juan, why would the target market be half to the total?

Well, these sort of…

Isn’t that big enough for you?

Okay.

You can’t see on that. How about when we get close to that target, well the advice was about the other projects.

Okay, Jay. These are approximate numbers and you know the way that does some of the firms out there, the consulting firms etcetera and the research firms identify high net worth is not exactly the way we do it. So for instance, Conning and a lot of the folks out there will define anything over a $1 million in value. Our homes typically are over $2 billion and $3 billion in value and higher. So we do identify subset of that high net worth market. That’s really what we’re looking at.

All right. That’s helpful. Then I guess more for Phil.

Don’t worry, you meet our target customers.

Actually I am and he is a homeowner’s customer. I don’t think many are asking. It might not be your target market though. With regard to the share buyback story…

Buddy, you always are, go ahead.

With regard to the share buybacks, can you kind of clarify what the plan is for 2016, after the merger closes? And then what are you thinking about in terms of share buybacks as a percentage of annual earnings going forward?

Yes. What we’ve said is that for '16 we expect no buybacks and when it gets to '17, we will let you know, right. We will see how the capital develops and we will make that decision as we go into '17 historically.

Historically ACE standalone?

Buybacks are not the first thing on our mind.

Okay. I mean, historically ACE has repurchased around equivalent of half of annual operating earnings and Chubb was higher, is that half level a potential starting point?

What are you calling historic?

2014.

I will take the last 12 years buddy and I don’t think you would come to that number.

All right. And then the last one if I can try on this one. So the ACE’s effective tax rate in the low-teens, Chubb is in the mid-20s including the benefit for Chubb of a big municipal bond portfolio. Is it -- putting those two things together in year one after the transaction, is it then reasonable to expect that new ACE Chubb would have a higher tax rate than ACE on a standalone basis?

That’s the way we planned it, right. We said that we don’t expect to see -- we don’t expect what we haven’t built into our plans any changes to the reinsurance. As you know that our view has been this deal stands up without that and so that’s the way we’re going forward.

That’s what I thought too. Thank you.

No material reinsurance.

And we will take our next question from Sarah DeWitt with JPMorgan.

Hi, good morning.

Good morning.

Just a follow-up on the tax question. I would think there would be a substantial opportunity that’s putting some internal quota share insurance and came from meaningful savings on the tax side as well. Could you just elaborate on why that would be the case?

No, we are not going any further with that line of thinking, but if you want to elaborate on why you think there is that opportunity, we’re listening.

Okay. Yeah. I think it’s -- I would have think it would be like you’d leave any money on the table, I think that would be a meaningful additional revenue treatment in addition to the strategic sense of the deal. Okay. And then just moving on…

I think you -- Sara, I think you are not thinking of it the right way, not the way we think about it. We don’t do internal reinsurance for tax planning purposes and we never have. We do it for capital management purposes and we do it around how we manage our risk exposures and where we pool capital and therefore, pool risk so that we can manage volatility and we can manage our capital exposures that are spread around the world to be able to take the risks we take locally. So if you think that way about it and you put your head around that, I think then that leads you to a whole other line of thinking and I think you then understand why we are not going to expand on that on the call.

Okay. Fair enough. And then just the unfavorable development in the A&H business. Could you just elaborate on what drove that and how we should be thinking about the run rate life earnings going forward?

Well, I think the A&H, we had a positive prior period development last year and so we just can’t project reserve development. This year, 6 million bucks, it was noise and there's nothing systemic and it was in a portfolio where we just saw that it’s quite profitable portfolio. But the loss ratio was running a little bit higher in there than we had estimated. And so we adjusted for it and just raised it.

Okay. Great. Thanks for the answers.

You are welcome.

And we will take our next question from Vinay Misquith with Sterne, Agee CRT.

Hi. Good morning. The first question is on other soft issues with integration. I'm sure you are doing a lot with the details. But just a big question on the cultural integration. Evan, it would be helpful to hear from you as to your own experiences and what's being done on a firm wide basis to integrate two very different cultures?

I have to tell you, the more we get in and look, and the more we work together, the more in my mind and I think in mind of my colleagues and I believe in the mind of our Chubb colleagues, those who've been working together. The cultural differences, there are far more cultural similarities than cultural differences. And I think the differences have to do a lot with simply speed and have to do with -- in some areas, what we consider what management responsibilities or supervisory level response plays, how broad are your responsibilities. I don't think -- I think what’s so similar is our striving to execute with excellence. Our striving -- we both put a lot of pride on technical excellence, whether it is in underwriting or in claims, or in product, or an actuarial or an accounting. I think you find -- and that’s one of the things we are seeing. Each one comes to the table and has sniffed the other one out as to, how are you about, how detailed are you and how deeply do you think about it. And I think we find that the similarities are gratifying. When we listen to each other's objectives and what you concentrate on and focus on to execute your plans, what's important to you. Speaking very similar ways, when we think about opportunities, we see it in a similar way. Chubb is an older company and has some of the attributes that we admire of an older company that is more mature in some ways in its processes and capabilities. I shout out -- I shout out claims to some degree with more training and development and some areas like that. ACE has invested more in technology. I don’t mind saying that. As an example, we’re both deep into data analytics. Culture requires -- now to answer your question directly, it requires leadership and management to be extremely visible in the behaviors and exhibiting the behaviors that they expect of everyone else. It’s not just what you say, it's how you do it. People watch your actions and then they listen to the exact words you use, not your description of culture but how you live the culture. That is true of the senior most leadership and how we all display it. That then is emulated by the leaders of the next level and on down and it cascades. And that we are all vigilant to reinforce that is important. Yes, at the same time, we have groups working on what I’ll call the more mechanical ends of it, of language that we use in common, so that we know what each other saying of being clear of here some of the behaviors that we all admire and should accelerate, what our brand identity is together. And so we give ourselves a name of -- a meaning behind the name of Chubb. Those are all things that we’re paying attention to and that will happen here. But finally, culture is also built on shared experiences in my experience. And that is the more people work together and have shared experience together, that’s what builds a common team spirit between yourselves. That’s how you take from what starts out as a little more sterile to absolute familiarity and where people really are one because they've gone through it together and you can't short-circuit that. You can try to help it to happen and create those experiences. That will happen over time and you pay attention and you be patient about that part.

Okay. That's helpful. The second question is on the small commercial initiative. My thoughts or my views about small commercial, is that it’s more of a low-touch business versus maybe the middle market to the higher end which is more high-touch? And that does small commercial is driven by technology. So could you help me understand how long do you think you would take to build up your technology? And what sort of investment do you think it would entail for you to be a meaningful player in small commercial?

Stay tuned, Vinay. We’re not going any further with the roadmap.

Okay. All right. Thank you.

You’re welcome.

And we will take our next question from Jay Cohen with Bank of America.

Yes. Thank you. Lot of my questions have been asked. One other question, so I think you talked about a run rate of $540 million for investment income. I believe last quarter was $550 million, although the new money rates still the same at 2.9%. So what -- it’s not a big number but what changed in the interim?

We have to make estimates of calls and private equity distributions. And in our view, the portfolio is turning over to the new money rate even with the additional cash flow.

FX too.

Yeah. We have FX as well and we had at this quarter, the rates, the dollar….

Got it. Make sense.

Dollar is strengthened more too, Jay.

Got it. Thank you.

And we will take our next question from Ian Gutterman with Balyasny.

Hi. Thank you. At my first, I just wanted to clarify. I believe you said that you hope to close the deal on early first quarter. And if I recall last call, you just have first quarter. Was I -- was I not listening closely enough last quarter or is that a change?

Ian, it’s like Kremlin watches. There is no change, okay.

Okay.

No change. You have set the -- we’re not worried about it. Yes, first quarter.

Got it. Okay. Just that you obviously got through some approvals already, so I don’t know if that got things up. Okay. So, I also wanted to ask on the personal lines just to understand a little bit better the difference between how you go to market with Chubb and the Fireman’s deal? So if I understood the way you were saying it under Fireman's essentially that name doesn't exist anymore, right. So you’re just going to market that we think when they were new it becomes ACE and if you're going to have two separate papers in the market going forward. It’s obviously, I mean, I just know what I shop before right. You get four or five names that got shown to you. It’s now like you can get 20 like standard market personal auto. So, how in the agent’s mind, are they going to have two, are they going to have representative from ACE and representative from Chubb that they are going to deal with? How do you -- not confuse the agents, I guess, what I’m trying to get at if they are going to have two separate plans?

It’s really -- Ian, it’s very simple. They are going to have one Chubb person call on them. I’m going to ask you a question about your homeowners insurance now. Here is your test buddy.

Okay.

You have an insurance company that you bought it from. Do you know the statutory company name on the paper, the actual statutory company name? So for instance, you buy from Chubb, you could be buying -- you are buying federal paper most of the time, do you know it’s federal, where do you buy Chubb?

Understood. Okay.

So in this case, there is going to be under the Chubb brand umbrella multiple statutory entities.

Okay.

And so if you’re the other statutory, if you bought from Chubb, you’re going to still have Chubb. And there is going to be one Chubb representative calling on your agent who servicing you. I hope you are going to be one of our clients.

I already have though.

And so the underlying paper won't change, it may still say it's American as an example.

Okay.

Or say federal, that's the only thing we’re saying, you have to distinguish the statutory, that’s it.

I understood. Okay. I want to make sure you won’t go in the market with Chubb was going to…

Oh, no, no. We have a month on month.

I think it’s one handed base, got it. Okay, that’s why it’s already that. Okay. Got it.

What you got. You’ve had two where there has been an emotional and intellectual test year that you're concerned about us right now.

I do. I have in Chubb clients. So I want to make sure you are not going to take away might not -- backup from me.

Your file is on Juan’s desk.

Evan just lastly, you mentioned the asbestos usual analysis in Q4. Just give any changes you're seeing in the environment. We we've seen, I think from others charge continued to pick a little bit, it sounds like there is a little bit of increase sort of the typical increase in defense costs, maybe I don’t know worse maybe or getting more real needs, there was these people are living longer. Anything, any color you can provide on, is it sort of business as usual or is it feel like things are gotten a little worst?

I think it’s business as usual in what remains just a hostile environment. The liabilities are long-dated and they are in run-off, but we don't see any -- we don't see change to the environment. The legal environment has been hostile for years and that remains the mortality tables and means of longer has been baked into the thinking in that environment. You’re right that that is something we've been living with. It’s a dynamic. The plaintiffs going to more peripheral industries and defendants, whether it’s pump manufacturers or those who make flooring has been going for a number of years. So, which end up with in development is really case specific as the cases ultimately develop and settle which is claims work much more than it’s actuarial work.

Got it. Okay. Okay. Great. And that’s all I had. I will let ask one off take it. Thanks.

Thanks.

Operator we will take question from one more person today.

Excellent. And we will go next to Brian Meredith with UBS.

Yes. Thank you. So, Evan, just a quick question here. Last quarter I think you mentioned that even with the FX you expect to see mid-single digit revenue growth in the P&C business to year-end. It doesn't look like that’s achievable. What’s changed?

FX.

Is FX just worse and you…

Yeah. FX is just worst and that’s primarily, Asia and Latin America economically are a little slower. And you see some softness there, but that impacted us in the third quarter on the margin but marginally. It was more FX, was worse than, we took another leg down, the dollar took another leg up and you saw that. And that was not in our forecast, that was not in what we had forecasted, we did not anticipate that, that is how we would.

Great. And then next question, what are the regulatory approval do you still need to close the Chubb transaction, Chubb major ones?

Well, we need, sure, we need and -- we need Insurance Department approvals.

Okay. [Indiscernible]

Different countries.

Six or seven, Joe is, go ahead.

Yeah. We need approvals from six or seven state insurance departments and we need approvals from about same number of foreign regulators as well.

Okay. And then last question, Evan, so ACE is known as a very efficient operator out there, as one of the big insurance company. I am just curious when you look at Chubb what disciplines and what area do you think you could make the more efficient, are there area that you kind of identified?

Not so much merger synergies but more what Chubb does.

I don’t know enough yet, I can tell you one thing that what I -- they are thoughtful underwriters, thoughtful leaders, that way and how they think about their domain and their business, and we have seen that. And they have been very, they are thoughtful and how they manage claims and a lot of expertise. I doubt we are going lend a lot of benefit to their fundamental underwriting thinking. I think there will be colleagues and it will be on the margin that we will each find it. I think some of our rigors and process around enterprise risk management, and how we think about it and how we think about concentrations of exposure, and how we think about using our own capital and industry capital to manage that. I think they will -- I think that putting the two together we will gain from that. I think we will both gain from the insights overtime. It’s not like throw the switch into the data and analytics of the two of us in that regard. I think that ACE, Chubb has deep distribution knowledge and experience in agency that will help us, help ACE. On the other side of the coin ACE has very broad distribution capabilities and experience in other channels of distribution, including direct response and we have technology in those areas that I think will overtime we will mix and match for each other, and help improve our overall distribution management.

Great. Thank you.

Thank you.

That’s all the time we have today. So thank you everyone for your time and attention this morning. We look forward to speaking with you again at the…

And this does conclude today’s conference call. Thank you again for your participation and have a wonderful day.