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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day. And welcome to the Chubb Limited Fourth Quarter Year End 2017 Earnings Conference Call. Today’s call is being recorded [Operator Instructions]. For opening remarks and introductions, I’d like to turn the call over to Helen Wilson, Investor Relations. Please go ahead.
Thank you. And welcome to our December 31, 2017 fourth quarter and year end earnings conference call. Our report today will contain forward-looking statements, including statements relating to company performance, pricing and business mix and economic and market conditions. These are subject to risks and uncertainties and actual results may differ materially. Please see our most recent SEC filings earnings press release and financial supplement, which are available on our Web site at investors.chubb.com for more information on factors that could affect these matters.
We will also refer today to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most direct comparable GAAP measures and related information are provided in our earnings press release and financial supplement, which are available at investors.chubb.com.
Now, I’d 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’ll take your questions. Also with us to assist with your questions are several members of our management team.
And now it’s my pleasure to turn the call over to Evan.
Good morning. As you saw from the numbers, we reported fourth quarter core operating income of $3.17 per share, up about 16.5% from prior year. These results were impacted positively by the U.S. tax reform law at the end of the year and negatively by the California wildfires, which included the two largest fires in California history. Those items aside, our company’s results were highlighted by excellent underlying or ex-CAT underwriting performance in every division and improving commercial P&C pricing conditions in a number of our businesses globally, leading to what should be a more favorable underwriting environment in ’18 for many of our businesses.
Our premium revenue growth for the quarter, excluding merger related actions, was 3.7%. Headwinds to growth related to these actions are almost all behind us, about $150 million remains or less than 0.5% of annual net premiums. That along with the strong economy both domestic and global and with an improving pricing environment makes us quite optimistic about our growth prospects for the year ahead.
Tax reform will benefit our economy and our company will benefit from both the lower corporate rate and additional exposure growth as the economy and therefore insurance exposures grow. Our quarterly operating income included a one-time $450 million tax benefit related to tax reform. And we will benefit in the future from a lower overall corporate rate. We chose to share a portion of the benefits of tax reform to make a difference in society with the contribution to the Chubb Charitable Foundation of $50 million.
For the year, we produced $3.8 billion in core operating income, which was down 20% from what we would have earned with the normalized level of cat losses, and without the benefit from tax reform or about $4.8 billion. Our results led the core operating ROEs of 12% for the quarter and nearly 8% for the year. For the year, we had strong book and tangible book value per share growth of 6.5 and 8.6 respectively.
In the quarter, the P&C combined ratio was 90.7 and for the year, it was 94.7 and that's with $2.7 billion in catastrophe losses. That kind of combined ratio in the face of this level of tax simply speaks to the quality of our underwriting and underlying book. And to that point, on a current accident year basis, excluding tax, the combined ratio for the year was 87.6 compared with 89 in '16 with the loss ratio up over just 0.5 point and the expense ratio down over 2 points. By the way, while it was a heavy year for cat losses, on the other hand we had an outstanding year in our agriculture business another cat like business, which I'll touch on later.
Net investment income for the quarter was $873 million, up 3.5% over prior year and a good result that contributed to record net investment income for the year of $3.5 billion, up over 6%. Considering the historically low interest rate environment, this was an outstanding result. Phil will have more to say about investment income, book value, the cats, and prior period development.
On our third quarter call, I reported that we began to see signs of a bit more stable pricing environment for the business we wrote. In the fourth quarter, that positive rate movement continue and in fact, accelerated month-by-month as the quarter progressed with prices beginning to firm in a number of important classes, both property and casualty related. And that trend has continued into January. I believe we are in a transition market globally. And rates should continue to firm as the year goes along. Although, not all classes and not in all countries or territories.
The current trend in terms of rate change is the best we've seen in the last few years. Renewal retention remains steady overall across the company and are quite good, but they vary by line of business during the quarter. Some areas of our business pay the price in terms of a modestly lower renewal retention level in order to maintain pricing discipline. The same with new business. Some areas of our company were up, while others suffered in terms of new business. Those areas where we suffer to what we speak -- what speak to a market in transition. Some companies are pressing for rate and in my judgment, understand they need to improve rate to exposure.
While other market participants have yet to respond and are using this moment to grab under priced pressure. As I said at the beginning, P&C net premium revenue growth, excluding merger actions, was 3.7% for the quarter and that includes 1.2 points from foreign exchange.
Now let me give you some specifics around growth and rate change. In our U.S. major account retail and E&S wholesale divisions, what we call major accounts and specialty. P&C net premiums excluding merger related actions were down just over 3%. For major accounts our renewal retention remained at historic highs of over 95% due in large part to our risk management portfolio where we are market leaders. For wholesale E&S, there was a reduction in renewal retention of about 2 to 3 points to the mid-70s.
New business in major accounts was up 3.5%, while an E&S, it was down about 8%. The change in price we achieved for both major accounts and E&S wholesale was the best we’ve seen in a number of years, and let me give you some examples of both rate and its movement during the quarter. Major account rates overall were up 1% for the quarter, improving to up 1.9 by December and they are as stronger, stronger in January depending on class. Property rates were up over 7.5% in the quarter, improving to up 10 by December. Casualty rates were essentially flat in the quarter, improving to up 1.5 in December. And public DNO rates were up 2.5 in the quarter and up 6 for December. Though overall professional lines rates for major accounts was down 0.5 point in the quarter.
It was a similar story in E&S wholesale. Rates overall were up 2.7 for the quarter, improving to 4.8 in December. And again, they are as strong in January. The property rates were up 2.8 in the quarter, improving to up 6.3 in December. Casualty rates were up 3.8 in the quarter, improving to up 4.6 in December. And unlike in major accounts, financial lines rates were up 2.3 in the quarter, improving to up 5 in December.
Now, let’s turn to our middle market and small commercial division, where net premiums excluding merger related actions, were up 2% in the quarter. P&C lines were up 3.1 while financial lines were up 1.2. Renewal retention was reasonably steady, down about a point to 86% and exposure growth added three tenths of a point. New business growth for our mid-market business was quite strong, up 10% and the best in a while. And by the way, 50% of that growth came from cross-sell efforts.
Rates excluding comp were flat, which marks the first reversal and declining rates in three years. Property rates were flat and rates for package were down about 1.5 points, while exposure related pricing for package was up almost 2 points. So there was a net positive change to renewal price for package. Causality related rates were flat and financial lines rates were up about a point. Comp rates were down about 4 points, while comp pricing related exposure was up over 2. So net pricing for comp was down 2.
Pricing in January for middle market appears to have continued the trend and in some classes firmed incrementally from the fourth quarter. For example, property is now up 2 points while casualty continues to be flat. Commercial auto rates continue to accelerate, but remember, we're not a huge commercial auto writer.
In our North America personal lines business, net premiums written were up almost 6% in the quarter. Rates were up about 2 and exposure change added 3. Retention remains very strong at about 95% and new business was up 12% overall and up 16 for our targeted premier and signature high net worth clients.
Turning to our overseas general insurance operations. Net premiums written for our international retail P&C business were up over 7%, excluding merger related actions or over 4% in constant dollars. Latin America and Asia-Pac led the way with growth of 11% and 9% respectively, while the Europe also had a good quarter with growth of 5%. The trend in pricing in the quarter was the best we have seen again in three years in both our international retail and wholesale business.
First in retail. Financial lines rates were up 3, property related rates were up 2, and marine was up 2. While general and specialty casualty were down 1. For our London wholesale business, property rates were up 5 and by December up 7. Marine was up 6 and financial lines were up 1. In January, London wholesale property moved to double digit rate.
Our agriculture business where we are the clear market leader had an excellent year, highlighted by a combined ratio of 74% and over $390 million of underwriting income, up 15%. As I noted last year, this is a cat like business and therefore it has a certain volatility to it by definition, as weather expose with weather impacting crop yields and commodity prices. We've experienced both sides of volatility, years with great growing seasons and others with drought. This has been and continues to be a good business for Chubb. John Keogh, John Lupica, Paul Krump and Juan Andrade can provide further color on the quarter and year, including current market conditions and pricing trends.
In the quarter, we announced the strategic cooperation agreement with PICC, Property & Casualty Company of China, the country's largest P&C insurer. The agreement will leverage Chubb's global capabilities and supported PICC customers and other Chinese affiliated companies around the world in line with the Chinese government's drive to promote the country's going out and one belt one road initiatives. With this 10 year agreement, PICC has the ability to offer some of China's largest enterprises, many of which have complex operations in multiple foreign jurisdictions access to Chubb's leading capabilities in countries beyond their home market.
I am both optimistic and confident about the year in front of us. We have positive synchronized economic growth globally, as well as the benefits of tax reform, which should produce exposure growth which is good for insurance and good for Chubb. We have the many investments we have been making to enhance our capabilities and growth potential. Like the PICC and recent DBS announcements.
Our middle market and small commercial business globally represents 30% to the company, and we expect good growth in this area globally. Our global A&H and Personal Lines businesses are 35% of the company, and we expect good growth this year. We are seeing and are reasonably optimistic that we should continue to see positive momentum building for commercial P&C pricing. We would like to see it spread to more classes and more businesses that need rate, and we will do our part as industry leaders to drive that momentum. In some, we’re bullish that our growth will continue to accelerate and ’18 will be quite strong.
With that, I’ll turn the call over to Phil, and then we’ll be back to take your questions.
Thank you, Evan. We completed the year in excellent financial condition. We have a strong balance sheet with top financial strength ratings, excellent liquidity and significant capital generating capability. Despite significant catastrophic loss payments, our operating cash flow was quite strong at $1.1 billion for the quarter and $4.5 billion for the year. As Evan noted, we grew tangible book value per share by 8.6% for the year. Originally down 29% at the merger closing, tangible book value per share has recovered over 20 points.
We have total capital of $64 billion. During the quarter, we returned $453 million to shareholders, including $330 million in dividends and $123 million in shares repurchase. For the year, we returned over $2.1 billion, including $1.3 billion in dividends and $830 million in share repurchases. In the quarter, investment income of $873 million was higher than our previously expected range of $845 million to $855 million due to increased call activity on our corporate bond portfolio and higher than projected private equity distributions.
We now expect our quarterly run rate to be in the range of $865 million to $875 million with an upward trajectory as the year progresses. Net realized and unrealized losses for the quarter were $384 million after-tax and included a $390 million loss from foreign currency movement; a $93 million loss from the investment portfolio, primarily due to increase interest rates; and a gain of $99 million, principally from positive asset returns on our retiree benefits plan portfolio. Pre-tax catastrophe losses for the quarter were $447 million and Northern California wildfires and other catastrophe losses in the quarter were $320 million as previously announced.
Additionally, there was $157 million from the Southern California wildfires and a favorable adjustment of $30 million from last quarter’s catastrophe events. Net loss reserves decreased $1 billion in the quarter on a constant dollar basis, primarily reflecting catastrophe loss payments and crop payments, which are typically higher in the fourth quarter. The pay to incur ratio was 120% and was impacted by these payments and by the favorable prior period development in the quarter. Adjusting for these items, the pay to incur ratio was 91%.
We had positive prior period development in the quarter of $158 million pre-tax or $130 million after-tax. This included $138 million pre-tax of adverse development, principally from our legacy asbestos exposures. The remaining favorable development of $296 million pre-tax was put about evenly between long tail and short tail lines. The long tail is primarily from accident years 2000 inflow and prior.
The operating income tax rate for the quarter and for the year reflects the provisional income tax benefit of $415 million relating to 2017 tax reform act. This benefit comprises a $743 million benefit to book value relating to intangibles, reflecting the favorable impact of the reduced U.S. corporate tax rate on our gross deferred tax liability established at the time of the Chubb Corp acquisition. And a charge of $293 million to tangible book value, primarily reflecting the negative impact of the tax rate reduction on our gross deferred tax asset balances.
We have previously announced an estimate that was in excess of $215 million. The increase in our estimate reflects a more favorable impact for the newly established excess foreign tax credits generated by the new deemed repatriation rules. We expect our annual core operating effective tax rate to be in the range of 13% to 15% under the new rules.
I'll turn the call back to Helen.
Thank you. At this point, we'll be happy to take your questions.
[Operator Instructions]. And our first question will come from Elyse Greenspan with Wells Fargo.
My first question, I appreciate all the disclosure on the market. Just tying together your color and I think there’s some speculation out there that maybe some of the tax reform benefit at least in the U.S. to a certain degree to get competed away. And then when you think about the outlook on the market, in some of your commentary and the rating environment. How does that play into how you think about the commercial lines environment on the pricing side playing out in 2018?
Elyse, it's right now, ideal speculation. And who knows there is no certainly. I think of few observations. Moving to the P&C, commercial P&C combined ratios. You've got to make profit to have something to compete away. So you can't and if you take out cat premiums, as well as cat losses to look at ex-cat accident year, so truly take out cat. The combined ratios of the industry on commercial P&C are very anemic. I'm hovering around 100 or over 100. And so how you're going to compete away with the tax benefit without profit, without underwriting profit, number one.
Number two, the industry is hardly running some brilliant ROE. It's mid-single digit to low-single digit. And on a risk adjusted basis, that’s an anemic return. Number three, the industry has had as operated at a very low interest rate environment, that is really pressured investment income. The tax benefit starts in my judgment to give some amelioration to that. And I think anyone who is rationale in thinking about this as a leader and projecting ahead is considering all these factors.
And then when had you said, you pointed to some companies that are looking to grab share in the market and under pricing business. Is that specific to turn in line or is that just something you’re observing broadly throughout the commercial lines market?
It truly varies by line of business. There is a cohort that we can identify that is by line of business and it’s generally by territory or country that we know that we have our eye on.
And then one last question, if I may…
I’m not going to name and shame Elyse.
One last question, can we just get a little bit of an update on where you see loss costs broadly within your commercial lines book right now?
Loss costs have been and vary by line of business. It has been pretty steady from what I’ve said in prior quarters. You’re looking at primary casualty depending on the line of business that’s running in that 3% that 5% range, excess is typically running in that 7% to 9% range. We’ve seen a net in professional lines, particularly in DNO, the employment practices. There has been an uptake in both frequency and severity trends over the last two years, three years and that is very troublesome because it’s related generally in the United States, it’s a merger related objections, and on to securities class actions. And by the way, I’ve noticed recently some public information release about DNO loss ratios, and they are pure loss ratios, they don’t even have loss costs in it. And the interesting part about loss costs and loss adjustment costs, when you add it all up, half the costs insurance companies are paying up goes to the legal profession, to either defend or it’s the trial bar settlements, hardly a benefit to corporate America or to shareholders who are supposedly agreed. Pardon me for going beyond loss costs.
And we will now hear from Kai Pan with Morgan Stanley.
My first question is that if you look at back two years ago, when you first set up the goal for the merger, the twin drivers, one is expense savings, which you have exceeded the original target. The other one is substantial revenue growth. But the revenue growth in the past few year has been limited. So where are the revenue opportunities and how these things will play out in the next three years?
We actually -- when we look at it, revenue growth ex the merger related actions, which was planned and understood all along, we’re actually very clear about it upfront. So I take a little exception to how you’re characterizing it. You take that out and you look underneath it. When we imagine, when we look at the market conditions, the two companies together are doing better in growth than these two companies would have done standalone, and not as really clear to us.
Secondly, we said and we put a time horizon on the growth of between that three and five year window because of the seeds we are planting and have been planting. And I just said that 3% of our business is small and middle market, and the growth in the small and middle market globally is accelerating. And in fact we had no small commercial globally between the two companies, until we've locked them together and took capabilities that both had and invested behind them and now have growing businesses, as an example. So I'll stop right there.
And then on the industry consolidation, recently we have seen some larger announcement. And now you are two year into the merger integration. Will you be -- how we are looking and looking for potential growth opportunities through acquisitions?
I know you didn't imagine I would answer that question. You're just trying me on…
All right, I tried. You can take on another question to repeat that one, so on the foreign exchange. In the past, you have said if U.S. dollar strengthening that will be hurting your book value. But now fourth quarter after U.S. dollar have been so weakening. So why there is a drag on your book value?
So the balance sheet FX impact in the quarter was a result of the U.S. dollar strengthening against most major currencies from 9/30 to 12/31; notably, the Canadian dollar, the Brazilian real, the Australian dollar. So for the quarter, we had a book value loss of $390 million. For the year, though, the dollar has weakened and we’ve had a cumulative gain of $512 million. It depends where it took place, Kai. So when you're looking at the dollar, weakening is a headline and how it impacts premium revenue growth on book value, it depends where you have your assets in the fourth quarter.
If the dollar stays the same, would that be possibly impact for the full year results 2018?
There’ll be no change.
And our next question today is Sarah DeWitt with JPMorgan.
On the revenues, now that the marks or related underwriting actions are behind you. Can you help us think about what premium growth we should be looking for given there is pricing actions, there’s economy and the growth opportunities that you're seeing?
First, remember I just gave you a number of $150 million remaining, so it's not zero but it's very modest now. Secondly, we don't drive revenue growth. I gave you as much color around revenue growth as I'm going to provide.
And then just on the pricing outlook. How high do you think you could raise prices as we look out a year or two or maybe another way to think about it. How much rate do you think you need across your book in the current environment?
I'm not going to speculate on that how much we can achieve. We're doing it in a responsible way. We're only going for rate that is required to earn a reasonable risk adjusted return, and it varies by line of business, by kind of customer cohort, and by country. So it's not a simplistic answer that way. What I would say is unlike others, you look at our total portfolio and you look at the combined ratio we’re putting -- we put. And it’s world class. It’s the best in the industry. But that does vary by line and commercial P&C, particularly larger business and E&S business, it runs in the 90s. We have other businesses that all together mix our portfolio down into the 80s.
So it varies by area and we’ve had underwriting discipline. We are willing to trade and we’ll continue to trade market share and growth to maintain a reasonable underwriting return. And as the market response to anemic returns and prices go up and as the market responds to an understanding that loss cost trends are something that just continue to grind away and put pressure on margins. The responsible thing to do is for both client and for companies, so you avoid volatility in the future end pricing is to raise respond by raising rates. And as that happens that increases opportunity for us and increases growth, and that’s about as much as I’m going to say so.
And we will now go to Yaron Kinar with Goldman Sachs.
I had a question regarding the comments on the acceleration of rate improvement over the course of the quarter, and then for January. I think looking at some of the comments made by brokers I got almost the opposite impression from them. So I was just curious to better understand why there may be a discrepancy between what we’re hearing from brokers and what we’re hearing from some of the insurers?
Well, you’re going to have to go figure that out. I can’t help you with that. I can only relate to the data we see. So I know our information. And if you’re getting contrary information and by the way, the brokers we talk to, what we see, what they see is consistent. So I think you may be confused in some ways and not comparing apples-to-apples with type of business, insurance versus reinsurance, London versus United States or whatever. But I can’t help you with your -- you live in your hell, I live in mine.
And then with regards to major accounts, I guess most of your competitors are necessarily even impacted by U.S. tax reform. So would you see the dynamic in major accounts being different over the course of the year than the dynamic in another account?
No.
And then maybe one final question. With regard to the 30% of U.S. premiums that you would see that’s overseas affiliates in the past. Given tax reform, are you trading that portion of the book, or have you adjusted in any way to addressable tax reform there?
We’re not really going into any detail about our capital management that is proprietary. And Phil you want to…
I would have said the same thing. We’ve looked at obviously the change in the ex-U.S. tax rate as one of the most important drivers of the reduction in our tax rate. We've looked at also rates around the world where we expect our income to emerge. And we've done it all in light of our planned capital management. We operate in 54 jurisdictions where constantly being changes of tax law and we've analyzed the rules and we've thought about modifying our capital management strategies and other border transactions, but -- and other cross-border transactions. But as Evan said, we're just not prepared to provide any more color on that. And currently, the rate we've considered to all those things.
And our next question comes from Jay Gelb with Barclays.
My first question is on the California wildfires. Could you perhaps provide some perspective on how large do you think the fourth quarter industry insured losses were for the wildfires?
I don't have a great handle on it. The numbers bouncing around have been -- that $9 billion and $12 billion. And I think that's probably a pretty good number, but I don't know with certainty the size of both of these fires. When I said they were the largest in history, not the insured loss which obviously will be, but that's really referring to is the geography on the third was greater than we've seen than has been seen in recorded history. So you get back past recorded history and they were both fair ones but this is as big as you've seen, so the massive we do know that. So we think probably that $9 billion to $12 billion wouldn't surprise me if it comes out there on the Northern fires. Southern fires are much smaller. They did burn in concentrations, greater affluence, though they were smaller fires. And there will be a few billion dollars anyway for the industry.
Does that have implications in terms of how Chubb would position its homeowners' business in California, going forward?
The whole notion of non-modeled cat and being able to model better is, we're an underwriting company and that is just such a part of our craft. And I am more enthusiastic about that that fascinates us. So the notion of how much concentration do you really have to an event as you can define an event and what is your appetite for that, are you getting paid adequately and how you protect yourself, are all the questions we dwell on in great detail as we expand our personal lines and smaller commercial portfolios.
Flood and the ability to manage flood that way is further advanced the wildfire, and can all come back on wildfire. And flood, the tools we can now use, the mapping, the analytics of portfolio and how to respond to various flood scenarios, is getting better and better. And it gives us much better confidence depending on the geography and the area that we're looking at flood concentrations.
In wildfire, the tools have been good, but they were improving. And there were some new tools that are out that give you a better way to imagine wildfire and the impact on the concentrations of the portfolio. So we’re all over that. The regulatory environment in California, in particular is -- you have to take it into consideration. It’s difficult when it comes to being able to get a proper price for the risk you’re taking and that’s not to California’s benefit given the values of concentration there, they need to attract insurers. But we take that into consideration when we think about our appetite in California.
One last big picture one, if I could.
Does that help you?
Very much, thank you. There was an announcement yesterday regarding three major companies in terms of trying to tackle their own employee health care cost. Do you any thoughts on that in terms of how perhaps Jeff could address that issue that’s affecting all companies?
Yes, I think it’s -- look, I only know and read what you did. I think it’s a very rational and I think it’s a very encouraging move they’re making. First of all between them, they have a cohort of employees of 1 million. So that is a big enough group to truly major difference, and will allow you to craft a more efficient healthcare delivery. And they want to tackle the structural questions of costs related to delivery. And I think that’s -- I applaud what they’re doing.
And we don’t have -- we have 15,000 employees roughly in the U.S., we don’t have anywhere near what they have. And I think they’re going to start blazing that trail as great and there’ll be others who will follow and I’m sure in time. But I hope it starts the right kind of movement. We need reform in healthcare. And the cost, I think Mr. [Buffet] said it pretty well, it’s a tapeworm that’s easing way at the economy in the United States.
And next participant is Paul Newsome with Sandler O'Neill.
You mentioned the cross-sell efforts. I was wondering if you could give us an update of what those -- how those efforts are going and what you expect for the coming year.
Well, I’m not going to tell you about the coming year, because I don’t guide on that. But I’m going to let Paul Krump talk about and reflect on current cross-sell and then John Lupica will add to that.
As Evan mentioned, in the middle market space, we actually had 50% of our new business come from cross-sell. And so those are existing customers where we’re adding additional product to what was so encouraging to me in the fourth quarter was that about a third of that cross-sell came from clients who were only purchasing professional liability lines from us. And we cross sold the package comp and auto to them. And I haven’t seen that happen in years and years to that extent. So that was just incredibly encouraging.
On the small side, we are cross-selling all kinds of product to customers that’s being very warmly receives, because there the bulk of our competitors really only sell about product comp in auto. We’re out there selling professional liability alongside of that umbrella, et cetera. We're even doing some cross selling on the personal line side where we're selling small commercial business to people that have in home businesses. So recently had a big win on a very large personal line client who got rejected in the marketplace because one of the spouses was rating Bs and selling honey at local fair, and nobody else could handle it, but Chubb. So very interesting growth story.
Let me just add a little more color. And giving you a statistic, I will recall cross sell. We also keep track of something very interesting we call strength of the organization where we've brought the two organizations together gives us more capability. And about 10% of our new business this quarter was a result of our two organizations coming together. And we are two years in and our 48 branch offices really have a familiarity and a comfort level to one another and cross selling and driving our products and specialty services into that organization is as good as it's ever been and we're very optimistic about it in the coming years.
Second question, a little bit of a follow up from Jay's in terms of lessons learned in the flood business. Do you think that Chubb and the industry can underwrite that if the government went away? And are we clear enough now to be able to underwrite flood?
I would say, I'm going to give you an answer. It's something in between. I think we clearly -- the way the NFIP has crafted today, it discourages more private sector participation and the private sector can do much more than it is doing in terms of taking on flood risk. The governments’ role I would suggest would be in two areas, and one of those areas may disappear overtime but in the short in the medium term. Number one, for those who can't afford flood insurance protection, they can't afford to pay for it, but they live in a flood exposed area subsidizing -- that's a social decision, and to subsidize those people because you can't charge an actuarially sound rate. That I see as a role for government. The industry should be charging actuarially sound pricing.
Number two there is a tail on flood that goes for a while beyond the industries where with all appetite. And I see the government like TRIA or like in crop insurance playing a role. But I do think that overtime given the global balance sheet and both traditional capital and alternative capital that tail risk overtime could also be displayed -- the private sector could displace the federal loan.
And we will now hear from Ian Gutterman with Balyasny Asset Management.
I guess first, Evan, if I can ask about capital. If I take in sense this year around number $5 billion this year, you can certainly do a lot better than $100 million something of repurchase if you wanted to. I know you’re not going to talk directly about M&A. But can you just give us some sort of sense of how to think about how you might deploy earnings over the next say two, three years as far as -- is there a target mix in your head or are we back to pre-acquisition thinking on buyback. Just how should we think about all that?
We will build capital flexibility that is a priority for this organization. I think we can generate greater returns to shareholders overtime by building -- by retaining capital, building capital flexibility and deploying it and various strategies and in areas for growth. This is a growth company. We measure growth primarily by growth and book value. To the extent that we generate capital that is in excess of the capital flexibility, we need to execute those strategies. We will do what we have a long history of doing. We will return it to shareholders through dividends and other capital management strategies, such as buyback. That’s about it. So I hope that gives you a sentiment. And I’m not going to put any more specifics.
Maybe if I can ask a slightly different way. Is certainly before the acquisition, there were a lot of questions about you having people wondering about and you guys having a more than normal amount of excess capital. And clearly after the deal, you had been below your probably target for capital for a little while as you rebuild. Are we back to neutral now or do you think you’re still building back to the cushion you would like to have or maybe we’re over that cushion? Just some sense of where the starting point is.
Ian, we’ve built it. And understand that we just paid out a couple of billion dollars in cat losses here. We incurred a couple of billion -- actually a few billion, not a couple.
On tax, I guess, I wanted to try that the previous question from someone else a little bit somebody as well.
I know you’re going to scratch on a subject that -- you’re going to scratch on the door we aren’t going to open it, but go ahead.
I guess what surprised me about ‘13 to ’15 is I just go around the world in my head about what countries you’re big in. And I think most of those that having at least of 20% tax rate other than Bermuda obviously and Switzerland, which you don’t -- I don’t think write that much direct businesses anymore, as a proportion any way. So I guess I’m struggling to figure out if it’s harder to do intercompany quota shares where -- why the tax rate went down from tax reform. I understand the U.S. rate went down, but I would have thought some of the inter-company stuff had to go up.
Ian in the balance, the U.S. rate reduction if you look at puts and calls as you’re imagining, we’re not going to give you the details at all of puts and calls. But if you look at the puts and calls, the reduction in the U.S. tax rate more than offset the negatives of reduction in affiliate. And by the way intercompany debt or any of the announcements you want to add in there.
And then just last one is I was wondering if you can…
I can just tell you that I trust our finance department, that all of them have done -- that the math is right, external and internal…
I just was trying to get my head around it, but…
Yes, I got that…
I was wondering if you talk a little about the outlook in Mexico, since we don’t talk about that maybe as much as some of the other ones. But I know it sounds good business for you guys. And just the outlook given A, we have an election that sounds like it may go in a way that's not market friendly, and B, if the math that goes in a bad way, does that matter for the business or is it really much more orient towards domestic activity than trade. Just what things matter in Mexico going forward?
The health of the Mexican economy and that is able to continue to grow ex the energy sector as it is and in fact accelerate. NAFTA has been a great contributor to that. And Mexico is so integrated of independent on the U.S. economy. So on one hand as the U.S. economy improves so does the Mexican economy, because we are so intertwined that way. On the other hand, the NAFTA -- and NAFTA has created an environment of certainty and predictability and encourage greater investment cross-border. The NAFTA negotiations going on today and the way they're occurring and how long they are taking, creates an environment of uncertainty on the other hand and that -- potentially, it hasn't shown up yet creates the risk of instability.
You said it on the political, there is the possibility of the elections results moving in a populous direction that could be more anti-foreign. And that would be bad for Mexico it would be bad for the United States. It could damage the growth of the Mexican economy. Our business is very focused on the domestic and the growth of the domestic economy. We ensure consumers and small and mid-size businesses and we ensure large Mexican corporations and multinationals doing business there. But the predominance of our business is consumer and small business oriented, which is very domestically focused.
And so the health of that business and the continued growth of that and we are growing double digit in Mexico, and we are -- and it is a very -- with very stable returns. And we are investing in Mexico and we are bullish about the future of that country. And if there is in any rational world NAFTA will be concluded and we will deepen the integration in North America and I hope that rational world prevails.
And our next question comes from Jay Cohen with Bank of America Merrill Lynch.
Most of my questions were answered, just one other topic I love you to comment on. The investigations going on now into the brokerage business in the London market. Evan, do you see a role for regulators to play in that market and the distribution side?
What do you mean by role for the regulators play? It is a regulated industry. And the regulator always has a role to play in ensuring that regulation, both the weather and spirit of what it intends, is properly adhered to. And I think that’s what their investigation is about. But I don’t know a lot. I got to be honest with you, I don’t know a lot, because we’re just -- it’s not focused on us and we’re just not really involved in any material way.
I guess the question was, do you think the regulators should be more involved with what’s going on there and take may be a slightly more of the heavy handed approach given some of the changes in that market?
I am more in favor, I’m always in favor of the private sector for leasing its own behavior, and to behave in what is the interest of a healthy marketplace, and that not over the line on regulators to perform that role. But where market participants and the private sector fails to address issues that may exists and I’m not just going to sit here and speculate further about that, but issues that they exists in practices then it requires regulator to get involved. Now, do those exists or not, I can’t really -- Jay, I’m not in a position to really say.
And we will now go to Brian Meredith with UBS.
Couple of questions for you Evan, the first one just back on tax reform and maybe implications on lines of business, and the agriculture business. Would you think that maybe there is some pressure on reimbursement rates or stuff as a result of tax reform?
I don’t know. I’m not going to speculate about that. The only thing I know is crop insurance is just so core to the U.S. farmers when they look at a farmville what’s the most important thing to them, and it is the stability of crop insurance. Because what that does to give them predictability and support as they do their business and face the vagaries of weather. But I’m not going to speculate on that.
And my second question, Evan, is it possible to give us broadly kind of what the potential revenue opportunity is from the PICC relationship over the next five years? I know it’s 10-year agreement? And also on that topic, what impacted all does it have on your [white tie] ownership?
It has zero impact on our [white tie] ownership for our 100% owned Chubb operations in China. And as far as revenue goes, it depends on how we each execute and how well we execute, and it requires both of us in that execution and to do it well. But I think the revenue opportunity is reasonably significant, I don't want to put a dollar amount on it, but it's significant when you start thinking about Chinese Multinational exposure and how that's growing and how it will continue to grow in the years to come. And the need to ensure them and think about PICC as an SOE, State Owned Enterprise, and you think about how many of their clients and how many of the Chinese multinationals to be doing our SOEs. And that is an ecosystem on to itself. And this between us gives us access and an ability to serve that ecosystem.
And our next question comes from Josh Shanker with Deutsche Bank.
Just I'm wondering if you could add any color on to what we're doing about the winter wheat harvest, and then are these significant drought like conditions and what that means for the agricultural business? And two given the big reserve release versus intra-year reserve change in the fourth quarter in crop. Is that a behavior on how you reserve for the business. Should we expect you be extremely conservative in the first half of the year and then true it up in the back half of the year?
First of all, we're not in the winter wheat harvest season. We're in the winter…
It’s the planting, I guess…
We're not in the planting season either we're in the growing season for winter wheat. So we'll start with that. Number two -- and so those are important distinctions. Number two, the draught conditions very spotty, we don't -- there is nothing we see at this moment that gives us concern with winter wheat. So I'll start with that. Number two, we have not changed any of our reserving practices around crop, and we use a historic loss ratio as we have said in the past, we say historic loss ratio. When we start a season, have no idea how it's going to play out and you never know till the fall, so you can't really move unless you have really some kind of early very clear data of significance. You can't really move off of the average until you have real clear knowledge of the present. And that doesn't occur until the fourth quarter.
And the weather has not changed, but does that mean we should expect the fourth quarter in most years is going to look very different from the other three quarters?
Just look back on the years, and you’ve answered your own question.
Thank you. That's all the time we have today to take your questions. Thank you for your time and attention this morning. We look forward to speaking with you again at the end of next quarter. Thank you and good day.
And once again, that does conclude our call for today. Thank you for your participation. You may now disconnect.