丘博保險集團 (CB) 2002 Q2 法說會逐字稿

Good morning and welcome though ACE Limited Second Quarter End Earnings Result Conference Call. At this time all participants have been placed on a listen only mode and the floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Helen Wilson. The floor is yours.

Welcome to the ACE Limited June 30, 2002 Quarter Earnings Conference Call.

I'm Helen Wilson, Director of Investor Relations at ACE limited and pleased to serve as your host for today's call.

Our presentation today will contain forward-looking statements related to business prospects, market conditions, profitability, growth, debt, reserves and recoverables. Actual results may differ materially. Please refer to our most recent annual report on Form 10-Q and quarterly report on Form 10-Q and other documents on file with the SEC for factors that could affect forward-looking statements. I'd also like to remind you that this conferences call and its contents and a any tapes, broadcasts or publications by ACE Limited are the sole copyright property of ACE Limited and may not be rebroadcast in whole or in part without the express written consent with ACE Limited. This call is being webcast live and will be available for replay for two weeks. All remarks made during the call are current at the tame of the call and will not be updated to reflect subsequent material developments. You may also listen to a replay of the call at 877-519-4471 or 973-341-3080. Access code No. 3378818.

Now I'd like to introduce our speakers. Brian Duperreault, Chairman and Chief Executive Officer will give his overview, followed by Dominic Frederico, President and Chief Operating Officer and Evan Greenberg, Vice Chairman. Phil Bancroft, our Chief Financial Officer will review the financials and then we'll take your questions. Always with us to assist with the questions, are representatives from some of the operating units.

Now I'll turn the call over to Brian.

We completed a very strong quarter with operating earnings approaching a quarter of a billion dollars for the first time in our history. Operating income rose 105% over the comparable period a year ago and net operating income per share increased 89% to 85 cents per share on a fully diluted basis.

I would hasten to point out in last year's second quarter we had 19 cents per share more in catastrophe losses than we had last year and good will amortization of about 8 cents. Even after adjusting for those events, however, and the impact of approximately 30 million of additional shares outstanding, net operating income per share rose 16% year-over-year. Our combined ratio of 91 1/2% reflected the combination of improved pricing and the absence of catastrophes during the period.

Operating cash flow for the quarter continues to be quite positive. Totaling $427 million. Investment income was flat as compared with the first quarter. Overall evidence of a strong upturn in our business and a more durable hard market continues to mount. Net premiums written rose 28% on a consolidated basis.

We enjoyed excellent premium production although an absence of loss portfolio transfers or LPTs in the quarter matched the underlying trend in earned premiums. LPTs are written and earned immediately while most of our business is earned over time. Exclusive of LPTs, earned premium rose 27% in the period. Two very important measures of performance were our analyzed return on averaged equity, which totalled 14.6% for the quarter. and our change in book value per share which increased 3% over year end to $24.21 per share.

In recent years, ACE has taken a very conservative posture with regard to investments, keeping exposures to equities very low and closely monitoring credit quality with regard to fixed income investments. As a result, improving bond markets outweighed the drastic reduction in equities during the quarter.

On balance our net unrealized depreciation offset realized losses for the period which coupled with strong retained earnings led to the increase in book value for the first half of 2002.

Because we are so diversified not everything adds up at the same time. As you can see from the segment data we are continuing to make changes in our re-insurance program at our Lloyd's unit and for the short term are experiencing combined ratio of 107.4%.

This of course is well above the acceptable corporate target and expect to see improvement as the year progresses. On balance we are enjoying a strong, positive momentum with regard to our flow of new business and expect this to continue as the volume of written premium flows through to earned.

I find it very frustrating though, that despite our good results and favorable operating environment, we are being swept up in a cycle and fear and suspicion that has permeated the entire equity sector. Unknown and uncertain risks are being magnified far out of proportion to their probable or even worst case outcomes leading to a distrust of the financial statements of many leading global corporations. It is most distressing and clearly excessively pessimistic. The best thing I can do in dealing with this economic malaise is to materially increase the amount of disclosures that we make regarding our operations.

As you know, Phil Bancroft and I have already voluntarily agreed to comply with the FCC directive regarding the accuracy of financial statements. Starting this quarter we have introduced a statistical supplement to our quarterly report that provides much more data on our company than has previously been disclosed, and highlights many of the burning issues of the day, such as asbestos exposure and re-insurance recoverables. This is available to everyone on our web site. I hope that as you review the material you will gain some comfort about our financial information and about management's ability to deal with these issues in the normal course of business.

Now to provide some detail behind the numbers I have asked Dominic and Evan to give you a brief overview of developments within their respective segments.

Thanks, Brian.

For both our Insurance North America and financial services segment just, we experienced a strong second quarter. All financial measurements showed significant growth over the prior year as well as demonstrating continued momentum for the remainder of the year.

In terms of the specific operations, our North America operations led to the way with very strong performances. As a reminder the North America segment comprises, ACE U.S.A., Westchester Specialty and the Bermudian and Canadian Property and Casualty Risk Transfer Insurance operations. Operating income was $126 million versus $72 million in the same period last year, an increase of 75%. Cash flow from ongoing operations approximated $300 million for the quarter, an outstanding result.

The North America insurance market characterized by a reduction in capacity and restriction of coverages has continued to harden. Rate increases accelerated in the quarter across all commercial lines. In addition, terms and conditions and attachment points are improving and should contribute to future profitability. The improvement in our combined ratio is balanced between our commitment to sound underwriting as well as our discipline towards expense control. The gains achieved in written premium reflect our new business opportunities, rate increases in our renewal business, as well as the state of strategic objective of increasing net to gross premium ratio.

Our reputation for financial stability, underwriting consistency, quality service and holistic approach to risk management continues to provide significant market acceptance to our businesses, especially our new product ventures that showed significant growth in the quarter. An example of the current market dynamics is our D&O book. ACE's approach to this line of business has always been a conservative one. First to underwrite quality companies and second, to maintain a strict adherence to policy form, conditions and terms.

Our conservatism displayed itself in a soft market where we avoided companies and industries that lacked core business fundamentals, evidenced by our contraction in this business over the last few years. The current market allows us to dramatically lower limits offered, tighten terms and increase premiums significantly.

Now turning to our financial services segment. Operating income after tax increased 21% in the quarter with the combined ratio of 91 -- 90.1% and a cash flow of $26 million.

Once again as a reminder, financial services includes financial risk or credit-related products as well as our structured financial solution areas. Combined these units should contain the majority of the premium variability we experienced as a result of the specific transaction types that are offered in this area. Such as LPTs and multi-year policies.

Our conservative approach to the business of diligent pricing, focusing on operating income, return on capital and cash flow, our attention to contract terms and prudent reserving practices have provided the framework to achieve these favorable results. Our new business opportunities continue at high levels due to broad-based credit spread widening and an increased demand for credit protection.

This environment has a two-fold effect. First, investors are willing to pay more for credit coverage. And second, a broader array of risks are being offered in the market especially at the upper credit spectrum at attractive ROEs. Lower rates have also created a favorable municipal refunding market.

We anticipate the demand for credit-related products and financial solutions to remain high. Our customers faced, with the changing insurance environment and credit concerns will continue to turn to us to solve their more sophisticated risk management challenges. The results achieved this quarter by North America and financial services, solidify our presence in today's market as we continue to fill marketplace voids, establishing new products and maintaining premier service and tailoring solutions.

Now let me turn the call over to Evan for more detailed review of our international and reinsurance segments.

Global reinsurance had an excellent quarter. Property casualty operating income increased 219% to $76 million. This was aided by an absence of CATs and a favorable underwriting environment. Overall gross and net premiums were up 105 and 132% respectively to 214 million and 197 million.

Our Bermuda CAT business was up 6% and at rates which we expect will have ROEs north of 29%. Our specialty and general risk reinsurance operations in the U.S. and UK produced excellent results as well. Net premiums for the quarter were up 202% to 104 million. The business we are writing is at rates and terms we expect will produce significant underwriting earnings as the business matures. In general the market has remained disciplined and we haven't seen any softening in the property classes. Though reinsurance rates, rate increase levels are beginning to flatten out.

On the casualty side, rates and terms are continuing to tighten in most classes and they should be. Some classes are still in our judgment underpriced, and we will continue to withhold our capacity until we believe rates and terms are adequate.

Now turning to life reinsurance. Life reinsurance produced operating income in the quarter of 2.2 million, which is up four-fold over the prior period. Premiums were about flat at 27.7 million. During the quarter we made the decision to cease pursuing large one-off transaction-type business and the long-term disability class in general. We simply don't believe our efforts in these areas justify the returns we could hope to make.

In ACE Overseas General, the quarter produced mixed results. ACE International had a very good quarter. ACE Global Markets, our Lloyd's operation produced unacceptable results. But is in line with what we predicted and described to you last quarter. So let's take a look at each of the operations separately.

At ACE International gross and net premiums were up 15% and 27% to 627 million and 456 million respectively. The combined ratio improved two points to 94.9. And operating income was up 36% to 35 million. Broadly speaking, ACE International breaks down into two major categories of business: property casualty and accident and health. Our accident and health business just had strong growth all year and this continued in the second quarter where net premium growth was approximately 20%. Our P&C net written grew by 31% during the quarter.

By region of the world, Europe led the pack with almost 60% growth in net written and Asia Pacific followed with growth of 40%. Japan was up only 2% on a reported basis, but 7% adjusting for foreign exchange, which given overall growth of the Japanese market is not bad. Though slow by our standards. Latin America had a disappointing quarter in terms of growth, but I expect this to improve during the second half of the year.

With the exception of Japan, no region or class of business was immune from the hardening market. It is broad-based. Rates overall again excluding Japan were up 46% for the quarter. Rates in Japan were up about 2%, but this is predominantly an A&H personal lines, and small commercial portfolio business.

Our net to gross ratio, which is a measure of how much we retain net, increased to 73% up from 66 last year. I expect this trend to continue.

Given market conditions and our International franchise, we are well positioned to take advantage of the opportunities we see to grow our business. Our energies are focused on rapidly improving our capabilities in certain lines and certain territories. So we can take even better advantage than we have of the growth opportunities at hand.

Now turning to ACE Global Markets. Again this was another tough quarter for AGM as we continued to live with the effects of the underwriting and management actions begun last year to bring this portfolio in line with our underwriting standards. Gross and net written premiums were up zero and negative 23% respectively. Reduction in line sizes, elimination of certain classes of unprofitable business, and very large reinsurance payments to cover the runoff is all impacting us. The combined ratio was 110.4.

As I stated last quarter the effects of our actions will shadow us for the balance of the year. However, beginning with third quarter, results should begin to improve. We remain firmly committed to our ACE Global Markets operation. It is an excellent franchise, engaged primarily in excess and surplus lines, specialty classes and energy-related businesses.

Our current production activity is very strong in AGM and will show in the results in future quarters. Rates in the second quarter for this unit were up an average of 41%. Which is better than first quarter when rates were up 30. All classes are continuing to harden.

In all, while results are currently unacceptable, we remain upbeat. AGM will become a meaningful contributor to ACE's earnings growth in the near future.

Now let me turn it over to Philip Bancroft, our CFO.

Thank you, Evan and good morning. In my comments today I will review our second quarter operating results, discuss key areas of our balance sheet and provide you with forward-looking guidance.

First I would like to comment on our change in presentation of our quarterly results. This quarter we provided investors with a financial supplement to complement our earnings press release. This supplement will provide you with additional disclosures about our company in a more user-friendly format. We have moved all the supplemental schedules that were formerly included in our press release to the supplement and have included additional information on loss reserves including WTC and asbestos, reinsurance recoverables and we provided sequential income statements for each segment. We plan to use this format from now on.

For the second quarter we recorded net operating income of 236 million or 85 cents per share. This was an increase of 59% over last year after adjusting for the elimination of good will amortization. If we also adjusted for the net impact of CATs year-over-year we recorded a 16% increase in earnings per share. We always had net realized losses after tax of 125 million and net unrealized gains of approximately 103 million which I will address later.

Our investment income was essentially flat at 201 million when compared with last quarter. While cash flows have been positive, reinvesting at lower rates the use of some cash to reduce debt levels impacted our net investment income.

Now I'll turn though balance sheet and cash flows. As you can see from the financial supplement, our portfolio remains invested in investment grade fixed income securities of the highest quality. At June 30 the portfolio included approximately 4.5% exposure to equity investments, the average portfolio yield was unchanged at about 5.2%. The portfolio's duration remained approximately at three years and average credit quality was unchanged to double A.

It was a volatile quarter for the investment markets, interest rates dropped by 100 basis points causing fixed income portfolios to rise in value. In addition, credit concerns and problems with individual issuers caused sectors of the fixed income markets particularly high yeld too lose value. Equity markets faced large decline, with the S&P index dropping nearly 15% in the quarter while international equity markets also declined. We incurred net realized losses on investments of 139 million, 125 million after tax. Offsetting this we had net unrealized gains of 148 million with 106 million after tax.

In our financial supplement we provided you with a breakdown of our net realized losses. These losses include 50 million of equity losses, principally from our investment in S&P index derivatives. We always recognize 30 million loss on interest rate swaps that are used to management the duration of the fixed income portfolio. These losses were due to the drop in rates that caused significant unrealized gains in our portfolio. As a result of corporate credit events during the quarter we recognized 24 million of impairments in corporate bonds, essentially reclassifying unrealized losses to realized losses, even though the bonds have not been sold. We wrote up bonds from 20 issuers including 12 million from Worldcom.

During the quarter we also recorded a 33 million loss on a mark to market adjustment for credit default swaps in the financial guarantee portfolios. Our net unrealized gains include a 207 million gain from our fixed income portfolio offset by a 60 million loss on our equity portfolio. Markets have remained volatile since June 30.

Based on the latest review our position since June 30 has not changed significantly. We have strong net operating cash flows for the quarter of 427 million bringing the total for the year to 570 million.

With respect to loss reserves you will see in the supplement that we included a roll-forward of both loss reserves and reinsurance recoverables including a runoff business so you can see the impact of the items that influence these balances. Gross loss reserves, relating to our ongoing business, increased by 376 million. This is offset by a reduction in runoff reserves of 241 million resulting in a net increase in gross reserves of 135 million. Reinsurance recoverables relating to our ongoing business increased by 169 million while our runoff book declined by 71 million.

There were no substantial World Trade Center claims paid this quarter, however we carried out an extensive review of our current WTC reserve and remain very comfortable with the reserves established in 2001. Our reserves for asbestos as well as environmental claims and claims expenses are updated quarterly and represent our best estimate of the future payments and recoveries expected to develop over the next several decades.

As you know the runoff in Brandywine is protected by the NICO reinsurance contract purchased at the time of the Cigna acquisition. During the quarter no further losses were seeded to the NICO cover. We have 535 million of remaining coverage to protect us against future adverse development in Brandywine.

It is important to note the 535 million is our remaining cover or an incurred basis. On a paid business we have 1 billion of loss reserves to pay claims before we attached to the 2.5 billion NICO cover. I think we have managed our balance sheet quite well over the last year, securing the equity we needed to grow and reducing our dependence on short-term commercial paper.

Our agenda now is to reduce debt. During the quarter we reduced our total short term and long term debt, including trust preferreds, by 425 million. We repaid 175 million of commercial paper that became due this quarter. We repaid 200 million of trust preferred securities, the RINOs, in the quarter. We also prepaid 50 million of the ACE INA subordinated notes. We incurred an after-tax charge of 7 million principally because of the high coupon of the security.

Looking forward, we will repay the remaining 200 million of the RINOs when it becomes due in the third quarter and repay 75 million of the ACE Financial Services debt when it becomes due in the fourth quarter. We are reducing the debt we put on the balance sheet as part of the Cigna acquisition and expect to continue to reduce our leverage over the next several quarters.

Our shareholders' equity increased by 180 million in the quarter primarily resulting from our operating income of 236 million offset by after-tax realized and unrealized investment losses of 19 million and dividends declared of 51 million. This resulted in a diluted book value per share of $24.21 and a return on average equity for the quarter of 14.6%.

Looking forward, based on current trends, we expect o to sustain a growth rate in net earned premiums of between 25 to 27% for the full year. We continue to believe that a combined ratio sustainable for the mix of business barring major CAT losses we believe we can produce a ratio in the 91.5. the 93% range for the remainder of he year. We believe operating cash flows will remain positive for the remainder of the year and net investment income should remain relatively stable given the current rate environment.

Our effective tax rate increased from 12.8% in the first quarter to 14.2% in the current quarter. As you know, this rate is dependent on a mix of earnings in taxable and nontaxable jurisdictions. We believe the rate will remain in the 12 to 13% range.

I am very pleased about the second quarter results. We continue to experience favorable conditions in the insurance and reinsurance markets that should help to us continue to grow our business and improve the results. We believe the investment markets will continue to provide a challenge in the near term, but our conservative strategies should help us through this period.

I hope that you're pleased with our financial supplement and that you'll find it useful. As I said we plan to add additional information to the supplement in the future to help investors build a better understanding of our company.

Now I'll turn the call back over to Helen.

Thank you, Phil. At this time we'll be happy to take your questions.

Thank you. The floor is now open for questions. If you have a question or comment, press 1 followed by 4 on your touch tone phones. If you are on a speaker phone, we ask you pick up your handset to minimize background noise. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again if you do have a question or comment, please press by 1 followed by 4 on your touch tone phones. Our first question from Susan Spivak of was Wacovia Securities.

Just wanted to congratulate you on a good quarter and commend you on being the first to provide such terrific disclosure to help us analyze the company. I just had a couple of questions, just wanted to clarify some statements. Evan, you talked about the fact that rates were flattening out. And I just wanted to get some more detail as to what was the level of flattening out and how much had they gone up before they flattened out.

Let me take it in two pieces.

First of all, it's the property. Casualty rates continue to harden. Casualty rates began hardening, as you know, later than the property rates did. And casualty in all classes, it was rather selective in the beginning by class, but casualty in all classes has -- is now hardening significantly. I'm speaking specifically to reinsurance rates now. I think that's -- that's where your question is pointed.

On the property side, CAT rates began increasing in 2001, and they increased again in 2002. They are at rate levels now that we believe are adequate, for the most part. You still have to -- you still have to underwrite this business and there are many risks that we're simply still not competitive on, and so the market - in any market - the market is chaotic, but overall for the business we are writing in CAT, it will produce an ROE of north of 25%, as I said and their rates in July 1 were not continuing to go up significantly. They were up really single digit. And I would expect that trend will continue for the balance of the year.

On the per-risk property side, rates have been hardening, again, through 2001, went up significantly in the fall and in January 1 and right now they are pretty much at a level -- we think they're at an adequate level overall, there are always exceptions, but for the most part rates are flattening out in the per-risk property. They are increasing a little bit, but not much.

If they maintain these current rate levels, and the terms and conditions which is as important or more important, remain firm, we like what we see.

Okay. Evan, what was the rate increase -- the stuff July 1, had that already experienced a rate increase where it's single digit now?

Yes, it had. The stuff that didn't experience a second rate increase went through and came up to the same levels. Those that that had experienced more than one rate increase level have about flattening out in the single digit range.

But was it 25%, is there any way to give us a range prior to that?

The CAT overall, as I said to you, it was single digit. And in the per-risk property, it varies by account. Some accounts were still going up 50%, but for those that were reasonable -- that was good business, that was -- had experienced a history of rate increases, over two cycles, those went up pretty much single digit or beginning to remain right where they were.

Last year, what was the rate, 50% last year and another single digit on top of that?

The rates have moved up on most accounts where you're seeing low single digit, they have moved up well north of 50%.

Can you quantify the casualty rates that are hardening, any magnitude of rate increase?

It varies by class. D&O, what's the right rate? It's going up 200%, 300%, 1,000%. Attachment points are way, way up. Terms and I wouldn't stay as focused on rate as I would on terms. Terms are tightening dramatically. Move to excess casualty and rates are still moving up 25, 30, 70% and 100% in many cases. So it's across the board, it varies by line of casualty, varies by territory.

Okay. And if I could just ask Dominic, I apologize for taking so much time. Can you provide the same information with your business in North America. What is the magnitude of rate increase, are you seeing that flattening out?

We are not seeing rate increases flattening out. I think as we had talked a little bit through the previous two quarters, we still saw people in the marketplace that had the benefit of prior year reinsurance protection still being fairly competitive in the market. Our view was that as the year ran through and these treaties had to be renewed, that in terms of conditions across all lines would even effect the stronger rate increase and movement. That's pretty much been confirmed, as I said, we saw rate increases in the mid-30s accelerating through the quarter.

There's another effect here, as people renewed treaty terms in conditions on their reinsurances, and a lot of the program business has kind of fallen out of the marketplace, which is forcing some of those larger risks to go out and seek individual protection. They are now subject to the same type of price pressure because capacity has dropped out.

Most cases people are offering 50% of their previous capacity, subject to now everybody pretty much -- there's still some outlyers on a consistent reinsurance platform, has for us created a continued momentum in the rate area. It really affects all commercial lines.

Brian, I can't leave you out, you talked about more durable hard market conditions mounting. Can you just cite some reasons or evidence of why you see that and how long do you think this momentum will continue?

Well, thanks, Susan, I appreciate your earlier comments. The rate increase as an example, is kind of an interesting thing to watch.

As Evan pointed out, if we look -- if we look at all our business, maybe the one area that isn't growing that fast is property CAT, but property CAT was probably the most disciplined portion of the market overall, through the last four or five years. And it didn't go up as much, doesn't need to go up as much. That's -- there is some rationality to it. Why the other rate is going up, I think the industry continues to need to build rate levels.

Dominic and evan talked about D&O, those rate levels definitely need to go up, I think, as exposures come in.

So there's a lot of -- there's still a lot of cleaning up that needs to be done on the balance sheet and I think there are some exposure increases as well. So when you just look at momentum across the world, the momentum is still there, and that's why I think this is going to continue for some time.

Okay, thank you. I'll let someone else ask a question now.

Thank you. Our next question is coming from Mark Lane of William Blair and Company.

Morning, everyone. Couple questions. Number one, given the huge growth in net written this quarter, do you anticipate the need to raise equity capital over the next 12 months to support the growth or are you able to generate capital sufficiently on an internal basis?

We feel very comfortable with our capital position. We think we can sustain this kind of growth rate indefinitely. So the answer is no, we don't see any need to go out and raise equity.

Quick question for Phil, the 25% to 27% net earned premium growth in the second half, that excludes the LPT business?

It does.

And then the question on asbestos, you provided a lot of detail, which I appreciate, and you had a lot of general discussion on this huge number of unimpaired claimants and peripherial defendants which are not new issues.

I am trying to figure out what exactly are you trying to say discussing these issues, are you taking a more aggressive stance on unimpaired claimants than you have in the past? If we get an adverse ruling in the errors case, is that something we should expect, driving more adverse development? Can you talk about that a little bit, why did you go into so much detail on these general issues?

Well, Mark, we wanted the detail because we got a lot of questions on asbestos and we were trying to give more background for our approach. And there's -- there's a lot of discussion about asbestos using, I think, kind of general statistical approaches which don't apply company by company. I think really the only way to do it is do ground-up analysis, which is what we do. So we were trying our best to describe to you how we approach asbestos issue and why we feel comfortable with reserve levels.

Are you setting up the errors case as a real precedent case or just using that as an example as to something that -- that --

It's an example. There are a number of cases out there. There's a lot of judicial activity and we are trying to give you some idea of the judicial activity that's occurring across the country at state and federal level. And that's just one example.

Okay. Thanks a lot.

You're welcome.

Thank you. Our next question is coming from Charles Gates of Credit Suisse First Boston.

Hi. Good morning. Superb financial supplement. I only have one question. In Evan's remarks about the flattening out of reinsurance pricing, to what extent do you think that a factor in part of the commentary that I believe Mr. Stannard over at Wayne Reeves said, that his results had benefited from a buck of luck, as well as the impact of the new companies -- that were created in the last six months, such as access specialty?

You know, if I'm understanding your question right, I think the new capacity has had a marginal effect. It's not lead capacity. It's following capacity.

The market continues to look to a few leaders who have the capability and the statistical and the systems capability to really price the business, and set terms, Wren is one of those company, Tempest is one of those companies. Right now overall, and there has been a absence of CATs, it's been a quiet market.

As Brian said, it's been a disciplined market. Right now the rates we are achieving, customers aren't going to really pay higher levels than they're paying today, not at this moment in time and we are achieving a reasonable return on equity for the risk we are taking. We think north of 25 is given the risk is a reasonable risk adjusted return.

And so I think that's why you see it flat -- you've seen it flatten out in the CAT area. But I don't think flattening is bad news at all. As I say, it depends. That's on the book of business we write. There's plenty of business we still take a pass on because we think it's too cheap or the terms are too liberal.

Thank you.

If I could just jump in a second on the rate levels. Certainly the property cat rate levels, if you're getting ROEs of 25% expected, those are pretty good rate levels, but I don't think we should lose track of the fact that overall reinsurance rate levels continue to go up, particularly in casualty.

I think if we look at our overall book of business, our rate levels are actually rising. Rate increases are actually going up month by moment on a weighted average basis looking at our entire book of business.

To focus on one area I think is maybe a little misleading.

To put a number, Charles, on what Brian just said, if I take all the reinsurance business in the quarter that we wrote, we achieved a 36% rate increase. We tracked this by line of business, by office, monthly. For the quarter we achieved 36%.

Which is kind of in line for what we're seeing for the overall book of business. The casualty rates are accelerating, the property is starting to slow, kind of natural thing.

What would have been the number for the previous quarter equivalent to the 36%?

I knew you'd ask that. Year to date is 34%. So I don't have the quarter in my head of the first quarter, but obviously the first quarter was lower than the 34. Around 30 or 32.

Nice job.

Thanks. Next question, please.

Next question coming from Michael Lewis of UBS Warburg.

Call me crazy, I like the first quarter presentation better. [ Laughter ] It was a lot easier. Lot less numbers.

Let me ask a couple of questions. Phil, give me some idea what you're shooting for, debt to capital level as well as what kind of leverage you're looking for and when you think you'll get there.

Also Dominic, can you give us some idea what you're talking about in your gross to net numbers. You've said you want to retain more business. Can you give us some idea in which areas and is that going to be a serious change in your retentions?

And lastly, on the World Trade Center, I see the numbers you put out on your reinsurance recoverables. Can you give us some idea, especially coming on the CHUBB comments regarding their concern about being challenged by some of the reinsurance companies regardless World Trade Center claims we won't run into a reinsurance recoverable issue as the payouts start intensifying. Give us some background when you start seeing the payout intensifying and how we should monitor reinsurance recoverables there.

Phil, take that.

First, with respect to the leverage, we haven't a set of specific target about where we'll take the leverage but we expect to continue to reduce our debt over the next several quarters and you'll see us paying off the remaining INA note probably and you'll see the fee lines convert. So we'll have a very low debt to equity ratio by the third quarter of next year, of 2003.

Dominic, want to take the net to gross question?

Yeah. Obviously as we look at the environment and the business in terms of improving rate levels, tightening of terms and conditions, we historically have kept very low net pretty much across the board, but specifically in the casualty lines.

Now obviously with A) kind of an increased ability to write business and B) writing it at terms and conditions that are within our range of favorable outcomes, we are going to take nets. At the same time we really focused our reinsurance strategy into what I'll call our core reinsurance portfolio of reinsurers.

And that also, A) reduces our dependence on reinsurance and B) it focuses our reinsurance to really key relationships, at the same time allows us the opportunity as we have done those two, to increase our nets that is really related to what we think is more preferred business at more preferred pricing, and I'll say it's mostly casualty, but at the same time we have increased nets smaller level of proportion in the property areas as well.

Michael, on the World Trade Center, I don't frankly know the reference on the reinsurance recoveries and can only talk about our own relationships with our reinsurers, I think you can see from the statistics we put out, we have collected just about everything and nothing's overdue. Our relationship with our reinsurers has been strong, we stay closely in touch with them, we don't see any issues emerging on our recoveries for World Trade Center.

I don't -- you ask me when it's going to accelerate. It was relatively light on the quarter. These things come and go. We had a pretty heavy activity with the Silverstein payment earlier in the quarter. My guess is it's going to string out a bit. I don't think you're going to see a big -- at least for our portfolio now, big payments. I think you're going to see it steadily over quarters and maybe years before this is finally resolved.

Thanks very much. That really very, very good disclosure.

Appreciate it. Hope you like the second quarter better than the first. Next question, please.

Next question coming from Ron Frank of Salomon Smith Barney.

I'll just jump on the "I like the disclosure" bandwagon and get right to my questions. How about that?

A few things, Evan, I wonder if you could tell us qualitatively what went wrong from your point of view at ACE Global Markets and what then was the fix. Not so much in quantitative term, but qualitatively, did they overreach and not as much better as they thought they were to begin with, et cetera.

The second question for Phil, a disproportionate amount of your doubtful recoverables seems to be on paid losses and I wanted a little more color on that and why I would not, as I assumed you are not, extrapolate that onto your overall book of unpaid recoverables because obviously that would have severe implications.

And finally with respect to the market to market on the credit swaps, if I'm reading that correctly, a number of your peers like CHUBB and Embac flowed that through the operating line and I wanted some insight into how you looked at that, thanks.

I'll let Phil take those two. We'll start with Evan on the qualitative questions regarding AGM Global Markets, Lloyd's.

Ron, see if I add a little color to this.

The size line that they were putting out on a gross and net basis was larger in many classes than we are ultimately comfortable with, and those lines have to be cut back and have been cut back, and that action was begun last year. And to stay with that point, you have to protect that portfolio until it runs off.

So as you renew business, you're renewing business at your -- you're holding smaller nets, lower nets in line with our overall corporate policy for that. Yet you have to keep purchasing reinsurance to cover the runoff on those larger lines. It would be imprudent to hold it now. So we are eating that point. Number one.

Number two, there are certain classes of business that haven't made money historically. And we don't believe will make money. And it isn't worth chasing to prove you can do it in one year. We don't believe that it will consistently earn a profit. So we have exited those classes.

And number three, kind of in line with number two, which is traditional in Lloyd's. Lloyd's, a large source of its business is line slips, MGAs, as the United States. That's how it secures a good portion of the E&S business that they write. We made a decision to not eliminate that business, but to truly manage the portfolio in a tight way, and so we have cut back on the number of line slips and the exposure that is out there and underwritten each of those who are underwriting on our behalf very closely and so that, again, reduces the portfolio.

In my own judgment, the actions that have been taken are the right actions, and I came in and looked at it dispassionately. I think it's the right actions. I think the protections that have been purchased are right. This is a short-term phenomenon from what everything we can see.

We look at the numbers closely and I can tell you not to like color it in numbers and all that, but underneath the surface, the current underwriting year, the business is growing very quickly and the team of people who are underwriting are very, very good.

So I think, as I said, I think the second quarter is kind of a zenith in terms of the results and I think it will -- I'm already seeing it because I have a little quicker look at third quarter than you do. It's turning the corner and it will. It will shadow us, however, for the balance of the year.

You want to take the other questions?

First on the reinsurance recoverables, Ron, we do a very careful look at this other category and go on a case by case basis and make our judgments about the reserve levels based on a specifically understanding of each individual case, whether it be a dispute or troubled company or whatever the issue is, we are doing it on a very specific case by case basis.

We are not uncomfortable that the concentration in the current category -- I mean in the paid category is going tol translate into any other concentration in our other categories. In each case we are looking at it on a case by case basis and making specific adjustments.

Phil, just following up on that, what might ordinarily cause that pattern to happen. Did you just inherit a bunch of old stuff from Cigna that's been noncurrent for a while and just sitting there?

That's a portion of it. The other portion of it is, as we paid a claim, then that's when it first becomes really collectible, right? Then we deal with the collection process and as we have disputes or dealing with companies that are in rehabilitation, that process stretches out. So we tend to have a concentration in that category in the paid recoverable section. Paid recoverable area.

The other question you asked was with respect to credit default swaps, and maybe it would be helpful to just spend a minute talking about our accounting in that area and accounting for both single name and structured transactions. First we account for the business's insurance and that means we record premiums and accrue for losses in the operating income as they occur. We evaluate the positions and establish specific reserves and IB&R for credit events which are charged to operations.

That's important. We charge those things to operations. We have case reserves which are established. Losses are probable and estimable and we also set up an IB&R based on historic loss experience and our expectations of frequency and severity.

We charge those items to operations based on our view of the losses in this business. So we believe the operating income reflects the earnings from the business.

Completely separately in accordance with FAS 133 we mark the credit default positions to market. The 33 million in realized loss that you see in the supplement, is the change in the market value in all the positions from March 31 to June 30.

The change in value reflects the change in credit markets and doesn't indicate there's a loss to ACE. It doesn't mean a loss has occurred or will ever occur.

It's just triggered by the widening of spreads?

That's right. That doesn't have anything to do with whether we'll have a loss. There's no credit event, necessarily. If there's a credit event, we record it in operations. And we even anticipate credit events in our operations through the establishment of IB&R. And so just as an aside, we also think our accounting is consistent with the other financial guarantee insurers.

That's all very helpful. Thanks again.

Next question, please.

Our next question is coming from Jay Cohen of Merrill Lynch.

Just a follow-up on a couple of Ron's questions. On the credit default swap portfolio, can you tell us what the notional amount of that portfolio is actually?

We have that in the supplement actually if you have a minute to flip through it. We don't have it? Oh, okay.

It looks like the par outstanding is about 17 billion and that's all disclosed in the supplemental information that's provided by our financial guarantee companies. You find a lot of useful information there in the credit rating reports on our financial guarantee companies.

That's helpful, great. And then secondly, related to the Lloyd's business, Evan you mentioned you were exiting certain lines of business. Just from a market standpoint, I'm wondering what lines are you finding to be particularly unattractive at this point that you are exiting?

These are more peripheral lines, not core lines. An example, blood stock -- animal mortality.

Okay. So no main categories really?

No main categories. I can tell you, for instance, our aviation business is growing, property business, specialty property business in London is growing significantly. Marine business is doing well. Professional lines business is growing, our political risk business is. So the main specialty classes, those continue. We haven't exited those.

Thanks a lot.

Okay, Jay. Next question, please.

Next question coming from Brian Meredith of Banc of America Securities.

Morning, everybody. Couple of questions, couple of quick numbers questions and then a more broader based question.

First could you give us the level of refundings, most revenues and earnings benefit in the financial services business and the second numbers question is I noticed interest expense was actually up sequentially despite the debt paydown. What was going on there and what's a good run rate, and I have one more question after those two.

Interest expense first. As you know, we issued 500 million of senior debt at the end of March. During the beginning of the quarter we paid down 175 million of commercial paper. And at the end of the quarter we paid down the RINOS and INA note. The net effect of that was a nominal increase in interest expense, from 51 million to 52 million. We expect going forward, at least for the third quarter, that will reduce by about 2 1/2 million dollars.

Dominic will take the refunding question unless you want Jerry to do it.

Jerry -- I could do it, we have the numbers. In the current quarter, refunding accounted for approximately 2 1/2 million of additional earned premium.

The last question is -- there's some stories about how people think that the terrorism legislation will come to the floor sometime in September or maybe we have something.

My question is if indeed we do get terrorism legislation out there, what do you think the potential impact is on your ability to write business. I imagine there's a lot of business, Dominic, you can't write right now because you're managing your aggregate exposures with respect to terrorism. What kind of favorable impact could we see going forward If we do get some legislation?

Since you mentioned Dominic, I'll let Dominic do it.

I think our disciplined, conservative underwriting philosophy will still be maintained with or without the Federal bill. The Federal bill really is pure Cat protection. There's a lot of exposure underlying that would require us to exercise discipline.

The benefit really to the people of the United States as opposed specifically our industry, and to those of us that write terrorism, I still think discipline of all normal underwriting matters would apply. Management of our capital being applied to this business, the PMLs of the business that we do right.

The backstop is, it's purely there on a CAT Federal protection basis for the rest of the general population where that cover will not exist, and I don't know whether just because of a Federal backstop, that would allow anyone to go back into the market aggressively. I don't think it should. In our view we wouldn't provide that in our business.

Great, thanks.

You're welcome, Brian. Next question, please.

Next question is coming from Dave [Shoussy] of JP Morgan.

Good morning, everybody. Just one quick question. Just trying to get my arms around kind of the capital allocation issues. What your thoughts are in terms of paying down debt or reinvesting excess cash flows back into the business just kind of from a 50,000 foot level. Why the aggressive prepaying the debt, get the balance sheet firmed up, and just get some color on that piece of it.

Thanks, Dave.

Well, clearly this is a time for us to use our capital in the insurance business. No question about it. And I got an earlier question can we sustain this growth level with the capital we have, and we can. There's a balance to everything, and when we acquired Cigna, we took on debt to do the transaction. And I wanted to restore some balance to that.

I think we debt we maintained should be more in balance with our financial structure. So therefore I said let's start repaying the debt, get it down to a level that I think is more reasonable and appropriate for the company. So yeah, I mean, you could argue that you could use the capital in the business, but we are using our capital in the business.

Should we look at that as kind of a percentage of tangible equity or -- I guess how do you look at that?

Well, I guess certainly it's a reduction in overall capital when we reduce the debt, overall capital comes down, not really a reduction in tangible equity but certainly a reduction in overall capital capabilities, but we feel very comfortable with our capital levels in general, including the repayment of the debt, going forward in this marketplace. We are growing, as you see, in the 20-plus, 30-plus percent range, and we have got the capital to do that. So we are going to walk and chew gum at the same time.

Great. Appreciate it. Thank you.

Our next question is coming from Alice Schroeder of Morgan Stanley.

Good morning. I really like the supplement, very user friendly, very helpful. I have three questions, but two of them are pretty straight forward. On the Lloyd's, could you talk about what the impact of the lines that you're exiting has on capacity. The Insurance Insider reported this morning for 2003 and 2488 you're de-empting about 300 million pounds.

Second, could you comment on the outlook for when one in the reinsurance market in light of the regulatory capital issue of us the European reinsurers which may not be reflected in the market behavior. I've gotten a little bit lost in the woods on the credit default swaps and need a trail of breadcrumbs.

First the 33 million mark to market and June 30, could you talk about how this relates to the $20 million Worldcom exposure that Fitz wrote about. Is that included in the 33 million or is that the net impact of the 12 million of bonds of Worldcom you wrote off, in other words, taking possession of the bonds on default and then your press release says that you're reporting the default swaps market to market as realized losses in connection with FAS 133.

I want to understand more clearly when you talk about charging it to operations, setting up IB&R and taking it and the accounting being consistent with the other financial guarantee insurers. Are you saying these are ineffective hedges in connection with FAS 133, because Embac and MBIA are changing their accounting as we understand it in connection with the new S&P core earnings definitions to put this back into operating earnings.

Let me take the first part. The credit default swap first. Understand what I said before, we do have the impact of credit default swap losses in our operations. We account for them as insurance.

When we see a specific issue, we provide a reserve for it. Before we provide a reserve for a specific issue, we provide for IB&R based on our experience and default rates, and we charge those things to our operations. Okay. So our operations reflect our view of what the profits from that business will be.

Completely separately and down below the line we are required to mark these instruments to market, and we think those changes in market are really somewhat irrelevant to our operations at that point. The market value is changing, but it reflects changes in credit spreads and doesn't indicate necessarily any loss.

So we don't think the change in market value is what should be reflected in operations, we think our view of what the losses are going to be and our provision for IB&R is what should be included in our operations. That's the way we do it.

I'm still a little confused on a couple of things. I may call you afterwards so we don't bore everybody on this call with accounting. Can you at least explain whether the Worldcom exposure is in or out of the 33, or whether that's the bonds that you were talking about?

The Worldcom, the 12 million that I mentioned earlier is bonds. That was the permanent impairment that we took, a portion of the permanent impairment we took in our bond portfolio.

But those were not bonds you took back on a swap default?

No.

That's separate.

I would be happy to talk afterwards.

Okay.

On the Lloyd's piece, you want me to do that?

Either way. Alice, the short answer is, the discontinued lines have absolutely nothing to do with the de-emption, the reduction in capacity.

I'll add a little more color to that, but let me just tell you, discontinued lines are -- it's in the millions of dollars, it's not in the tens of millions in the quarter or any of that. It's a piece, but it's not -- it's not significant. The -- but it is a portion of why the growth year over year, one part of it. The de-emption, ACE global markets we are very committed to ACE Global Markets. As I said, it's an E&S operation out of London. It happens they have been exclusively utilizing Lloyd's paper up until now.

In the future, beginning with 2003, ACE Global Markets will be using company markets, our company market paper as well as Lloyd's paper for certain lines that we think are more appropriately written on company paper as opposed Lloyd's paper. In total, we expect ACE Global Markets to grow in 2003. So the de-emption shouldn't be read as a shrinking of that E&S operation of ours in London, no, it will continue to grow and it will simply have more than one underwriting venue it will access as an entity.

So really your distribution, not your volume, that you're talking about?

Yes. Remember, if you look at -- perspective in looking at the history of ACE. ACE purchased its position in Lloyd's prior to the Cigna acquisition. With the Cigna acquisition we gained admitted paper around the globe and we gained admitted company paper in London, so we have more tools and capabilities in our organization, and so the de-emption is simply a reflection of that. The unit that underwrites that business will grow next year, not shrink.

How much would you save in terms of levees and costs by doing that?

The company market is overall, in our judgement, it is a more efficient market for those lines of business.

Thanks.

She had one other question on the reinsurance, maybe Dominic can do that. Reinsurers in Europe.

I think we still believe there is additional pressure to be brought to the market from a reinsurer perspective and quite honestly we look forward to that pressure because we believe that continues to maintain the marketplace as one that evaluates its need for continued rate increases, not only from the standpoint of our -- anyone's net underwriting book, just but also for their cost of reinsurance.

We do anticipate reinsurance costs to continue to increase across what I'll call the commercial lines of business, and the issue on capital relative to European reinsurers and the pressures that might bring on pricing, it is anticipated. As I said, we see rate increases accelerating because of the effect, not only, but also from reinsurance this year and expect that to continue.

Alice, if that -- if the European reinsurance carriers have problems and we create -- that creates a vacuum, we'll be there to fill it.

Thanks.

Our next question is coming from Steven Eiseman of Chilton.

You there? Why don't we go to another question then.

I would like to remind our audience, for further questions, please press one followed by 4 on your touch tone phones at this time. Our next question from Al Cuppertino of Columbia Management.

Good morning. I have a question I think for Evan. You mentioned you're stopping the large one-off transactions and disability lines and life reinsurance area. Can you give us more information as to where you are focusing your life efforts and the second piece of that, I am assuming that ACE does not do much in terms of reinsuring the equity guarantees for variable annuity [riders]?

First of all, we write a small book of life reinsurance. I underline the word small. The -- it is not a major line for us. The long-term disability business we had written a little bit of that, a couple of one-off deals and some active life business as well. In our judgment, upon looking at it fairly closely, it's fine, it will run off just fine, but we just don't see a lot of juice in it.

We don't see there's much of a market need for another player in that business. The returns are single digit as far as we can tell, if you want to build any sizable portfolio, so why put the effort to it? We didn't have the in-house expertise and have to farm out too much of that expertise both in claims and in actuarial, so we simply made the decision and this is not a big deal to discontinue pursuing that.

Now we do pursue some specialty business. You mention the GMDP business and we do write some of that. We think we have a particular expertise in that area and we have guys with a very good knowledge in it. We write a small book of it. It is a growing book.

The -- I might say when you talk about the equity market guarantees, it's equity and interest rate, first of all and secondly, remember, somebody has to die first or they have to annuitize, so it is double trigger. Then the value that they collect is more driven by what happens to the equity markets or the interest rate markets.

If I take our existing portfolio today and I market to market it at the S&P right now and I say it never changes, we still make money on our in-force book of business. We are not losing any money, and it's a small portfolio.

Thanks very much.

Our next question is coming from Bijon Mosami of Freedman.

Actually I don't understand quite how you can still have some kind of premium growth, but the pace you incurred staying at 103% excluding the runoff and about 120% including the runoff. Could you walk me through what has made this [INAUDIBLE- Interference] increase staying high? Thank you.

I don't understand the question.

Could you ask that again? [INAUDIBLE- Line interference]Could you go over the question again.

[INAUDIBLE- overlapping lines] - net basis.103% excluding the runoff and 120% including the runoff.

Well, let's -- Phil, you want to go to the statistics on this thing?

I'm sorry I still don't understand the question. Can you ask that question one more time.

The question is kind of simple. Considering your still growing premium volume, I still don't understand why the payouts are so much quicker than the reserves that you are taking. In other words, I want to understand the quality of the earnings.

Are you [overlapping speakers] we are not quite sure if those are correct.

-- Large payouts in the quarter that makes the pay to be large. My understanding was there was no World Trade Center issues, is there anything there that is continuing to make the pay to incurred above 100%?

I don't think the paid to incurred is above 100%, Bijon. We are checking numbers now. I'm not sure that's correct. Gives a chance to verify that.

We are looking at page 22 on our supplement. Is what you're looking at.?

Right. If you look at the top, you see excluding the runoff operation, you had a payout on net basis of about a billion dollars.

The first page includes runoff. The first caption includes runoff.

So the righthand side it includes the runoff. Lefthand side, it does not.

No. The lefthand side does include the runoff. The right hand is the runoff.

In any case, in both cases if you include runoff, it's 120%, you exclude it, it's 103. Any unusual payouts in the quarter?

No, there's none. We are not seeing that relationship. We are seeing an increase in our gross losses during the period of a billion 8, being offset by payments of a billion 7. A gross increase in reserves and we are seeing a gross increase in recoverable. You can see the components there.

Thank you.

I tell you what, maybe the best way to do this is to call us offline and let us go through the statistics with you.

Thank you.

Because we're not seeing -- our loss activity is actually quite good. It's actually quite good.

Thank you.

Thank you.

Our next question is coming from Alice Cornish of Prudential Securities.

Thank you very much. I would like to go back to the errors case again, the Supreme Court, do you have any idea when the court would hand down a decision on this case?

Alice, I don't know. I'm not sure I could give you even a reasonable guess as to when it would happen.

Just so we could track a time line because it does sound like it could be pretty persuasive in other legal situations if it were to be favorable.

Yeah. That's why we pointed it out as one of the number of things going on out there.

Dominic, you had mentioned there had been significant growth from new products and new ventures in the North American operations, can you talk a little bit more about these?

Yes. You know, end of last year and beginning of this year we went into the A&H business, the accident business in the United States, that has provided significant premium growth.

We went into the umbrella business and the medical malpractice business, we are entering currently the environmental business, and all of those -- and the consumer solutions business on a broader scale than we had in the past and all of them have contributed to current profitability. Susan, would you like to expand on that?

Dominic, I think you hit it right on the nail. Our renewed effort on the E&O front and D&O front in the United States has contributed to a lot of growth so far this quarter.

Thank you.

Okay, Alice. Next question, please.

Our next question is a follow-up from Ron Frank of Salomon Smith Barney.

I like Bijon's question better than mine. I want to be sure I'm not doing the math wrong. Phil, I'm not trying to argue on the phone, but, Phil, if I understand the total includes the runoff, correct?

That's correct.

So if I subtracted one net column from the other, 984 minus the 10 in the net column, that would mean your incurreds for ongoing operations were 974, right?

Correct.

If I do the same with the paids, your paids on ongoing would be 832?

Correct.

Paid to incurred in the 80s and about the same on a gross basis?

Yeah. We have done the arithmetic, we were going to talk to Bijon separately about it.

We set it at 85.

Bijon doesn't let me on his calls so I figured I'd make sure.

The paid is actually about 85 --

Yeah.

It's progressing very nicely. We are growing too.

My second question was Phil, you mentioned an expected growth rate in the upper 20s for the rest of the year on written premium growth. The full year, sorry. That was exclusive of LPTs.

That's correct.

There's been some confusion about that in the past. Could you help me with what the LPT numbers in last year and the first half of this year are so we can get the base right?

We can. And for your convenience, we have included it in the supplement. So if you turn to page 14, you'll see that we have in the first quarter of '01 we had 252 million. Second quarter '01, 165 million. Third quarter was 135 million. Fourth quarter was 90 million.

I missed that completely, Phil. Sorry about that. Thanks a lot.

Next question, please.

Our next question is coming from James Tarkenton of Oak Value Capital.

Just wanted to see if you could expand on your assumptions that you used to come up with your expected 25% plus return on equity on your property CAT reinsurance business as far as term and expected losses.

Guess that's yours, Evan.

You know, I'll invite you down any time you like to spend a couple of hours with the rocket scientists who really build up the pricing of this business, but let me give it to you in a nutshell.

It's really built up in a granular fashion. We have a number of tools and models. It's done in a scientific way as is possible, as quantitive a way.

That is for -- because what is it? It's wind and quake and flood primarily are the exposures.

We measure those exposures by location. We do damageability assessments on every portfolio that we underwrite. We get detail from every one of our insureds, run them through the models. For that territory, for that peril and estimate damageability.

We understand what the probable maximum losses are. We understand what the frequency of occurrence of those losses would be and the magnitude of the loss and therefore we put capital at that and a rate. And based on the rates for the capital for that exposure it develops a ROE, return on equity.

That's done on every single risk we underwrite. When the underwriter is finished with that, using the tools that they use, they then peer review it with other underwriters before it is released to the market. In a nutshell, that's how it's done.

Great, thanks.

Our next question from Tom Chonaki of Goldman Sachs.

I must be awful slow at the finger this morning. Just one quick question. Most of my questions have been answered. Could you just touch on the growth in the Bermuda operations, which seem to be down. I was wondering what's going on in the excess markets there and whether you see that picking up for the balance of the year?

Look, I know that Dominic really wants to answer this question, but the growth -- our Bermuda operations are really growing quite well. So.

If I read the uh --

The old supplement has, Tom, if I could just jump in, the supplement from the past has both the financial lines business in it as well as the standard Bermuda operations.

Looking at page 16 and 17.

Yeah. So let Dominic go through it since this is his operations. Our standard Bermuda operations are definitely growing. Go ahead, Dominic.

Page 16 and 17 are on an old segment basis where the financial solutions business was previously reported under ACE Bermuda.

Currently the ACE Bermuda book of business is experiencing probably approximately 100% growth, in the core lines of businesses. In excess property, directors and officers, excess liability, we basically have doubled the volume period over period. The two things that are offsetting that is, A) under the old segment basis, the financial solutions.

And two, as hopefully you're aware in previous quarters we have stopped underwriting aviation business in Bermuda. And therefore that is having a negative drag on what I'll call consolidated growth on production side.

Thank you.

The true growth in Bermuda, just to give you a number, was 55% in the current quarter. So it went from 73 million up to 113 million.

I think we're seeing for the first time this year the excess business coming back to its former levels, D&O is growing. I would say the solutions business is actually growing overall. We had heavier growth in the U.S. than the solutions business, but the solutions business had good growth for the quarter as well.

Thank you.

Anybody else?

Yes, sir. Our final question is coming from Ken Zuckerberg of Lazar Asset Management.

How alphabetical. Good morning, Brian.

Last but not least.

I'm used to it my whole life.

Anyway, we have obviously seen some stress in the European life insurance market and Evan I know you commented a bit about your desire on what you'd like to do and what you'd like not to do in life insurance. Just wondering if any of the turbulence there presents you guys with any opportunities to be helpful to primary companies or alternatively does it offer sort of a good or interesting time for you guys to think about building some product capabilities in Europe?

Evan, I think that's yours.

Are you thinking specifically life reinsurance?

I guess both. I think none of us and probably you guys as well want to live through a joint UK life insurance acquisition, but the issue being can you come with the balance sheet and capabilities either to reinsure life companies or alternatively work in sort of specialized solutions if companies have solvency concerns and/or really the need to lay risks based on the fact that their stock market investments are sort of down?

The major players in the life reinsurance area have been, as you know, the Swiss and Munich. The score has been a significant player on the continent. And grilling has been as well.

To date, on the life reinsurance side, which is mostly mortality based, we have not seen any change in the market. The market is as aggressive as it has been.

Do I believe they're making money? Yeah, I believe they are making money in mortality but I believe their appetite for returns are lower than our appetite is. They are so large and they have -- and scale is important because of what a life reinsurer does in terms of providing on true case by case underwriting support to the market.

We just don't see the opportunity at this moment to enter that. We haven't seen any of their weakness in balance sheet changed translate to a market opportunity yet on the life re- side.

On the life insurance side in Europe, margins are extremely low and have been extremely low. It's about distribution. If you wanted to build [INAUDIBLE] in Europe, you'd be generations doing it and you'd be competing against returns that are, as you know, very, very thin.

Why have they chased the equity game? Because there's no pricing, there's no margin in basic price in the product they sell in Europe.

So we have not seen that. On the acquisition front, that's opportunistic and we keep our eye open.

Thank you very much. That was helpful.

You're welcome.

Okay.

Thank you. Any there more calls?

There are no further questions at this time.

Thank you. We'll conclude this call. We thank you for your interest in ACE and look forward to having you join us again next quarter. Thank you and good day.

Thank you ladies and gentlemen. This does conclude this morning's conference call. You may disconnect your lines at this time and have a wonderful day.