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Poor P&C ROEs create opportunities for 'garbage collectors,' says Chubb CEO

A perceived rise in adverse development covers around the property and casualty industry has not gone unnoticed by Chubb Ltd. Chairman and CEO Evan Greenberg, who said Feb. 1 that he has no interest in participating in those transactions as either a buyer or seller.

"This is an industry where you look at the ROE ... and the mean is poor," he said in response to an analyst's question during a conference call. "On one side of that mean are those who outperform, the other side those who underperform. And those who underperform, they generate a lot of garbage, and so the garbage collectors come around."

Neither Greenberg nor the analyst referenced any of the participants in the adverse development covers by name. The question, however, referenced large deals that are "back in a way we have not seen in almost 20 years" and followed the January announcements of separate retroactive reinsurance deals between Berkshire Hathaway Inc.'s National Indemnity Co. and American International Group Inc. and The Hartford Financial Services Group Inc.

Among the providers of cover, Greenberg said, a "couple of guys" have been "pretty good" at running that business. He said it would make "no sense" for Chubb to pursue that sort of cover.

"I can't imagine that we'd be in a position where it would make sense for us to give up a substantial percentage of our loss reserve asset and its future income because we didn't have the risk management and the control and knowledge of our business that would be so insecure we would have to give up our portfolio that we shrink our balance sheet that way," Greenberg said.

He explained that some "more aggressive" underwriters in the industry tend to sell "very broad" coverages at "cheap prices" at certain points in the P&C cycle without sufficient command and control in their underwriting practices.

"And so they get surprised," Greenberg said.

He emphasized that Chubb had remained disciplined in a globally "soft" commercial P&C market that has been characterized by increasing levels of competition that varies by line and class of business.

"The industry capital base continues to expand from a combination of retained earnings and new investors," Greenberg said. "So, globally, new business remains harder to come by. It is a hungry market, and competition is fierce for new business." Terms and conditions softened "a bit in a number of classes," he added.

Greenberg said renewal pricing during the fourth quarter of 2016 was flat for Chubb's U.S. middle-market commercial lines business and down 2% in its U.S. major accounts and international retail commercial businesses. He noted that Chubb's renewal retention rate remained "quite good" during the quarter and said the franchise, one year removed from the completion of the merger of legacy ACE Ltd. and Chubb Corp., is "built to outperform."

Chubb recorded a $78 million charge for its asbestos reserves, one of the risks most commonly addressed in the Berkshire Hathaway adverse development covers, in its fourth-quarter 2016 results. More broadly, the company posted what Greenberg characterized as "simply excellent" underwriting results for the period.

Greenberg also commented on recent U.S. political developments during the call, saying it would be a "mistake" for the country to shut its doors to immigration.

"While early days, I am concerned about our own country's potential trade and security posture," he said. Greenberg added that talk about corporate tax reform and a reduction in regulation represents a "real positive," but he believes the country's openness to immigration "is fundamental to our identity and history as a nation and vital to our future prosperity."