Chubb Ltd Q2 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to the Chubb Limited Second Quarter 2022 Earnings Conference Call. Today's call is being recorded. For opening remarks and introduction, I would like to turn the call over to Karen Beyer. Please go ahead, ma'am.

Thank you and welcome to our June 30, 2022, second quarter earnings conference call. Our report today will include forward-looking statements regarding company performance, pricing and business mix, growth opportunities, as well as economic and market conditions, all of which are subject to risks and uncertainties that could lead to actual results differing materially. For more information on factors that could impact these matters, please refer to our recent SEC filings, earnings release, and financial supplement available on our website at investors.chubb.com. We will also discuss non-GAAP financial measures, with reconciliations to the most comparable GAAP measures and additional details provided in our earnings press release and financial supplement. Now, I would like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Peter Enns, our Chief Financial Officer. After that, we will take your questions. Several members of our management team are also here to assist with your questions. It’s now my pleasure to turn the call over to Evan.

Good morning. We had a very strong quarter with record operating income driven by outstanding underwriting and investment results as well as double-digit, constant dollar P&C premium growth. Pricing was strong and exceeded loss costs in commercial lines, even as we increased the inflation factors we are using in our loss ratios in anticipation of future increases to loss costs. Meanwhile, growth in our consumer businesses continued to accelerate. Core operating income in the quarter was a record $1.8 billion or $4.20 per share, up 16% over the prior year. For the year, we have produced over $8 per share, up nearly 31%. Our second quarter underwriting results were simply lights out: $1.4 billion of underwriting income, which was up 21% over prior, with a published combined ratio of 84%, both record results; catastrophe losses in the quarter were reasonably light relative to our expected losses and virtually flat with last year's second quarter; the P&C current accident year combined ratio, excluding cats, was 83.5%, a nearly 2-point improvement over the prior year. On the other side of the balance sheet, adjusted net investment income was a record $950 million for the quarter. As you know, we are predominantly a buy-and-hold fixed-income investor. Given rising interest rates and widening spreads, investment income is and will continue to rise. Our reinvestment rate is now averaging 4.7% against a portfolio yield of 3.2%. We've begun to thoughtfully and meaningfully accelerate the turnover of our portfolio in a targeted manner so that we can put cash to work more quickly at higher yields. Spreads have moved to more historical averages among the various fixed-income classes. And the wind-down of QE could create more volatility and put more pressure on spreads in the future, which would benefit us. Peter will have more to say about these and other financial items. As you saw, we completed the acquisition of the Cigna business. As we had previously announced, the addition of Cigna's A&H and life business in Asia will be immediately accretive to core operating income per share and ROE. We have spent the past 6 to 8 months planning the integration to generate the revenue and earning power the combination of our businesses together in each country should achieve. We are off to a rapid start and are beginning to execute. Having just come back from Asia and met with the teams in Korea and Thailand, morale among our new and existing colleagues is quite high, and there's a great sense of optimism in what the future holds for our business in the region. Our Cigna colleagues who are joining us, starting leadership, are a great fit with Chubb and our culture. Now turning to growth in the rate environment. Total P&C premiums globally increased 9% in the quarter on a published basis or 11% in constant dollars, with commercial up 12% and consumer up 8%. Growth in the quarter remains broad-based with contributions from virtually all commercial businesses globally, from large corporate to middle market to small, from traditional to specialty, and most all regions of the world. Commercial P&C premiums for North America were up 12.5% or 8.7% excluding agriculture. While in Overseas General, commercial lines grew 13% in constant dollars. We then scrubbed 6 points of FX to arrive at the published result. Agriculture premiums were up 44% in the quarter driven overwhelmingly by crop insurance growth. Commodity prices plus growth in market share produced this result. Looking forward, we will have very strong crop insurance revenue growth in the third quarter as well. In terms of the Commercial P&C rate environment, market conditions overall remained favorable, while the level of rate increases is moderating. The vast majority of our portfolio is achieving favorable risk-adjusted returns, and additional rate is therefore required primarily to keep pace with loss costs, which are hardly benign. The rate environment is naturally becoming a bit more competitive, particularly in certain casualty-related classes as more carriers seek to now grow. The market is reasonably disciplined, and I expect it will remain so given not only the specter of loss cost inflation, but the presence of other risk exposures such as climate change, the war in Ukraine, the litigation environment, cyber and the overall cost of reinsurance. Plenty of reminders to managements to get paid for the exposure underwritten. In the quarter, North America, total Commercial P&C premiums, excluding agriculture, grew 8.7%. Growth this quarter in commercial lines was led by our Major Accounts & Specialty Division, which grew about 10.5%, followed by our middle market and small commercial business, which grew about 6.5%. Renewal retention for our retail commercial businesses was a very strong 101% on a premium basis. Overall, rates increased in North America commercial lines 7%, while total pricing, which includes rate and exposure, increased over 10.5%. Remember, most but not all of the exposure change helps to ameliorate loss costs. In major accounts, which serves the largest companies in America, rates increased over 8% with pricing up 11.6%. General casualty rates were up nearly 13% and varied by class of casualty. While risk management-related comp in GL were up about 4%. Property rates were up around 9% and financial lines rates were up nearly 7.5%. In our E&S wholesale business, rates increased by just under 10% with pricing up over 14%. Property rates were up over 13%. Casualty was up 8.5% and financial lines rates were up 9.5%. In our middle market business, rates increased nearly 7%, excluding comp, with pricing up about 9%. Rates for property were up 5%. Casualty rates were up over 7%. And comp rates were down 4.3%. However, comp pricing was up over 5% when taking into account exposure change. And finally, financial lines rates were up over 10%. Turning to loss costs for a minute. We increased our loss cost trends in North America to 6.5% in anticipation of rising costs, meaning the actual trends we are observing at this time are lower. Again, the 6.5% is compared to pricing that was up over 10.5%. In general, we are trending loss costs for short-tail classes close to 7%, up from 6.5% last quarter. In long-tail, excluding workers' comp, we're trending at 6.5%, up from 6%. And our first-dollar comp book is trending between 4% and 4.5%. These trend factors are contemplated in both our pricing and in our accident year loss picks in the quarter. Turning to our international general insurance operations. Retail Commercial P&C premiums grew 12.5% in constant dollars, while our London wholesale business grew over 10%. Retail commercial growth varied by region, with premiums up 14% in Asia Pacific, followed by growth of over 13% in Latin America. Our U.K. and Europe division was up nearly 12%. Internationally, like in the U.S., we continued to achieve improved rate-to-exposure across our commercial portfolio. In our international business, rates increased in the quarter about 9.5%, while we estimate pricing was up about 12%. Rates varied by class and by region as well as country within region. Outside North America, we are currently trending loss costs at about 6.5%, up from 4%, though that varies by class of business and country. Loss cost factors we are using for short-tail are now running over 7. And in long-tail, we're trending at about 6. Again, these factors are contemplated in both our pricing and in our accident year loss in the quarter and, like in North America, are higher than actual observed trends. International consumer lines growth in the quarter continued to pick up momentum as premiums increased over 12%, though FX then scrubbed about 7.5 points off the growth. Premiums in our international A&H business grew over 12% in constant dollar, with Latin America up over 19% and Asia Pacific up 13%, while our international personal lines grew 12%. Net premiums in our North America high net worth personal lines business were up 4.7% on the back of record new business activity. Our true high net worth client segment grew 12%, while overall retention was very strong at nearly 98%. In our homeowners business, we achieved pricing of about 10%, while the homeowners loss cost trend is running about 10% as well. To sum it all up, we had simply an excellent quarter. And as I look ahead, I am mindful of the world and the conditions in which we operate, including inflation, the specter of recession, the war and energy and food security problems globally. With all that, we have a lot of broad-based momentum and earning power in our organization that gives me confidence. Commercial P&C growth and pricing are favorable, our consumer lines business growth is accelerating, our life company revenue and earnings will accelerate with the addition of the Cigna business in Asia. Asia is now a $7.5 billion region for our company. Our underwriting margins are excellent, and our investment income will grow nicely due to rising rates and strong cash flow. We are well positioned for continued excellent EPS growth well into the future. I'll turn the call over to Peter, and then we'll come back and take your questions.

Good morning, everyone. As you just heard from Evan, we had another excellent quarter. In addition to the record results, we ended the second quarter in a position of exceptional financial strength. Our strong underlying performance produced operating cash flow of $2.7 billion for the quarter and $5.2 billion for the first 6 months. Our balance sheet remains strong. We have $68 billion in total capital. We continue to remain extremely liquid with cash and short-term investments of $10.6 billion at quarter end or $5.2 billion after accounting for the cash that was paid on July 1 for the Cigna deal. Among the capital-related actions in the quarter, we returned $1.5 billion to shareholders, including $1.1 billion in share repurchases and $348 million in dividends. Through the 6 months ended June 30, we have returned $2.8 billion to shareholders. The current quarter included after-tax realized mark-to-market losses on our private and public equities of $489 million compared to gains of $794 million last year. Also included are after-tax losses on sales of fixed maturities of $279 million, in part to advance our portfolio turnover strategy. Book and tangible book value per share decreased 7.7% and 11.6%, respectively, from last quarter driven by the continuing impact of rising interest rates on our investment portfolio and unfavorable foreign currency movements. Net realized and unrealized losses for the quarter were $5.4 billion after tax. In the quarter, adjusted net investment income of $950 million was above the top end of our estimated range and benefited from higher interest income from floating-rate securities and higher reinvestment yields resulting from portfolio turnover in this more attractive interest rate environment. We are remaining consistent and conservative in our investment strategy with 82% of our fixed-income portfolio rated investment grade, and we intend to maintain our historical allocation across investment assets. As Evan noted, with rising rates, our portfolio's reinvestment rate has increased year-to-date from 2.3% in December to 4.7% at June 30. Our current book yield is 3.2% versus 3% in the first quarter. As a reminder, every 100 basis point increase in our investment yield generates approximately $1.2 billion pre-tax of net investment income. Updating our quarterly guidance, we now anticipate adjusted net investment income over the next quarter to be in the range of $980 million to $1 billion. And we expect the quality of this income to be high as the vast majority of it will be predictable yield-oriented income and very little from more volatile sources like PE distributions and call premiums. Our reported ROE for the quarter was 9%, and our core operating return on tangible equity was 18.6%. Our core operating ROE was 12.4%. Pretax catastrophe losses for the quarter were $291 million from weather-related events globally with approximately 79% in the U.S. and 21% internationally. We had favorable prior period development of $247 million pretax in the quarter, split approximately 1/3 in long-tail lines, principally from accident years 2017 and prior, and 2/3 in short-tail lines. The current period included a charge for molestation claims related to reviver statutes of $155 million. Our paid-to-incurred ratio for the quarter was 83%. Our core operating effective tax rate for the quarter was 17.7%, which is slightly above the high end of our previously guided 2022 annual range of 15.5% to 17.5%. This was due primarily to growth in higher-tax jurisdictions and the negative impact of adverse market conditions on assets supporting certain employee benefit programs. With an updated forecast of income jurisdiction, along with the closing of the acquisition of Cigna's business, we now expect our annual core operating effective tax rate for the full year 2022 to be in the range of 16.5% to 18.5%. As you saw, we completed the purchase of Cigna's A&H and life businesses in Asia. Our expectations regarding the earnings and expense synergies from Cigna remain consistent with or better than previous disclosures. As a reminder, we reported an expected $450 million of core operating income, assuming a close date of January 1, 2022. With the acquisition completed July 1, we will have a full quarter of earnings in the third quarter. We now expect expense synergies to reach a run rate of about $100 million pre-tax, which is higher than our initial estimate. To achieve the run rate savings, we expect one-time integration costs over the next 2 years to be about $140 million.

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

We take our first question from Michael Phillips with Morgan Stanley.

Congrats on a solid quarter again, guys. First question is regarding accident years 2020 and 2021 and the nuances from COVID. So Evan, do you have any concerns about potentially higher-than-average late reported claims coming in later than expected for these two accident years?

I'm sorry, accident year 2020 but related to what again?

Yes, the two accident years because of COVID may be affecting late reported claims. Do you have any concerns that we might see more claims reported later than would typically be the case for those two years?

No, no. Not at all.

Okay.

I'll remind you, it's quite the opposite. When we accounted for the 2020 and 2021 accident years, we anticipated that those years would continue to align with our trends as we moved forward with inflation costs, and so on. We did expect that the reporting patterns of claims, and consequently the payments of claims, might occur later. However, we thought those accident years would behave in a reasonably normal manner; we simply didn't deviate from the trend. As a result, our reserves reflect all of that. I've been mentioning this for the past couple of years.

Yes. Okay. And then just a particular question on the segments, if I could. In Overseas General, I guess their production in Europe seems to be down a bit, and I just wondered if there's any particular nuances there in the quarter. Or maybe just some outlook in Europe for Overseas General?

Yes, Europe grew 12% on a constant dollar basis. There is the impact of foreign exchange, particularly with the euro and the pound. However, the underlying health and growth remain very strong.

Okay. So underlying is still strong in Europe and more just FX impact there as well?

Yes, you can find all the information in the supplement. Check the Overseas General page. I can't recall the specific page number, but you can look in the lower left-hand corner to see the growth by region. I might forget kids' birthdays, but I remember details like that.

We're moving forward to David Motemaden with Evercore ISI.

Just a question on North America commercial. The underlying loss ratio there, very strong improvement. Was most of that pricing coming in above the new loss trend assumption? Or was there anything else in there related to structured transactions or noncap property losses that impacted that ratio?

Yes. It's important to note that we are discussing earned data rather than written data. When you mention performance exceeding the new loss cost trends, it pertains to earned results rather than written ones regarding the loss ratio. The improvement is widespread and comes from nearly all product lines. The effect of structured transactions was minimal. Overall, we observed a broad-based rate improvement that outpaced the trend throughout our portfolio as it is recognized.

Got it. I appreciate the information on the loss cost trend changes. I was curious about the long-tail lines, particularly in North America and Overseas General. Was there anything specific in the environment, aside from general inflation, such as court reopenings or any changes in the legal environment that contributed to that shift?

No, there isn't anything specific. It's our assessment of the overall loss cost environment, considering the trends we've been noticing in both legal and nonlegal aspects. Additionally, we are factoring in inflation related to wages, medical expenses, and all other contributing factors. We're not focusing solely on current observations but are looking forward, anticipating developments, and staying proactive.

Got it. And a follow-up question is whether there is a significant difference between what you're observing and the new trend. Can you provide any quantification on how substantial the difference is between what has been seen and what is projected?

It really varies by line of business. There are both frequency and severity factors that influence loss cost trends in each line of business, and these can differ significantly. Overall, for proprietary reasons, I'm not going to disclose the specifics of what we are experiencing, but I can share that the trends we're using are likely more insightful than what you might find elsewhere.

We take our next question from Elyse Greenspan with Wells Fargo.

Evan, I was hoping to get some forward view just on the pricing environment, right? You guys said loss trend around 6.5%. The disclosure you gave on your pricing, right, is still above that trend level. And you pointed to concerns about inflation. We also have to deal with courts reopening, Ukraine, right? You listed things that you guys are concerned about. As you think out, how long do you think the pricing momentum and rate can stay on top of that loss trend?

Well, Elyse, if I could accurately predict the future, I wouldn't be in this business; I'd pursue something else. I can't foresee the future. However, from my perspective on market trends and the indicators that my colleagues and I observe, the market is becoming more competitive as companies seek growth in what is a reasonably rated environment. At the same time, I can sense how companies are reacting to low costs and inflation. There is a clear transparency in pricing and value selection in short-tail classes where they apply pricing factors like inflation and property values. The market seems rational to me right now, despite the increased competition. Rates, like anything else, cannot keep rising indefinitely. They've achieved a sense of adequacy in nearly all areas of our portfolio, so pricing needs to align with that. Currently, I view the market as rational and don't see indications that it's moving in the opposite direction. The rates being charged appear to be set up to yield reasonable results. Although there are instances of poor decision-making on the margins, those are isolated and anecdotal. Overall, I feel fairly confident, but that's about as much as I can share.

That's helpful. Now that you've completed the Cigna deal, what is the impact of the excess capital on your return on equity following that transaction?

Elyse, we're not going to update it every quarter. It doesn't change significantly. In the first quarter, we provided a number that took the Cigna deal into account.

Okay. And then one last one. Did you guys release any COVID reserves this quarter? I don't think you called that out, Peter.

No.

We take our next question from Greg Peters with Raymond James.

I guess I'm going to pivot to the investment income commentary. Evan, in your comments, you talked about being largely a hold-to-maturity investor or having that strategy. And then you also highlighted the sale of some fixed-maturity securities to take advantage of the new yields. You talked about the book yield being at 3.2%. If I were to infer from your commentary, it sounds like you might be accelerating the sales and shifting your strategy from the hold-to-maturity to more like a trading just to upgrade on the yields. But I want to put words in your mouth. Maybe you can give us some color on that.

I'm going to hand it over to Tim Boroughs and Peter shortly. However, I want to clarify something that I've seen mentioned in your writings. The term held to maturity is a specific accounting term governed by GAAP, and there are strict rules associated with it. If an asset is classified within the held-to-maturity portfolio, it is designated as a security that will not be sold, except under very specific circumstances like impairment. I see my Chief Accounting Officer looking surprised, but I remember those rules. Our strategy predominantly involves being a buy-and-hold portfolio. This means our intention, assuming no changes, is to hold these securities to maturity, although we do have the ability to trade if beneficial. In fact, we do engage in trading to capitalize on yield opportunities. Nevertheless, the overall approach is to hold the portfolio, and any losses will amortize back to par over time. Now, regarding our current position, I will turn it over to Tim and Peter.

Yes, this is Tim Boroughs. In this environment, with rising rates, we have a gap of about 150 basis points between our book and market yield. This is a great situation for bond investors. We're pleased with it. As new cash flow and maturities come in, for the first time in almost a decade, we are actually seeing an increase in yield. That's a positive development. In this environment, we will prioritize risk-adjusted returns. We won't chase yield and will maintain a strong focus on high-quality investments. The accelerated turnover, as mentioned by Evan, will happen within the same sectors from which those securities are sold. These tactical shifts are part of the investment income guidance provided by Peter and will not significantly affect the average credit quality of the portfolio. They will help in promoting the increase in book yield.

Got it. I guess just as a follow-up on that answer, just trying to understand the magnitude and the timing. I'm not sure you're prepared to give us much on that, but I had to throw it out there as a duty. Can you give us some sense of the magnitude you're talking about?

I would say, as I said, anything that we now contemplate is incorporated in the guidance that Peter gave. And the preponderance of the increase in the guidance, Greg, comes from net interest income. So I think that's the point.

Got it. Okay. My second question...

The only other thing I will add is it'll continue to accelerate from there.

All right. The second question will be on Cigna and Asia. We've observed some other large public companies in the insurance market, either accident health, supplemental health, struggle to generate growth in Asia in the last several quarters, if not the last couple of years. So you've talked about the return factor for the Cigna transaction. Can you talk about how you think about growth of that business over the intermediate term?

Yes. First of all, our Accident and Health business in Asia is significant, nearing a $1 billion valuation, and it experienced strong double-digit growth in the second quarter. Secondly, our strategy combining Cigna and Chubb focuses on generating value through two main areas. While improving efficiencies and reducing expenses is important, the key lies in generating revenue and earnings growth through the integration of the two companies. We are uniquely positioned in Asia with a combined life and non-life approach tailored to achieve accelerated growth on a country-by-country basis, surpassing what each could achieve individually. Both companies excel in direct marketing, and their combined customer databases enhance cross-selling opportunities. Additionally, we are planning to create unique products that merge life and non-life offerings, which will stand out in the marketplace. Our goal is to increase our share of marketing space through this unified approach. We expect to see modest growth in 2023, with more significant acceleration in 2024 and 2025. Lastly, we are shifting focus towards blending digital marketing with telemarketing, particularly in regions like Korea, Thailand, Taiwan, and Hong Kong. I recently visited the region, and the execution plans are detailed and actively underway.

There was some feedback at the beginning of your comments. And maybe the moderator has the mic open. It wasn't on my end. Just FYI.

Yes, I think there are some window washers actually outside my window, which really you can't make this stuff up. Oh, I didn't know. If I was garbled, you just tell me what I didn't get and I'll give it to you.

We take our next question from Yaron Kinar with Jefferies.

I guess my first question, I don't think you mentioned any Russia- or Ukraine-related losses. Are you seeing any of those and they're just not large enough to call out? Or are you just waiting to see kind of how this situation develops before putting up along?

They are not significant enough to highlight. Year-to-date, they're a negligible amount. These are losses for which we have sufficient information to assess as incurred and assign a dollar value. Naturally, we have greater exposure that we are monitoring, but I am confident that our loss estimates will take those into account.

Okay. With regard to raising the loss trends, it seems like you are ahead of many of your peers in adjusting the trends to where you have set them. Does that challenge your ability to grow at the pace you desire?

First of all, I can't comment on what my peers are doing with their loss trends. I also can't confirm if they are maintaining the same levels. What I can say is that, as always, we will set our rates to achieve a reasonable risk-adjusted return. If we're unable to make a profit, we won't take on the business. I don't believe this will put us at a competitive disadvantage at this stage in the market.

Got it.

As you go forward and things become competitive again, when and if it happens in the future, then of course, I'll trade growth all day long to be sure that underwriting continues to grow book value. I have not changed in 45 years.

We take our next question from Meyer Shields with KBW.

Two quick questions. First, Evan, in your prepared comments, you mentioned food and energy and security. And I was hoping you can give us a little bit more commentary on maybe the regions where that represents underwriting risk.

I don't think it presents a clear underwriting risk. It's not a straightforward relationship, but it does contribute to the overall environment we are experiencing, whether that involves inflation or recession and how it affects people, as well as social and political tensions that can lead to instability. It's essential to take all of that into account. It is part of the background noise of the risk environment. Therefore, you need to adopt a broader perspective initially, then focus on specific correlations when assessing individual risks. I also want to emphasize that we're not overly optimistic when we express confidence in the company's future. As we look ahead, we are confident in the factors we can control and our vision. We aim to maintain a positive outlook while considering the external environment as we perceive it today. That's my point.

No, understood. That's very helpful. I have a second question. Regarding the reserving process for recent accident years, how much of the increased cost trend that you mentioned is reflected in the current valuation of those accident year reserves?

Can you say that again? I'm not sure I fully understood what you said.

Yes, I may have misspoken a bit. You mentioned incorporating the new loss trend into pricing and accident year results. Does the reserving process also adjust the accident year 2021 when a line's loss trends increase?

Well, as we do individual reserve studies on each line of business, everything comes to play. So you first start with, how is it performing against frequency and severity, etc., against what you expected when you put it up? And also your future loss cost on that accident year, what are the trends you used versus your view of trends today? So all of it gets mixed into an analysis when you're looking at the study of any one cohort of business as we review them. I say it to you that way because you can't spike one thing out and then use some simplistic way to imagine because you're trying to go to adequacy versus inadequacy or any of that, and I'm trying to pierce through to that thought, if you're following me.

We take our next question from Brian Meredith with UBS.

Two of them here for you. First one, hopefully pretty quick, for Peter. I'm just curious, FX had a little bit of a headwind here from an earnings perspective also. Should we expect something similar here in the third quarter given where FX rates are?

Very hard to say, Brian, just because of the volatility around it. We obviously have a substantial international operation. You saw that in the revenue and the operating income numbers. I really can't judge. We don't hedge the operating businesses for FX. So what happens, happens. We do, do some hedging around debt and some of the other aspects.

Got you. And then, Evan, I was hoping we'd dig in a little bit into the whole loss trend situation you were talking about and the increase here. Is there any specific area that you're more concerned about? I mean if I think about it, there's been conversations about medical cost inflation ticking up, tort inflation as the court systems reopen. Any kind of signs that you're seeing that you say, wow, this is an area that we're concerned about and why we increased our trend assumption more?

Brian, I'll say it again. We're not seeing concerning trends across our business. We're anticipating an increase in response to future developments because the insurance business typically lags. To avoid being caught off guard, we aim to anticipate ahead. I don’t have specific areas of concern; we just remain vigilant about everything. Or at least, we try to be.

Got you. So does that mean that your business today, you would kind of view as rate adequate, but you still want to kind of be careful about what's going forward?

In my commentary, I mentioned that the rates we're charging for our business are primarily generating an adequate risk-adjusted return, which indicates that our pricing is sufficient. However, it's crucial to ensure that our rates keep pace with loss costs, particularly for the majority of our portfolio. Instead of relying solely on past data, we anticipate loss costs based on a combination of frequency and severity, which can vary by line and often acts as a lagging indicator.

We take our next question from Tracy Benguigui from Barclays.

Could you walk us through your process of setting combined ratio target to your underwriters? I'm thinking it's some derivative of ROE. So when you're coming up with these targets, are you basing that on new money yields or portfolio yields?

The portfolio takes a long time to turn over. So you know what? It's based on portfolio. And I'm not going to go through it, no.

Okay. Got it. All right. No, that's very helpful. I mean this is where I was going with it. According to broker pricing surveys, in your own book, you called out deceleration in casualty-related classes. So I was just trying to get a sense if part of the equation of casualty deceleration is because maybe others are pricing based on new money yields and they're weighing more in future investment income. But it sounds like you're taking a more measured approach, looking at the portfolio yields. Is that fair?

No, I think you’re misinterpreting this. Your perspective seems more academic than practical. If you believe that the market currently prices underwriters and trades based on calculated views of combined ratios using new money versus portfolio yield, let me correct that view. It doesn't work like that in reality, as the market pricing operates differently. The time it takes for others to analyze portfolios, assess results, and make decisions, and how that influences trading rates, is not as straightforward and doesn't align with your assumptions in most of the insurance industry.

We take our next question from Alex Scott with Goldman Sachs.

First one I had was on personal lines. The underwriting has been holding up quite well relative to what we're seeing across the industry. So I was just interested if you could provide any color on what you're doing that's allowed that to happen and if the maybe better price adequacy than some of your peers have will allow you to pivot harder to growth.

We have a unique portfolio focused on high net worth individuals rather than general market homeowners or auto. This positions us in a specific segment of the marketplace. Over the past few years, we have made significant adjustments in how we determine our pricing and the rates we charge, considering factors such as risk and geographic location. We have been proactive in addressing past deficiencies in pricing adequacy, which affected our growth. In the high net worth sector, both rates and the way we assess the values of homes and collectibles, as well as the inflation factors we consider, have been areas of focus. We have been disciplined in making necessary adjustments for inflation, which has been persistent in this sector, while many competitors have been slower to respond. Although we have lost some business because of this approach, I believe it positions us well moving forward, and we will continue with our steady strategy.

Got it. Second question I had for you is on capital management. I know you guys just closed the Cigna deal, so maybe a little early for me to be asking this type of question. But at this environment, it seems like the returns are quite strong, you're generating a lot of capital. I was just interested if you could update us on capital deployment priorities.

Capital deployment is steady as she goes. We will retain capital for both. We run a conservative balance sheet. We're in a balance sheet business. We're in a risk business. And we will retain capital for risk and volatility, and we will retain capital for growth opportunities, organic and inorganic. And the money doesn't burn a hole in our pocket, and we've been awfully good stewards of capital. I think our history shows that. No change to policy.

Hello?

We went blank.

Yes. Okay. Well, thank you. At this point, we want to thank everyone for joining us today. If you have any follow-up questions, we'll be around to take your calls. Enjoy your day. Thank you.

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