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Chubb Ltd
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Good day, ladies and gentlemen and welcome to the Chubb Ltd. Fourth Quarter Year-End 2018 Earnings Conference Call. Today's call is being recorded. There will be a question-and-answer session at the end of today's prepared remarks. [Operator Instructions]
For opening remarks and introductions, I would like to turn the conference over to your host, Karen Beyer, Investor Relations. Please go ahead.
Thank you and welcome to our December 31, 2018 fourth quarter and year-end earnings conference call.
Our report today will contain forward-looking statements, including statements relating to Company's performance and growth, pricing and business mix, and economic market conditions which are subject to risks and uncertainties and actual results may differ materially. Please see our recent SEC filings, earnings release, and financial supplement, which are available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings press release and financial supplement.
Now, it’s my pleasure to introduce our speakers this morning. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft, our Chief Financial Officer. We'll then take your questions. Also with us today to assist with your questions are several members of our management team.
And now, I will turn the call over to Evan.
Good morning. As you saw from the numbers, we reported core operating income in the fourth quarter of $2.02 per share. The quarter was marked by greater volatility from elevated natural catastrophes around the world from a variety of perils and from increased property loss activity in the U.S. On the other hand, we had strong premium revenue growth, enjoyed improved commercial P&C pricing globally, and produced record net investment income. Core operating income was $935 million and included $506 million of after-tax CAT losses, compared with a $1.5 billion income last year, which included a tax benefit of $450 million and tax of $331 million.
Simply, to give you a sense of underlying strength, excluding CATs and the tax benefit, core operating income per share in the quarter was up 6.5% over prior. Our published P&C combined ratio was 93.1% and included 8.5 points of CATs on the combined. On a current accident year basis, excluding CATs, the combined was 88.3% versus 86.4% prior year. The accident year was impacted in the quarter by elevated large loss activity in our U.S commercial property portfolio in both our major account and E&S businesses, as well as in our middle-market division. And this added about 1.4 points to our combined ratio. From what we can see, this is simply volatility or variability in a short period result, not a trend.
We also continued to experience elevated losses in our U.S. homeowners’ book, which we have discussed in some detail with you. We are on track with the pricing, product and underwriting strategies that we outlined on last quarter's call. Given, the state-by-state regulatory nature of this business, it’ll take some time to show through in the results on a run rate basis.
On the plus side of short-tail activity, our combined ratio in the quarter included a strong contribution from our crop insurance business as well as positive pretax prior period reserve development, which benefited by $130 million from a one-time reinsurance settlement in our legacy A&E runoff liabilities. Premium revenue growth in the quarter was 5.8% in constant dollars and FX then had a negative impact of 1.6 points, bringing the published growth to over 4%. The pricing environment overall improved over the third quarter in a number of our businesses. And this momentum continued into January with much better tone in actual rate movements compared to the fourth quarter prior year. In fact, in terms of price movement, globally, this was the best and most broad-based quarter of the year and the best in several years. We are also seeing more dislocation in certain markets and that means opportunity.
For the full-year, our growth was 4.4%. Geo-economic environment notwithstanding, I expect we will at a minimum, maintain that range in constant dollars and with some variability quarter-to-quarter. There is a great deal of optimism and positive energy across the company. Net investment come in the quarter was $903 million, was up about 3.5% and contributed to net investment income for the year of $3.6 billion, both were records. Our results are being driven by strong positive cash flow and higher reinvestment rates that now exceed our current book yield and are beginning to benefit from an improving interest rate environment.
Core operating income for the year was $4.4 billion or $9.44 per share, up 18% on a per share basis from ‘17. Earnings were split between P&C underwriting income of $2.6 billion and adjusted pretax investment income of $3.6 billion. For your information, pretax CAT losses for the year were $1.6 billion, about $700 million more than we planned for when calculating our expecting CAT amount. Our earnings led to a core operating ROE of 8.7% for the year or 9.8% on an expected CAT basis. For the year, the P&C combined ratio was 90.6% compared to 94.7% prior. And on a current accident year basis, excluding CATs, the combined ratio for the year was 88% versus 87.6% prior year.
Book value per share was down about 0.5%, and tangible book per share was flat, unfavorably impacted by the mark-to-market effect of rising interest rates and foreign exchange. Adjusting for the mark, book and tangible per share were up 2.7% and 5.8%, respectively. Phil will have more to say about investment income, book value CATs and prior very development.
Turning to growth and market conditions. Commercial P&C pricing and underwriting for the business we wrote in the quarter, was as good or better than what we saw in the third quarter and overall for the year, and materially better than this time last year. The industry and Chubb is no exception, is experiencing margin pressure in numerous classes and an improving rate environment, particularly in the U.S. and the London wholesale market is important. I hope it continues to improve and spread because rate is needed in other markets.
I mentioned at the opening that we began to see some signs of dislocation on the margin in the market as some carriers curved their appetite for certain lines of business by reduced line sizes or exiting from markets altogether. That's another marker of affirming or market correction. In North America, the positive pricing trends in the third quarter continued, in fact improved in several areas, particularly in our major accounts, retail and E&S wholesale divisions. Overall, rates in North America were up about 2.5%, the same as last quarter, while renewal price change, which includes exposure, was up 4%. Retention of our customers remained strong across all of our North America commercial and personal P&C businesses. Renewal retention is measured by premium of nearly 92%. In major accounts in specialty which doesn't include agriculture, premiums were up 5%. Rates for major accounts were up over 3 with risk management at rates of less than 1%, while excess casualty rates were up 10%, property was up 12% and public D&O was up 8.5%.
In our Westchester specialty business, rates were up 4.5%. In our North American middle-market and small commercial, premiums overall were up over 4.5% the quarter, our best growth in many quarters. New business was up almost 14% with a meaningful percentage of that coming from growth initiatives. Renewal retention in our middle-market business was 90%, middle-market pricing which includes rate and exposure change was up 2.5%. In our U.S. small commercial business, premium revenue continued its positive growth momentum with net premiums up almost 30%.
In our North America personal lines business, net premiums in the quarter declined 2.5%. In the quarter, we added California to our existing homeowners quota share treaty, effective 10/1. And this impacted growth by 4.2 points. Excluding premiums paid to reinsurers, premiums were up 2.3%. Retention remained very-strong at about 96%. Homeowners pricing was up 7.5% in the quarter, which included again, both rate and exposure change. Our North American agriculture business had a very good year, highlighted by a full-year combined ratio of 75.5%, which is about flat with prior of 74%. Our crop insurance business is a great franchise and we are the clearly leaders.
Turning to our overseas general insurance operations, a $10 billion business. As I mentioned, we experienced excellent growth this quarter in our international P&C division. Net premiums written for our international retail division were up 8% in constant dollars and FX then had a negative impact of 4.5 points. This compared favorably to year-to-date constant dollar growth of about 6%. Growth was broad-based. Asia-Pacific and the Latin America grew 10% and 8.5% respectively, while the Continent was up over 5%, UK-Ireland was up 4%. We benefited from our growth initiatives and improved price environment, in certain markets, particularly London and Australia.
Net premiums for our commercial P&C lines overall, international retail were up 8.5% in the quarter with strong growth in particular coming from our middle-market and small commercial initiatives. Net premiums for our London market wholesale business were up 12% in the quarter in constant dollars. This business is growing again, on the back of improved pricing after several years of shrinking. It’s an excellent example of how Chubb is nimble and can quickly take advantage of changing and dynamic market conditions. As for pricing conditions outside the U.S., rates in our international retail and London wholesale business vary by line and by country.
Overall, rates in our retail were up 4%, the best in some time, though concentrated in a few countries and lines of business. For example, property was up 5% and professional lines were up 7%. Rates in our London wholesale business were up 10%. International personal lines premiums were up 8.5% in constant dollar, driven again by Asia and Latin America with growth of 19.5% and 9.5%, respectively.
And finally, our Asia life insurance business had an excellent year with premium revenue of $2.4 billion and earnings of over $100 million. John Keogh, John Lupica, Paul Krump, Juan Andrade and Ed Clancy can provide further color on the quarter, including current market conditions and pricing trends.
In summary, Chubb performed quite well, despite a quarter of greater short-tail volatility. We have a good momentum and it’s continuing to build in terms of executing on our growth initiatives and taking advantage of an improving pricing and underwriting environment in the U.S., London a few important territories. Our organization is optimistic about the year ahead, and we are off to a good start.
With that, I'll turn over to Phil and then we’re going to come back and take your questions.
Thank you, Evan.
We completed the year with a strong balance sheet and an excellent overall financial position with total capital of over $63 billion. Even with significant catastrophe loss payments, our operating cash flow was quite strong at $1.6 billion for the quarter and $5.5 billion for the year.
During the quarter, we returned $654 million to shareholders including $336 million in dividends and $318 million in share repurchases. For the year, we returned over $2.3 billion to shareholders, equaling 54% of our earnings, including over $1.3 billion in dividends and over $1 billion in share repurchases. Also, during the year, we issued $2.2 billion of debt in the European markets, paid off $1 billion of debt that matured throughout the year, and redeemed $1 billion of hybrid securities, which together, reduced our annual interest expense run rate by approximately $47 million.
Net realized and unrealized losses for the quarter were $958 million after-tax, which included $383 million of losses in the investment portfolio, reflecting the widening of credit spreads on corporate fixed income securities late in the quarter, partially offset by declining interest rates. Since December 31st, the mark-to-market gain on the portfolio is in excess of $900 million. We also had unrealized losses of $205 million related to the annual review of our retirement benefit plans and mark to market loss of $263 million on our variable annuity portfolio, principally driven by a decline in the equity markets, and $95 million loss from FX. Since December 31st, the mark on VA portfolio is a gain on $65 million.
Since the Chubb acquisition, we have reduced our dilution on tangible book value per share from 29% to 9%, an improvement of 20 percentage points. Since December 31st, the dilution improved to 6%, based on market movements in the portfolio. If we had included the fair value mark on our private equity portfolio in our operating income as others do, core operating ROE for the year would have been 9.5% compared to the reported 8.7%. Our adjusted net investment income for the quarter was above our expected range due principally to higher private equity distributions and higher reinvestment rates.
While there are a number of factors that impact the variability in investment income, including interest rates and private equity distributions, we now expect our quarterly adjusted net investment income to be in the range of $880 million to $890 million. We had a favorable prior period development in the quarter of $253 million pretax or $202 million after-tax. This includes pretax favorable prior period development from our legacy runoff exposures of $22 million, comprising adverse development of $108 million, principally related to asbestos, offset by a favorable reinsurance settlement of $130 million. The remaining favorable development of $231 million was split approximately 60% from long-tail lines, principally accident years 2013 and prior, and 40% from short-tail lines.
On a constant dollar basis, net loss reserves decreased $661 million for the year, reflecting the impact of catastrophe loss payments and the impact of favorable prior period development. On a reported basis, the paid-to-incurred ratio was 102% for the year. After adjusting for the items noted above, the paid-to-incurred ratio was 93%. Our core operating effective tax rate for the quarter was 17.1%, driven in part by catastrophe losses, which were incurred in lower tax jurisdictions, as previously disclosed.
Our full-year operating effective tax rate was 14.4%, in line with our range of 13% to 15%. For 2019, we expect our annual core operating effective tax rate to be in the range of 14% to 16%. There has been a report that the tax deductibility of our intercompany debt will be affected by the provisions of the tax law that impact hybrid debt. That is not true.
I’ll now turn the call back over to Karen.
Thank you. At this point we'd be happy to take your questions.
[Operator Instructions] We'll hear first from Kai Pan from Morgan Stanley. Please go ahead, sir.
Thank you and good morning. Evan, you mentioned that the larger property loss in commercial line, you considered one-off. Can you give a little bit more details, what gives you confidence it’s one-off rather than a trend?
There is just variability -- there was a variability of frequency in North America larger losses in a very short period of time. I mean, it’s just a deviation, and it wasn't a huge number of losses but it has an impact. And, there is nothing we see in the underwriting that leads us to believe, and there is nothing we see in data that leads us to believe that’s trend. It’s just you can have quarter-to-quarter volatility, and we had more volatility. So, that’s what I can tell you. And beyond that, we've been -- short-tail lines need rate. And we have been achieving rate full year, actually began in ‘17, and that continues into the first quarter and that too has an ameliorating impact. And in fact, we are achieving rate that achieves or exceeds trend. So, that’s all beneficial.
My second question on the catastrophe losses. You mentioned that without catastrophe, your ROE would have been 9.8% for the year versus 8.7%. So, my calculation points to probably -- implies 4 points of normal CAT load. I just want to make sure my math is right. And also, given the elevated losses last few years, do you think that that’s still a good run rate going forward? Are you taking any actions in terms of reinsurance coverage potentially could mitigate the CAT exposure?
We’re constantly managing our portfolio and it’s dynamic in terms of how we protect. And so, I’m not going to give any forward-looking on that. But, that’s something that we constantly are engaged in Kai. And as far as what to expect, look, we work on longer range period than just a couple of years and looking at what's expected CAT. So, the last two years have been elevated. People have short memories. I'll remind you that the four or five years prior to that, had far lower CATs. And yet we don’t adjust the number of expected down to that; you're using a longer-term average, 10 to 15 years. The most recent years become a part of that average. And so, they reflect that experience for both modeled, and the way you project non-modeled and put a factor on that as well. And so, that's what informs how we look at CAT loss over a longer period. And so, it has more stability to the expected number.
It’s just editorialize one step further to imagine that well, the last two years, now climate change has arrived and boy, this is the new normal. Well, what would you have said about the four or five years prior to that? I think, it’s simplistic thinking to imagine on that basis. I think, longer term averages have a bit more stability to them. It’s sort of like the same as looking at quarterly result variability in short-tail versus looking at the annual current accident number, which is a far more credible number.
We will hear next from Mike Zaremski from Credit Suisse.
Thanks. Good morning. A follow-up to the question on the CAT load. Given, there was a merger that took place, do you know -- could you tell us what your 10 to 15-year average has been? Because the math that some of us have done here points to the 10 to 15-year average being 30% or so above what your expectation was in 2018 in terms of the CAT load?
Well, I don't know what your math is; I can't comment on that. I only know how we do our own math and to imagine modeled and non-modeled loss. So, what I can’t do is on this call engage in here is my math versus your math. But, you are free to call us and tell us about your math. And while some of this we disclose, some we don't, we’ll discuss it with you.
And so, my next question is regarding relationship of commercial P&C pricing versus loss trends. We always appreciate your insights…
By the way, I’m confident in my math. I just thought I’d put that out to you. But, go ahead.
Okay. That’s fair. So, yes, regarding pricing versus loss trend on the commercial side, we’re always trying to parse whether you feel the -- clearly improving rate environment is largely due to just the industry reacting to higher loss trends or do you feel that Chubb could potentially see some margin improvement, if commercial rate environment hovers around the current levels?
No, I don’t see an improvement.
That’s simple answer. And maybe one quick follow-up to that, some -- is number of [multiple speakers]. That’s fair. One more in, a lot of management teams including yourself have talked about a more legal -- active legal bar, and some teams have also talked about the rise of third-party capital backing lawsuits, some people call litigation finance or finding. Do you think that having -- that asset class is having impact on the insurance industry’s loss trends?
On the margin, I think only on the margin.
[Operator Instructions] We will hear from Elyse Greenspan from Wells Fargo.
My first question is going back to where Kai was asking about the higher non-CAT property losses in commercial lines. I know you made the comment that it seemed just due to the variability to be a one-off quarter. Did you see non-CAT property elevated in any of the other quarters of ‘18? And then, could you also give us a sense -- I know it’s only one month and we’re just into February. Do you have a sense that the level of losses reverted back to normal in January?
Yes. The answer on January is, yes. But Jesus, it’s one month and hardly a credible period. And to answer your other question, it was basically fourth quarter. We saw little bit in late third quarter occur, and then it was fourth quarter. And January, sure -- but that's a fool's game. And by the way, Elyse, you’re really -- when you’re looking at something like property, and let’s keep in prospective, we write -- what, in North America about $4 billion -- sorry, about $2.4 billion of property business. So, a very large portfolio, we have a lot of experience with it. The variability quarter-to-quarter is not that unusual. Obviously, it's a short period of time. It's not that credible. The annual period is far more credible. Anyway, I think I’ve answered your questions. And please don't take one month of January, better as well; it was -- it’s a month.
I get that. That was helpful. And then, in terms of homeowners, you pointed during your prepared remarks, it takes time for with the states to get the rates into the system. Would you expect to start to see the margin improve in the first quarter or is that something that we should start to think about seeing more of the underlying margin improvement coming later in 2019.
We were pretty clear when we talked about it in the third quarter to you that it would be something in the latter part of ‘19, we should begin to see it come through on a run rate basis, all things being equal.
And then, my last numbers question, you guys bought more reinsurance timely for in California this year, at the start of the quarter. Can you give us a sense of your gross losses for the California fires? And then, how did the gross loss in 2018 compared to the gross losses that you guys saw from the fires in 2017?
We didn’t -- and it was really a miscommunication in here. We didn't publish a CAT page but we are going to give you a CAT page and put one out to you, so you can see by CAT how it breaks down, and we're giving you the net. The gross number is not applicable really to an investor's view of the company, and that is what impacts our balance sheet and financial statement. And so, we will give you what you need for that.
We’ll hear next from Paul Newsome from Sandler O'Neill.
I was hoping you could maybe just add on to the high net worth environment. We still seem to have -- personal lines front -- we seem to have still a large number of new entrants into that market. I’m just interested if there's been any really change in that competitive environment, seeing how it does feel like there is a lot of folks that are announcing new efforts?
I’ll ask Paul Krump to comment on that. From my point of view, we don't see a change of any consequence in the competitive environment over the last year. It’s pretty stable that way. You get new entrants who come in and they are particularly in the mass affluent category, not the true high net worth. They don't have the coverages and the services and the capabilities to really manage that market. And when they come in, they got one thing to offer in a segment of the market that is I would say, in some ways -- it’s the price-sensitive end of the market. And in there where coverage matters or service matters less, on that one way and that’s to under price the business. But we’ve seen that for a while and it’s on the margin. But, Paul, do you want…
Evan, I agree with everything you just said. Just to try to put some more color around it. Our retention in the homeowners and PRS space is 96%, it’s actually even better on the high net worth, the real wealthy homes, what will recall premier and signature. So, we do lose a couple of customers through that, and we’re trying to figure out how to stop that but can’t. So, I can’t -- maybe on two hands I could count the number of accounts that we lost to any new entrants in the last 12 months. They are definitely going after the low-end of the market. And if you look at the writings, I think you'd be shocked that how little traction they are getting in new market. It really is a service game and agents and brokers are very conscious of that. It’s not just one-off fire loss they worry about, they worry about what happens in the big capitals and then there are hundreds if not thousands of claims to handle.
And I would say this. We don’t -- we're not arrogant about it, we’re not at rest about it. It’s like everything else in the world. Service has to constantly improve; your standards of service must constantly improve. Coverages have to be constantly improved. You’ve to be able to offer more choice to customers. Some who want to buy a full boat of coverage and some who want to buy something a little later. And you’ve got to be able to do this in a digital world where the customer service and experience represents that. And the same thing with marketing and sales. And we’re continuing to iterate and crank up our capabilities in all of those areas because we think there is -- and remains a large opportunity in this marketplace.
And second, I wanted to ask about the accident health business. We haven't talked about that in quite some time. At one point it was a huge focus for the old Chubb to have it, I think as much as 25% of the revenue…
I think you mean…
You’re right. And I was curious is that -- is it still an idea to have or a goal to have that kind of high percentage of the -- in each business in the new combined entity?
Yes. When you look at -- which I know you did, our investor deck and you look at growth lines, and I believe from memory, 31% on pie chart that would grow high single to double digit, you saw the accident health business as one of those areas of business. And in Asia and Latin America and in North America, in particular, the growth rate is improving in that business and will continue to improve in ‘19. And a lot of the distribution that we have, deals that we have made over the last year, including what we just announced as Banco de Chile, will directly benefit that accident and health business. And so, it is a growth area for the Company. And our objective is to increase because if it is growing at high single to double-digit, it will increase -- continue to increase as a percentage of our total business. Because it’s a specialty and a capability of ours; it’s deep in our DNA. And by the way, whether it is in the combined, in the U.S. where we reinvented in our growing, our worksite benefits businesses, it’s now $150 million premium from nothing that’s growing at serious double-digit to serving the lower middle income with -- to grab, which is the largest -- which is the Uber of Southeast Asia or DBS’s customer or Banamex’s customers or Banco de Chile or many other sponsors that we have on a direct marketing and digital basis, it’s the full boat.
Moving next to Yaron Kinar from Goldman Sachs. Please go ahead.
Two questions on North America commercial. So, the first, I just want to confirm that the 1.4% impact from adverse property claims experience or loss experience, that’s consolidated, right?
Consolidated?
On total P&C.
Total P&C, sorry.
Sorry. Yes on total P&C. Yes, we did post the number.
So, if my math is correct, it would suggest that the accident year loss ratio excluding the elevated property office actually improved year-over-year. And if that is correct, could you maybe talk about what's led to that improvement? Is it earned rates, is it something else that’s driving that?
Are you saying the accident loss ratio on the total business?
No, on North America commercial, excluding the property deterioration.
Excluding the property deterioration, and are you looking at the combined ratio or the loss ratio?
No. The accident year loss ratio for North America commercial.
We will take that offline with you and go through that with you. I'm not sure I'm completely relating to that number, the way you’re saying it. And it would be very modest and it would be likely mixed related. But before I jump to that we’ll take that off line with you.
Okay. Thank you. I appreciate that. And then, my second question on North America commercial, Evan, in your comments, you talked about the rate increases. It sounds to me like you may be actually leading the rate increases here, maybe a little bit above industry here. And if that is the case, would you expect that to impact the growth -- the top line growth over the next few quarters as maybe the industry tries to catch up?
A couple of things. One, the industry -- I would glue it together this way. You saw the fourth quarter growth rate. And in January, our growth relative to our own plans was good. And we were on or over or exceeded our plan in the first -- in the month of January. You don’t know our plan and we don’t disclose it. And, we got better rate in January or the same rate; it varied by line that we -- particularly in North America and in our wholesale business that we saw in the fourth quarter. And our renewal retention is good. So that implies to me the industry environment is improving as well. And you have a couple of things going on. You have not just driving for rate but you companies reacting to the loss environment, to the pressure by reducing limits in areas or competitors depends on the area withdrawing from a line of business. That starts to -- that plays with the supply-demand part of the dynamic of the market. Okay? So, you’re only thinking just in terms of rate. And that’s why it is trying to signal that there is more than that going on. But, you see our retention rates, you see our business, and yet we’re pressing for rate adequacy. Anyway, I think, that's the best way I can explain it to you.
Jay Gelb from Barclays, your line is open.
Based on the commentary that Chubb is off to a good start in 2019, and if I look back over the past three years, there is remarkably stable underlying accident year combined ratio. Given the pricing is improving, should we expect that trend on the accident year combined to be the same in 2019, the same or better as 2018?
I wouldn't look for an improvement. What I have said is that remarkably stable. Remarkably stable rate on some of the business, particularly in short-tail is achieving or exceeding trend, which it needs to do, which is beneficial. In long-tail lines, it varies. There are many classes where rate is not keeping pace with loss cost trend. We constantly are exercising portfolio management, used reinsurance and mix, and so therefore mix of business to balance it. But, this is a risk business. And I wouldn't imagine -- and I don't imagine that you just pick a combined ratio and that's a static number. It has variability around it. And so, I would say, what you see is what you get within a reasonable range of deviation. That’s all.
Right, of course, okay. And then, separately, given the strong operating cash flow for full-year 2018, I believe you said around $5.5 billion, what would you quantify as Chubb’s excess capital position as of year-end?
What we have said is that the impact of the excess capital on a full-year basis would strip about 0.5 point off of our ROE. So, you can do the math.
I hope so.
I trust you buddy.
We’ll hear next from Brian Meredith from UBS.
Just first one, Phil, I’m just curios, tax rate guidance; it looks like it’s actually up a little bit on year-over-year basis. Is there anything to that; is it just mix business, something else going on geographically?
There is two things. One is, in the past two years, we’ve had some compensated related deductions, and we don't expect them -- compensation related deductions that we don’t expect to recur. And we’re going to have lower tax exempt income. We’ve sold about $4.4 billion of our municipal bond portfolio. And as we look at the after-tax yields, we would expect that some of that will continue. Remember, that doesn’t take away from our income because our after-tax yield is going to be higher based on the judgment to sell the munies.
Got it, makes sense. And then, I noticed that administrative expenses on a year-over-year basis were actually down this quarter. Was that FX-driven, was there anything else going on?
It’s principally just timing, as we look at it. There is nothing specific that I would point to, it’s just going to be variable and it’s a timing issue.
And just lastly, Evan, on the small commercial property thing. If I take a look at your North American commercial, your underlying combined ratio for the year was pretty much flat to down modestly. Is that the way we should kind of think about how the business is going to perform? And you’ll have some ups and downs every quarter, I assume.
Yes. You should think about it and you can see it, if you look at past years. There is a variability -- there is a little more in this quarter than it is in the recent quarters. But, you’ll have some variability by the nature of the business. It’s a risk business. So, that can just happen. Of course, we’re underwriters. And when we see a spike in something, we take a pretty close look. We want to know what an early -- what that’s telling us and is it -- is there something that is changed in our business or is it just a natural variability that you continue. But we more judge then on a longer period and at an annual period of time it’s a more stable measure obviously than one three-month period. And so, again when we look at this, we judge it from everything we can see as just a deviation around the mean, and the annual was more stable period. Look, I expect and it doesn't surprise me, given the nature of the business. It’s a risk business that you see some variability.
I just want to make sure because if you strip out that…
Casualty? I got to tell you, I have a whole different view [multiple speakers] one-off large loss of some kind. But, if I saw a frequency or casualty, that’s a whole different story.
That makes sense, because you strip out that large loss all of a sudden, your underlying combined ratio in North America looks way down on a year-over-year basis. And I just want to make sure, that’s not kind of way to model off of.
Yes. I don’t think that’s the right way. And we will take it offline and do some work with you about those.
We will hear next from Meyer Shields from KBW.
I just wanted to follow up on Brian’s question, we saw particularly lower admin expenses year-over-year in North America commercial and personal. Is that also just randomness or is there some connection to the elevated losses?
No, no connection to the elevated losses. It is a randomness, quarter-to-quarter.
And Evan, I was hoping you could take us through the thought process of buying more quota share protection in California homeowners over excess?
Well, we -- it benefited the Company. Look, we wanted to reduce our exposure and balance our exposure in California where we have a lot of concentration in both CAT and non- CAT modeled and non-modeled CAT. We did -- the quarter share was initially purchased for the New England states and the Northeast where we had -- we have an usual amount of concentration. We weren’t simply trying to balance CAT but the exposures of non-modeled CAT is well like, just frequency of winter losses that you had in the Northeast and the impact it could have on the total book when we put all these books together. So, it was really looking for to spread the risk of the ground up concentration, not simply a single event concentration, or the losses produced because of the concentration from a single event. And that was the reason for purchasing the Northeast quota share. And it made sense to us to extend that then to California as well. And we gave the reinsurers a better balance; they were concentrated in just one territory.
Larry Greenberg from Janney Montgomery Scott, your line is now open.
My question also is on the underlying and commercial North America, and you’ve probably given me enough to answer it. But I’m going to still ask...
Then, why you’re asking me, Larry.
Because I’m not sure if I know the answer. But, let me just ask it this way. The underlying loss ratio deteriorated by about 60 bps for the year. And over the course of the year, you've called out some things, you actually called out some things last year as well. But, would you say the 60 bps is fairly representative of the price versus lost trends in the business?
Perfect, perfect.
Okay, thanks.
There is gravity. Yes.
Okay. And then, the expense ratio improved more this year than at least I was thinking. And I would say, maybe you guys had indicated coming out of last year. And is that just kind of operating leverage in the business, are there any other explanations to discuss there?
Larry, there is -- I’m going to give you three answers. Number one, we had the runoff, if you will, of all the projects we have put in place since the merger. And those had some runoff final benefits that emerged in the year. We have a constant expense control in here. And yes, there is one-off items that benefit the expense ratio during the year. But, every year we have one-off items. They vary by quarter and that sort of thing. But, there always seems to be a number of them; it’s just the nature of the business. So, but the first two I gave you are really the enduring drivers of it. Expense ratio is part of strategy.
And at this time, we do have time for one final question and that final question will come from Ryan Tunis from Autonomous Research. Please go ahead, Ryan.
Just a couple for Evan. I guess, first of all, thinking about casualty line in North America commercial, how do you feel about loss trend today versus maybe a year ago? Do you feel like there is more pressure, is the pressure alleviated some?
It’s about stable. We haven't seen -- over the last year, we haven't seen a change in loss trend from...
Is it still mostly limited to the management liability lines or have you seen it creep at all into excess casualty or...
No, not -- the way you’re asking it, I want to make sure we have clarity here. What you're asking about change in loss trend, and I'm responding to change in loss trend but -- and that’s stable. But, there is a loss trend to every line of casualty. I mean, I could tell you that middle-market, our comp business, the frequency is stable, so is the loss -- the severity trend but it has a trend of calling our book of over 5 points -- 5%. So, it’s real. Excess casualty, excess casualty has a loss trend to it, whether it's major account or it’s middle-market, all casualty does. And so, loss costs go up every year. But, the trend is stable.
The trend is stable. Got you. And on the personal line side, I appreciate it’s going to take some time for your rate increases to earn in. But, would you say the loss activity has -- is that still getting worse at this point and you’re still kind of trying to pin that down...
No. I would say and we were just looking at it yesterday, looking month by month actuals versus expected. The frequency and severity, average severities by cause of loss, we believe they have stabilized; we’re seeing it stabilized. We're not still trying to get a handle on it. It has stabilized, we see it. And it is a clear trend we have seen for a period of time. And so, we know the target we’re shooting at.
And at this time, I would like to turn the conference back over to your host, Karen Beyer. Please go ahead, ma’am.
Thank you all for your time and attention this morning. We look forward to speaking with you again next quarter. Thank you and have a good day.
That does conclude today's teleconference. We thank you all for your participation.