丘博保險集團 (CB) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ACE Limited third quarter 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 on the presentation. It is now my pleasure to turn the floor over to your hostess, Ms. Helen Wilson. Ma'am, you may begin.

Thank you. Welcome to the ACE Limited September 30, 2002, earnings conference call. I'm Helen Wilson, Director of Investor Relations, and I'll be your host for today's call.

Our report today will contain forward-looking statements such as statements relating to our financial outlook, business prospects, market conditions, profitability, pricing, growth, retained premiums, cash flow, investment income and strategies, debt, tax rates, exposures, reserves, and recoverables. Actual results may differ materially. Please refer to our most recent annual report on Form 10-K and quarterly report on Form 10-Q and other documents on file with the SEC as well as our earnings press release and financial supplement, which are available on our Website for more information on factors that could affect the forward-looking statements.

I'd also like to remind you that this conference call and its contents in any tape, broadcast, or publication by ACE Limited are the sole copyrighted property of ACE Limited and may not be copied, taped, rebroadcast or published in whole or in part without the express written consent of 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 time 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 number 3534101.

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, Chief Financial Officer, will review the financials; and then we'll take your questions. Also with us to assist with your questions are representatives from some of the operating units. And now I'll turn the call over to Brian.

Thank you, Helen. This last quarter was particularly a big one for us in terms of premium volume. With gross premiums written up 41 percent and net written premiums up 70 percent. Operating income totaled 57 cents per share and book value per share rose to $24.37, representing a new high for ACE. Our operating cash flow for the quarter exceeded $1 billion, which was greater than the positive cash flow that we realized for the entire first nine months of 2001. Finally, our invested assets rose to nearly $18 billion, an 11-percent gain over the prior year-end.

Our financial supplement contains a great deal of quantitative information on which Phil will provide you with more insight in just a few minutes. Clearly, from a business development point of view, the big story this quarter was volume. Every business segment contributed to our net premium growth. North America was up 58 percent; Overseas General was up 63 percent; Global Reinsurance was up 176 percent; and our Financial Services was up 81 percent. While these very high rates of growth are unsustainable over the long term, the increasing position of importance that ACE has achieved in the global property and casualty marketplace is sustainable. This is demonstrated by the breadth of the premium gains achieved over the entire spectrum of ACE's product lines.

In addition, as we indicated earlier, our net-to-gross premiums ratio rose 11 points to 63 percent in the quarter as compared to 52 percent in 2001. We expect this ratio to continue to increase over the next several quarters as we increase our Global Reinsurance business, which is largely retained for our own account, and reduce our utilization of reinsurance in our primary business.

Our net operating income of 158 million compares favorably with the 390 million loss we sustained a year ago from the events of 9/11, but, of course, almost any result would compare favorably. Our combined ratio of 97.7 percent included the impact of the European floods as well as heavy reinsurance costs associated with the restructuring of our global markets unit.

The fact is that despite a great many positive factors that were achieved this quarter, the ultimate result is hardly indicative of our peak earning power. Our net investment income was up 4 percent over the comparable period a year ago -- this, despite the increase in cash and invested assets. As long as new money rates remain below our average portfolio yield, we will only be able to increase investment income marginally through additions to our fixed income portfolio from positive cash flow. Fortunately, the exceptional premium growth and favorable trading conditions we are currently enjoying bodes well for a continued strong positive cash flow in the year ahead.

We reported 205 million of realized losses after tax. As a result, we incurred a net loss for the period of $57 million at 24 cents a share on a fully diluted basis. These realized losses were substantially offset by unrealized gains. As a result, our book value per share rose slightly over the period, which I believe should be viewed very positively in this extremely volatile market and points to the conservatism we maintain in our investment portfolio. Looking forward, Phil will provide you with more specific earnings guidance for 2003 later in this presentation.

In summary, we're well positioned to capitalize on our global platform, and we're emerging as the insurer of choice among leading commercial insurance buyers. On that note, I'll turn it over to Dominic to review the North American and financial services segments.

Thanks, Brian. In both our insurance North America and our financial services segments, we delivered a strong third quarter. Compared to the same period last year, we have seen substantial premium growth and increased our net operating income significantly. We are well positioned to maintain this momentum into 2003.

I'd now like to comment on our specific operations. All prior quarter numbers and all changes from prior quarter that I have referenced throughout my commentary will be excluding the effects of September 11th. These adjustments have been detailed for you in a previous correspondence.

Our North America operations continued their strong performance in the third quarter. Operating income was $113 million versus $85 million in the same period last year, an increase of 34.5 percent. These businesses posted a combined ratio of 90.7 percent in the quarter versus 96.4 percent in the same period one year ago. The improvement in our combined ratio reflects our commitment to sound underwriting as well as our discipline towards expense control. Our 5.1-point improvement in expense ratio is a credit to the development of our business platform and infrastructure over the past few years to build to deliver an increased capacity than incurring additional expenditures.

Insurance pricing continued to harden through the end of the quarter. Overall rate increases north of 60 percent for property, 70 percent for [casualtiesh], and 125 percent for the U.S. DNO book. Our Bermuda book of business delivered DNO increases in excess of 200 percent due to their lead position in the professional risk market for Fortune 500 businesses. More importantly, as I stated at the Bermuda Angle, favorable changes in terms, conditions, attachment points, and exposure limitations are improving and should contribute dramatically quality of risks written in our portfolio. We are now routinely able to exclude coverages that we previously either explicitly or implicitly assumed. In addition, we have included specific sub-limits on some types of risks at levels below the policy limits. All of the above contribute to a decrease of overall loss exposure for the business risk.

During the third quarter, we introduced a number of new businesses as well. We entered the environmental risk arena, where we determined that there was a shortage of capacity and a market yielding above-average returns. We also announced the creation of a casualty unit, which will specialize in general and product liability coverage for customers with challenging exposures below the Fortune 1000 market. We also formed a unit, which offers customized excess workers' compensation coverage.

In the specialty P&T market, we formed a dedicated global solutions group to enhance the service of our global property, [brain], international casualty, and multinational cash flow programs for U.S.-based clients. This business segment, which harnesses the global franchise of our organization has led to new business opportunities as reflected by The Hartford's decision to utilize ACE's global underwriting expertise, services, and solutions for its U.S. clients with international operations.

Momentum continued to build in the third quarter in our financial services segment, as the market created exceptional opportunities resulting from widening credit spreads, reduced competition, financial strength downgrades, and recognition by many companies that they do not have the resources or the expertise to underwrite credit risk. Our financial solutions group has established their reputation as market leaders that can deliver solutions designed to meet our clients' insurance and risk financing needs.

Overall, the financial services group continued their strong contribution as a company by posting $48 million in net operating income and combined ratio of 96.8 percent. In the third quarter, gross written premiums were up 104 percent to $493 million. While this portfolio transfer business grew 38 percent in the quarter while all other products experienced tremendous growth, comprising 186 percent over the prior year.

Our credit-based underwriting operations continue to experience variable market dynamics. The market's volatility allowed us to be both more selective in our underwriting activities and to achieve higher pricing. Not only are current operating earnings registering strong double-digit growth over last year, but we expect the embedded earnings potential of current writings in future periods be strong as well. Our fourth quarter outlook for our credit-rated products remains quite high.

This quarter you will notice that we have added a financial guarantee supplement. This information highlights the diversity and strong credit quality of our [audio break]. This supplement shows that our strong earnings momentum has been achieved with only a modest, less than 5 percent increase in the exposure accompanied by an improvement in non-municipal average credit quality to A-plus. Let me also add that ACE guarantees Triple A rating was affirmed by S&P after a lengthy review by S&P of the [monoline] reinsurance industry. This affirmation reflects the extent of experience of our team and its ability to profitably adapt and grow its business in the current credit environment.

The results achieved this quarter by both insurance North American and financial services solidify our presence in today's market as we continue to expand our business reach, introduce new products, maintain our premier service level, and create tailored business solutions. Now let me turn the call over to Evan for a more detailed review of our international and reinsurance segments.

Thank you, Dominic. ACE Global Re -- ACE Global Re property casualty had an excellent quarter. Gross and net written premiums were 84 percent, 257 percent, respectively, over the third quarter of last year. Pretax operating income was 66 million and the combined ratio was 76 percent. These results are particularly impressive considering we incurred 32 million of European flood losses in this division during the quarter. It's worth noting our expense ratio improved 10 points from 34.5 to 24.4 -- a very efficient ratio for a P&C reinsurance company.

All three of our operations -- Bermuda, U.S., and London -- reported very good growth. CAT-related premiums were up 34 percent and non-CAT was up 256 percent. CAT-related rates overall remained firm during the quarter with rates up about 8 percent over the prior year. We expect CAT rates to remain essentially flat during the fall and winter season, barring any major CAT claim activity. As I have said in previous quarters, rates we are charging on our portfolio should provide a return, over time, of 25 percent-plus ROE. This is adequate for the risk we were assuming but, again, as I have also said, we decline more business than we write, and we decline it because we deem the rates and terms inadequate. This simply re-emphasizes the value of our CAT franchise and our experienced analytical underwriting capability. Making money in the CAT business is not simply about rate, it's first about underwriting.

The non-CAT rate environment varies by class of business. However, overall, rates were up 35 percent during the quarter in both the U.S. and London operations. In general, risk property rates are approaching adequacy in the level of rate increases, therefore leveling off in the U.S. but continuing to rise overseas where many areas still need more rate.

Casualty, marine, and other specialty areas continue to tighten, and we expect this trend to continue, as well it should. We are well positioned in our U.S. and UK operations to take advantage of an increasingly favorable reinsurance environment. We have a great team, and we're focusing on the right product areas.

Now let me turn to ACE overseas general. Our ACE Overseas General Insurance Division, which comprises ACE International and ACE Global Markets had an excellent quarter in terms of revenue growth with net premiums up 63 percent. Earnings, however, were impacted by 68 million of flood-related losses. Let me briefly highlight each operation.

First, ACE International -- net premiums were up 51 percent to 494 million. The combined ratio was 103.6 for the quarter, bringing the year-to-date combined to 97.5 percent. In the quarter, ACE International had 42 million of the 68 million I previously referred to of flood-related losses. Excluding the flood, the combined ratio for the quarter was 94.7. Our expense ratio declined 4.3 points versus last year, going from 39.3 to 35.1. ACE International is experiencing rapid net premium growth in all regions of the world. Europe was up 73 percent; Latin America, 50 percent; Asia Pacific, 73 percent; and the Far East, 6 percent, which is not bad considering the Japanese market is growing at almost zero.

All classes of P&C and personal accident lines are experiencing rapid growth. In a word, we are rapidly building a balanced and diversified portfolio, both geographically and amongst various lines of P&C business.

Internationally, the markets continue to firm in all regions and, in fact, in a number of areas the trend is accelerating. Rates for our property casualty lines were up 35 percent during the quarter. I expect this trend to continue, as many of the incumbent players, especially UK and European-based, continue to withdraw or restrict capacity.

With our presence internationally in all regions of the world, we are in an excellent position to continue to take advantage of the global opportunities. Frankly, our strength in underwriting and marketing is building, as others are growing weaker.

Now let me turn to ACE Global Markets. In past quarters when asked the question, I said I thought we'd begin to turn the corner in the third quarter, and I believe we have. Growth in net written premium was up 102 percent to 196 million, bringing the year-to-date growth rate up to 11 percent. ACE Global Markets incurred 26 million of European flood losses during the quarter, combined to 116.5. Excluding the floods, the combined ratio improved to 102.1, still unacceptable by our standards but clearly heading in the right direction.

ACE Global Markets is basically a short-tail buck, and I expect results to continue to improve as we work our way out of past underwriting problems. We should return to underwriting profit in the near future, but the results may be a bit volatile, quarter-to-quarter. Like with ACE International, the current business ACE Global Markets is writing is at good terms, and rates overall were up 44 percent in the quarter. I might add it was our best quarter this year for rate increases in London.

Again, ACE Global Markets is essentially an E&S operation with an excellent management and underwriting team. I have a great deal of confidence in their capabilities, and it's a great time to be an E&S underwriter. Now let me turn it over to CFO, Phil Bancroft.

Thank you, Evan, and good morning. In my comments today I'll review our third quarter operating results, continue our discussion of key areas of our balance sheet, and provide you with some forward-looking guidance for the fourth quarter and 2003. Before I do, I'll mention that we have issued our financial supplement updated for the third quarter. We've added some additional disclosure in this quarter on our financial guarantee business, and we've provided pro forma information to exclude the effects of September 11th.

For the third quarter we recorded net operating income of 158 million, or 57 cents per share. As already mentioned, our results were impacted by losses from floods in Europe, which totaled 90 million after tax. We also had realized losses after tax of 205 million, and unrealized gains after tax of approximately 160 million, which I'll cover in a minute.

Our overall earned premium growth in the quarter, excluding the Financial Services segment, was 51 percent. I'll spend a moment to analyze this growth. First, we need to consider the impact of the World Trade Center on premiums last year. Adjusted for this, earned premiums grew by 38 percent compared with 16 and 24 percent for the first and second quarters. The third quarter growth was strong across the board. The most significant was in ACE Global Re, which reported a 111-percent increase over the prior-year quarter after adjusting for World Trade Center and excluding life.

Our net investment income was essentially flat when compared with last quarter. As Brian said, our operating cash flows for the quarter were substantial at $1 billion, and these inflows, which were weighted towards the end of the quarter, helped offset the impact of declining rates. In the third quarter there was unprecedented volatility in the financial markets. Not only did interest rates decline over 100 basis points after dropping 100 points last quarter, but global equity markets fell a near-record 20 percent in the period.

The decline in interest rates that are lowest levels in nearly 50 years along with economic uncertainty, caused volatility at levels not seen in decades. As investors sought safety in a flight to quality, credit spreads rose dramatically for the period.

As you can see from the financial supplement, our portfolio remains invested predominantly in investment-grade fixed income securities of the highest quality. The average portfolio yield was down by about 50 basis points to 4.7 percent. The portfolio's duration remained at approximately three years, and average credit quality was unchanged at double A with a 3.5 percent exposure to equity investments.

For the quarter, we had certain non-operating gains and losses, both realized and unrealized. First, we had losses of 16 million on our fixed income portfolio, and 55 million on our equity portfolio, principally from a recognition of certain impairments. Second, we had losses of 57 million included in net income, resulted from changes in the value of our S&P index derivatives. This is in contrast to accounting for direct equity investments, where changes in fair value are not included in net income but flow directly to equity as unrealized gains or losses. Third, realized losses include changes in the fair value of the interest rate swaps that we use to reduce the duration of our fixed income portfolio. These losses of 56 million resulted from the drop in interest rates that caused significant unrealized gains of 282 million in our fixed income portfolio.

Overall we had a net realized and unrealized pretax gain of 42 million from our investment portfolio. In addition, we had a loss from the change in the value of our credit default swap portfolio of $51 million pretax. We don't believe this change is indicative of losses. Losses only occur from the event of default. We account for losses in our operating income as they're incurred, including a provision for incurred but not reported losses.

Markets have remained volatile since September 30, with both equity markets and interest rates up. Based on the latest review of our portfolio, our net position hasn't changed significantly since September 30th. With respect to loss reserves, we have again provided in our supplement, a roll-forward of both loss reserves and reinsurance recoverables including our run-off business. So you can see the impact of the items that influenced these balances. Gross loss reserves remaining to our ongoing business increased by 1.2 billion. This was offset by a reduction in run-off reserves of 195 million. This large increase in reserves was partly due to LPTs written in the quarter.

Reinsurance recoverables relating to our ongoing business increased by 368 million while our run-off book declined by 53 million. During the quarter, we paid 61 million of gross World Trade Center claims and continue to collect the reinsurance recoverables. We continue to monitor our World Trade Center reserves and remain very comfortable with the reserves we 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 run-off in Brandywine is protected by the [Niko] reinsurance contract purchased at the time of the Cigna acquisition. During the quarter, no further losses were seeded to the [Niko] cover. We have 535 million of remaining coverage to protect us against future adverse development in Brandywine. It is important to note that the 535 million is our remaining cover on an incurred basis. On a paid basis, we still have approximately 1 billion of claim reserves to pay out before we begin to receive cash reimbursement under the 2.5 billion [Niko] cover.

During the quarter we reduced our long-term debt, including trust preferreds, by 250 million in the following manner: We repaid the remaining balance of 200 million on the [RINOS], extinguishing that debt completely, and we also prepaid 50 million of the ACE INA subordinated notes incurring a prepayment penalty of 10 million, principally because of the high coupon on this security. We continued this into the fourth quarter by repaying 75 million of ACE Financial Services debt. Our intention is to reduce the debt we incurred as part of the ACE INA acquisition and expect to continue to de-lever over the next few quarters. As we said at the Angle, we want to keep our consolidated debt-to-capital ratio under 20 percent and bring our debt-plus-preferreds and mezzanine equity to tangible equity to under 50 percent. At September 30th, these ratios were 21.4 and 73.8. Our mezzanine equity, known as [Feline Prize], will convert to equity in May 2003, which will increase our shareholders equity by 311 million. This will increase our outstanding ordinary shares by 11.8 million and eliminate the preferred dividend. As a result, we expect no impact on EPS from the conversion.

Our shareholders' equity increased by 64 million in the quarter, primarily resulting from operating income and unrealized gains offset by realized losses and dividends declared. This results in a diluted book value per share of $24.37 and our annualized operating return on average equity for the quarter was 9.5 percent and for the year-to-date was 12.6 percent. The guidance provided in our Bermuda Angle presentation for 2002 is still appropriate to use.

Looking to 2003, we expect to sustain a growth rate in net earned premiums in our P&C business between 27 and 30 percent. We believe we can produce a P&C combined ratio in the 91- to 93-percent range. This assumes approximately 100 million of CATs for the full year for our catastrophe reinsurance business.

In the Financial Services segment, we've said that premium volume is not a good indicator of earnings, because we generate a stream of income, over time. Our current outlook suggests growth in operating income from this segment of 15 to 20 percent.

Increasing net investment income will continue to be a challenge for us. If we assume approximately 2 billion of operating cash flow for next year, reduced by debt repayments and dividend payments, and if we apply our maturity and reinvestment assumptions, we would expect investment income to be in the range of 820 to 840 million for 2003 compared with approximately 800 million in 2002.

As we reduce our debt leverage, our interest expense will decline in 2003. All of our outstanding debt excluding the 150 million of commercial paper as a fixed coupon. Based on our current de-levering plan, our interest expense should be about 170 million in 2003.

Finally, we expect that our effective tax rate will increase somewhat and be in the 18 to 20-percent range. This rate is dependent upon the mix of earnings from different jurisdictions with various tax rates. In 2003, we expect higher growth in taxable jurisdictions. A different geographic mix of actual earnings would obviously change the effective tax rate. We continue to experience favorable trading conditions in the insurance and reinsurance markets that should help us continue to grow our business and improve our results.

And now I'll turn the call back over to Helen.

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

Thank you. The floor is now open for questions. If you do have a question or a comment, please press the numbers 1 followed by 4 on your touchtone phone. If at any point, your question has been answered, and you wish to remove yourself from queue, please dial the pound sign. Once again, that is 1 followed by 4 on your touchtone phone at this time. Please hold while we poll for questions.

Thank you. Our first question is coming from Ron Frank of Salomon Smith Barney. Please go ahead with your question.

Good morning.

Good morning, Ron.

Just a quick thing, Evan. It looked like retentions at ACE Global Markets went up, and I know part of what you've been doing there is to sort of cover the tail on some of the runoff with reinsurance, so I was surprised to see the seeded percentage rise. Could you give us a little color on that?

Ron, as we have continued to seed. That did begin in the second half of last year, so that's one point. So now you're looking at a comparison year-on-year. We've had substantial growth as well in the underlying business, and so property, financial lines, our marine business, have all generated very good growth. So a combination of the two is showing the -- is why you're seeing the substantial growth in that now.

Okay, and, Phil, just to clarify on the guidance -- the earned premium growth guidance -- that's ex Financial Services and the investment income as a consolidated guidance figure?

Exactly, it's P&C business on the earned premium and consolidated for investment income.

Thank you.

Thank you. Our next question is coming from Brian Meredith of Banc of America Securities. Please go ahead with your question.

Good morning. Just a couple of quick questions here -- one, you mentioned that there was some impact of LPTs on the loss reserves. Could we get that just to get an apples-to-apples comparison here? And did you have any prior-year reserve strengthening, ex Brandwine, in the quarter?

Phil, why don't you do the impact on the LPTs, can you do that?

If you look at page 22 in the supplement, you'll see that in our "other" category in the first -- where we show the change between -- the change in our net reserves, you'll see that we've added 144 million to our reserves in that separate "other" line. That's principally a portion of the LPT reserve. In total, the LPT reserve that got included is about $320 million for the period.

Brian, is that okay with that -- on the reserve strengthening side, you know, there's always some kind of noise, but I would say that it wasn't material. You know, the losses, I think, fairly represent what's going on in the current book.

Terrific, I appreciate it.

Thank you. Our next question is coming from [Mark Lane] of William Blair and Company. Please go ahead with your question.

Good morning. Two questions -- first of all, on the guidance -- D&C, 91 to 93, $100 million of CATs, which is, according to my estimate, about 1.5 points on the combined ratio. Excluding CATs this year, that's sort of a similar combined ratio that you're at for that sort of business, taking out the European floods, and given the level of rate increases and the earned premium growth, the benefit on the expense ratio, you're talking about decreasing attachment points, lowering limits, excluding exposures you didn't cover before, putting in sub-limits on certain exposures, why aren't the underwriting margins -- why wouldn't they be better than this year, excluding CATs?

Okay, [Mark], you had two questions, is that all of them?

That's the first question.

All right, let me start with that one. First of all, the guidance, 91 and 93 -- the 100 million in CATs, that's for Tempest, and Tempest actually didn't have 100 million in CATs this year, if I recall. So there is a marginal benefit to that, but, really, the more important question is, you know, I think what you're saying is why isn't the combined ratio better, and there are -- I think you have to look at somewhat the mix of business. Let's take Tempest as a good example. Tempest's growth rate will be substantially in the non-CAT area, and the non-CAT area of business is casualty and, to some extent, property, both of which carry higher combined ratios than the CAT business does, and I think if you do a similar analysis of other areas within the company, you'll find that the growth rates tend to be weighted to areas that have a higher combined ratio. So, in fact, there is an improvement taking place in most of the portfolios, but when you mix them together, you get that kind of combined ratio. I will say, in summary, that's a hell of a combined ratio. If you run 91 to 93 on a consistent basis in the P&C business, you've done pretty well, and that's including what we think is a reasonable estimate for CATs.

Okay, that's helpful. The second question is regarding asbestos, and in your financial supplement, which I appreciate the detail -- in the reserving process for asbestos, the description on reserving process, this quarter compared to last quarter, I interpret the disclosure as being much more cautious on the adequacy of asbestos reserves versus last quarter, and some of the things I'm citing is that you say that you do the buy annual outside actuary review, which you're going to get back in the fourth quarter; that you're paying relatively small amounts to unimpaired claimants; that you have favorable views of legislative developments over the next couple of years. Last quarter you said that you felt like your reserves were adequate right now, and the [Niko] would cover any adverse development. Now you're saying that the [Niko] coverage just provides coverage for a layer of protection, and I'm wondering if you're trying to signal something or - why the change in disclosure on the margin?

You know, funny, we had that disclosure out last quarter, and we had a lot of people asking a lot of questions, and I think what we tried to do was clarify it as opposed to sending some signal. Should one be cautious about asbestos? Yeah, absolutely. You should absolutely be cautious about it, but what we tried to do, I think, was just clarify what our position was.

So has your position at all changed today versus six months ago?

Is it changed versus six months ago? Let's see, well, we -- you know, I guess I'd have to say no. I have to put it this way -- there has certainly been lots of activity on the asbestos front -- some good and some bad. So if you take a particular issue, I might have a different position than I did six months ago but, in balance, no, I can't say that I feel better or worse than I did six months ago on asbestos.

And you're not hanging out the third party study to be completed in the fourth quarter as a big event? It's more of an ongoing process that you've always done?

Yeah, we do it all the time. I think it's every two years, and we do our own studies continuously, but this one happens every two years for the state. I mean, it's out there. We'll see what it produces when we get it. What we tried to do is show you what we think. We're still responsible for the reserves. We have to make estimates. We do them ground up, based on how we view each and every one of our exposed clients, and that remains our burden, and what we're trying to do in this disclosure is tell you how we think about it, and also how we interpret this very interesting fight that's going on, you know, across the entire country, and it's a hell of a fight. Like I say, some days you win one, some days you lose one, but I think it's a fair fight.

Thank you very much.

Thank you. Our next question is coming from Paul Newsom-ph of Lehman Brothers. Please go ahead with your question.

I was hoping he had more of a broader question. It sounds like, from your general comments, that pricing is really better in Europe outside the U.S., and is that a general view in terms of pricing improvement, I should say, and what does that say about the mix of your business in intermediate term?

I think Evan might want to comment, is the level of pricing activity that we've seen, not just in Europe but around the world, and I have said before that we have not seen this kind of pricing activity. That's what's unusual. So if you wanted to balance it against the U.S., the interesting thing is we've seen the U.S. go through cycles of price improvement and price decline. This price improvement is in line with the issues that are merging interest rates, et cetera. We haven't seen the same kind of volatility or cyclically in Europe. Now we're seeing it, and you can read a lot into it. So, yeah, in some ways, it's better only because we haven't seen it before. In absolute terms, the U.S. is higher. In absolute terms, property might be closer to parity, casualty is clearly higher in the U.S., but the casualty results in Europe have historically been better. So that kind of gives you color. Is there more you'd like to know?

Is there any change in where you want to put down stakes and grow?

Oh, well, you know, I, in my opening comments, said we're growing in every area, and, you know, it's great. So we're not necessarily emphasizing one place over another. We like the diversity that we're getting, and you never like to be overweighted in one area. We're not. We're getting growth in every area. So I'm not picking one place out, saying that's where I want to be right now, no.

Relatedly, are there any concerns from a reinsurance recoverables perspective from some of the problems we're seeing from growing? I guess [Score] had some issues this morning that make us pause or wonder about the recoverability of some of the receivables?

Well, I think certainly there is stress in the reinsurance market. You know, you mentioned, too, the equity markets, some of the larger, the Europeans, pretty heavily. They had the financial strength to sustain that. It may cause them some issues with respect to future growth. That's up to them, I don't know, but we look at our recoverables routinely and feel comfortable that what we have for collectability, for collectibles, is a good number. But, you're right, there is some stress, but I'm not sure that stress is going to translate to promise in collections. I think it's more to do with their aptitude and abilities to grow forward.

Great, thank you very much.

You're welcome.

Thank you. Our next question is coming from Hugh Warren-ph of JP Morgan. Please go ahead with your question.

Yes, good morning, thank you. Brian, one kind of big picture thing I guess people are wrestling with -- if we look back, and we strip out all the large losses, and we just try to compare clean quarters and, you know, I think the presentation you gave at the Angle laid out a very rational approach of attacking retention, everything down the line, but combines, ex everything else, are roughly flat for the consolidated companies on the P&C side, in particular. I guess what's on top of everybody's mind is when does all that start to kind of improve and flow through. Do we need an event to start to kick in the terms and conditions improvement? I mean, how is that actually going to come through to the income statement?

This is kind of a follow-up to the other question about why the combines improve, and I'll go back to saying there is an improvement in the combined ratios. You know, as we looked at each of our units and did our 2003 planning and added them all together, there is an improvement, but, again, you know, you have to look at mix of business issues to really understand how that's flowing through.

You know, one could always expect dramatically better results, but we're, right now, looking at low 90s for a global P&C company, could it go below 90? I guess it could, but that is, you know, for the historians out there. We had never seen that. You know, so it's very difficult for any of us who have been around for some period of time to project combined ratios of that magnitude. If there is an absence of events, you know, with the CAT bill, you know, if a CAT doesn't happen next year, you know, I think we probably would break 90 based on the guidance we gave you if we didn't have 100 million of CATs. That's a pretty extraordinary year. So I understand -- I generally understand the question, but I think you have to look at the dynamics of the business, and you have to look at trends and frequency and severity as well. It isn't all gravy. There is a loss activity that we see out there.

So I think it's a reasonable presentation, and the real issue, I think, for all of us -- for you, as an analyst and for us as professionals in this business, is the under-weighting that investment income is having on all our results. I think we're at historically high levels of underwriting total income, and in a different rate environment, 91 combines would be celebrated, you know, out on the shoulder, but now if this is no investment income, what's the problem? And there is a lot of -- there is certainly a lot of pressure to get the combined ratios down to that level, but it's hard to project below-90 combines.

It's just when you look at just the pure loss here to 65.7 for the quarter, ex all your CATs, and you were at 65.9 back, ex World Trade, for consolidated on the P&C side, and, obviously, the steps you've made, I guess, what everyone is just struggling with is how is this going to fall through, but we'll just keep watching.

Two quick numbers questions -- Phil, the share conversion for the mezzanine equity you said is 11.3 million shares?

That's right, and take out the [Feline Prize] dividends, it washes in EPS.

Okay, and then the net written premium P&C guidance -- I didn't catch that number.

It was 27 to 30.

Okay.

That was actually net earned --

[crosstalk]

Net earned premium was 27 to 30.

Okay, and then one last question on page 19 of the supplement on the reinsurance recoverable piece -- when you looked at the recoverable and the paid losses about a billion-one, almost a billion-two, of which 28.5 percent or so is being written for the bad debt reserve -- I guess what I'm trying to look at is when we look at the 11.5 billion, we don't really know the split of who is in there. We can see by the sizes that are there. Why wouldn't that pattern somewhat continue outside of the Berkshire pieces of it? I guess as the development of this comes forward and these go from [IBNR] to paid loss.

I think what we see, as it gets into paid, and it gets into this category of "other," it tends to stay there and concentrate there. There's things in dispute, there's insolvencies, so they take quite a time to work their way out of that category. If you look at the --

-- at the World Trade Center page?

If you look at page 22, for example, you can see there's a lot of activity going in and out of that account, right? We have reinsurance losses incurred, or recoverables going up of 850 in one quarter and down by 540. So there's a lot of activity going in and out of that, but the accounts that tend to concentrate in that other category take time to work their way out.

Okay, well, thank you very much.

Our next question is coming from Michael Lewis of UBS Warburg. Please go ahead with your question.

Thank you. Good morning. I have two quick questions. Again, these are follow-ups from questions that were asked earlier. You know, Brian, as you kind of talked about the change in your mix of business, obviously, you're getting into riskier business, because obviously the tail is getting longer on the business you're writing versus what you wrote in the past, and in light of that, can you kind of bring us up to the fact -- obviously, your capital isn't growing right now, I mean, you're holding your own, which isn't bad, but how are the rating agencies looking at you, as they're becoming much more proactive in light of the higher-risk underwriting portfolio you're taking on? And my other question has to do with the asbestos issue -- in light of Chubb's having outside study, raising their reserves aggressively -- today, in light of The Hartford having a face with [Westin MacArthur] coming in and going after them, after they paid to their limits on the product liability, now they're going under being assessed for workplace liability -- do you think -- you said you're not more concerned about the asbestos outlook. It appears to me most companies are more concerned because of the claims situation of late and obviously some of the interpretation. So can you touch on what you think may happen on the asbestos side in light of those two developments and what's happening with the credit rating agencies?

Okay, Michael. Well, yeah, is our business riskier because it's longer [tail]? I'm not sure I classify it as riskier. The CAT business is probably the shortest we're going to have. People don't think that's risk-free, but, anyway, that's semantics. The real question is how are the rating agencies looking at our capital based on these growth rates? Well, we've given you guidance for 2003 in terms of the premiums we think growth rates will have in our premium, and we believe that we will fare very well with the rating agencies at those growth rates, that the rating agencies will certainly give us good marks. I think we have good relationships with them, and I think they have consistently supported us in our activities, post 9/11, et cetera. So I don't foresee any problems with the rating agencies at these growth rates.

Now, with respect to asbestos -- you make it sound like I'm not concerned. Certainly, I'm concerned about asbestos, and I have been concerned. I'm not sure that the events that have occurred in the past week are much different than what we've seen in the past month or the past six months, and that's really where I'm coming from. I mean, there's going to be, every day or every week, some kind of headline news, and sometimes those things will appear to be adverse. There are other things that are actually quite positive occurring there, and I'm just trying to express a balanced view for this thing. I really can't comment on Chubb's reserve increases. I don't think it's appropriate. You'd have to ask them for the chapter and verse on what happened there and, you know, with respect to Hartford, I guess they have a dispute with one of their claimants, and, again, that's going to be all very fact-based. I think you're jumping to a conclusion that may not be correct. I think it has to be played out, and that's what the court system is for.

Back to this asbestos issue, you know, in the Angle and in our disclosure, we tried to provide you with our view of the good and the bad and the ugly in this very dynamic business.

I guess, just as a sum-up, I guess the only thing I was really saying is your capital position is kind of static, your amount of insurance is growing, your premiums to capital obviously is expanding, and you have some -- you know, there's outside elements that still overhang you, and some of them seem to be breaking negatively for the industry, and I'm just -- you know, in that kind of environment, with the rating agencies being so proactive, I just wonder why you stand in such good stead? You feel, when everybody else is kind of falling into somewhat more -- harder times with the agencies, and being forced to be proactive as far as raising capital. But that was only the issue I was asking. I guess you kind of addressed it.

Michael, you know, I think, I was pressing them for an upgrade in the past, and they said, "Well, we'll take care of that."

That's why you're the most optimistic guy on the island.

We feel very comfortable with the capital now, and as I said, the rating agencies have -- you know, they've been in. We have another one, I guess another review coming up. As far as we know, based on our analysis of the factors that go into their study, we'll be in great shape.

Thanks very much.

One other thing to consider, if you look at the last published report by S&P, they had us at 165 percent capital adequacy ratio, which is very high for a company that's rated A plus and, as Brian said, we have been pushing for an upgrade. So we have a lot more margin than others might have at our rating category.

Thanks very much, Phil.

And they just gave us good marks on our guarantee company. Okay, next question, please.

Thank you. Our next question is coming from Jay Cohen of Merrill Lynch. Please go ahead with your question.

Thank you, good morning.

Good morning, Jay.

I'm wondering if you could talk about your exposure to U.S. financial institutions and your liability business? I'm just not sure how much of that business you wrote and what the type of business you write there.

U.S. financial institutions and what was the other one, Jay?

That's it -- but just the liability portion of U.S. financial institutions.

I'm going to ask Dominic to help me out on this thing but, to start with, we do write some financial institutions. We write them in a variety of ways. We do have directors and officers' liability exposures to some of them. We write contracts that cover their general liability and property exposures. If you're trying to press on issues with respect to some of the issues that are emerging, there may be some exposures in the D&O area but, generally speaking, not part of our coverage.

Okay.

If I can add, Jay, I mean, we've been very fortunate in that the timing of our growth in both the professional and general liability area and especially in terms of taking a larger retention has really been kind of a post-event phenomenon. You know, the U.S. book of business, we had very little professional risk business, and that was really a rebuild starting about a year-and-a-half ago of the whole team that did that business in the United States. So our growth is kind of post-event syndrome. Number two, we do with the benefit of what I'll call the improvement of terms and conditions. As we talked at the Angle, that was previously very much an entity-type cover. It has now gone back and really separates the size of the old D&O policy.

In the liability area, we weren't a significant net player, nor were we significant in other than the risk management business. As that business grows, it's subject to the same benefits in terms of rating as well as terms and conditions, as we see across other aspects of our portfolio. So and specifically in the financial institutions -- as you know, that's been pretty much a prohibited class in terms of who we write. So we don't have a lot of activity or involvement, I think, in regards to your question.

That's great. Thanks for that answer.

Okay, Jay.

Next question, please.

Thank you. Our next question is coming from Tom Cholnoky-ph of Goldman Sachs. Please go ahead with your question.

Good morning, actually, most of my questions have been answered but, Phil, I guess I just wanted to clarify -- and I know you're not going to go to a single-point number, but it seems to me that with your guidance that you've provided us that you're talking about numbers that are probably at the mid-point, slightly below consensus numbers for next year. Is that kind of where you would come out with your guidance?

I don't think we're going to go there, okay? I've given ranges. That's the style of the guidance that we've chosen to give, and, you know, we have decided consciously that we don't want to be giving point estimates for where we're going to be next year.

That's fair enough. I thought I'd try. Thanks.

One thing I would add, though, is that as we look at the analyst models, you know, we talked about today, I think one of the most significant differences -- or two of the most significant differences that we see -- are, one, investment income. The estimates out there seem to be much higher than we think we're going to get, based on we talked about our estimates for the portfolio rolling and reinvesting at lower rates. And the other thing that I see as a significant difference is the tax rates. I think as we see the -- we're projecting the growth in our business next year, more of it's going to be in taxable jurisdictions, so we see the tax rate rising. So those are two things I'd focus on.

Yeah, no, I hear you. Thank you very much.

Okay, Tom.

Thank you. Our next question is coming from Angelo Grassi-ph of Merrill Lynch. Please go ahead with your question.

Good morning, everyone. I have a couple of questions regarding CDOs and the financial guarantee business. One of them is you give a breakdown of the financial guarantee business and the exposure to CDOs and part of the [fall to ops]. Could you provide a little more color as to -- you have the average rating. Could you give more of a breakdown of the ratings by category of how much are you in areas like single-age tranches and lower?

Okay, Dom, I'm going to ask you to help me out on this, if you wouldn't mind.

Yeah, I'm paging back to the -- we've got it in the supplement here -- in the supplement we tried to give you kind of an overall flavor for the book of business, and actually listed the ratings. In general, we only write investment-grade or better, and that's the large, large majority of the entire portfolio, the matter under what form or structure it is. Number two, as we've said, based on recent changes in the marketplace, we've been able to increase bad credit quality such that, even under the investment-grade minimum criteria, we're now looking at minimum of A, and as you can see, the overall portfolio now on the non-municipal side, if we average out all the ratings, is rated as A-plus.

The other thing you have to understand is, we've joined with the investment report and combined single-name exposures there to give you a flavor of the top 10 exposures we have. Most of the time, we think exposures into that marketplace at around a $10 million number on a single-name basis. So the significance of one name, except for the highly, highly rated triple A-excellent are down on an average rate basis -- or on an average value basis -- somewhere between, say, $10 million and $15 million. So the significance of any one is not, in any way, significant to the portfolio.

Also, a lot of this stuff is disclosed in terms of very good detail on the rating agency report on the financial guaranteed companies that go into a lot more specific disclosure. So I think we've done a pretty good job of giving a flavor for the overall, understand the limits per name is pretty insignificant, except for the top-rated guys, which we've now showed you as being part of both the total exposure to the company by adding the investment side piece to it. I don't know -- if there's anything else I can add, I'd be happy to try.

Okay. It seems like in your comments the increase in spread in the credit market, in your view, seems to outweigh the default environment.

[crosstalk]

I would have a question --

[crosstalk]

-- more positive things on credit in general.

Well, you've got to understand, the fall rates, even in today's obviously increased financial volatility times are still almost negligible. I mean, if you go by rating class, I think you'd find that, even today, and go back over the last six months, say, A rated or better, the default rate is less than 1 percent, even probably less than a half a percent. It's very insignificant. So default rates have never been the problem unless you've been kind of over-exposed to one specific name, which, as I said, we've disclosed who the big names are. The rest of the names are not significant on a single-name basis. So it's never been an issue of default rates. Yeah, you get some large headline-grabbers out there that get everybody's attention, but if you look at the class itself, it still maintains its historic default rate as it always has.

Well, that kind of makes sense. It makes sense at the higher layers. That's why I'm asking you more about the single A, which can be in the mezzanine layers, which could potentially be more of a burning layer.

Oh, yeah, but understand, if we go lower into the credit rating area, obviously, we do take some equity CDO exposure, but we get paid, as we talked about in the footnote, you know, kind of in the 80-percent on line where we might take the third default through the seventh default of a portfolio of 100 risk, all of those risks are rated A or better, but, you know, we still look at the potential for frequency there and therefore get paid for it. But, as I said, even under the comment of the A-plus or the A-rated, the default rate, if you look on a six-month or nine-month basis, it's still pretty much within historical patterns.

On a separate matter, what are the levels of CDO investments in the investment portfolio? Do you invest in CDOs?

Not significant at all.

Okay, great, thank you.

Okay, Angelo. Next question.

Thank you. Our next question is coming from David McGowan-ph of Salomon Smith Barney. Please go ahead with your question.

Thanks. Good morning, guys. I also wanted to ask a little bit about your disclosure on the CDO portfolio, and I appreciate the expanded disclosure. I think it's helpful.

Dominic, you talked a little bit about the rate on line you're receiving versus that 620 million of funded equity position. Does that imply that your economic loss is limited to the 15 to 25 percent? And an aside there, in terms of how the accounting works, do you match the losses with the rates as they come in? Or is it possible that if you had a significant impairment on the equity piece, that it would show up as a big loss in one particular quarter versus, say, small premiums?

No. Let me clarify that. Remember, we have a discussion all the time -- we think our accounting is probably the most conservative accounting that exists, because we take, as Phil mentioned, on the mark-to-market basis, impairment kind of below -- or in the realized gains of [inaudible] we're putting up full reserves in the insurance operation side. So part one of your question, you are correct. If we get an 80-percent rate on line, our absolute exposure is the 20-percent piece, okay? And that really goes way up to default scale on those typical structured portfolio products that we sell. Number two, we have reserved 100 percent of that, so that as we collect the premium, we are putting up 100 percent of the reserve in the event of a default. We are still taking the mark-to-market impact in the realized gains and losses, irrespective of the reserve that we're putting up in the operations, such that if we ever do have a default, it's absorbed within the current reserve levels that are established. The only way we'd be exposed if it break out of that 80-percent containment, which, obviously, we don't believe it will. That's why we sell the product as we sell it.

Am I correct in understanding that the rate gets paid up front and that's why you think that it can't break out of the 80 percent?

Yes.

Okay. On a different note, you talked about paying down debt over the next coming year. I don't think you actually have a lot of debt maturing, as I look at the capital structure. Is your intention to go out and continue to buy back bonds in the market, even though it might cause a temporary loss or --

Yes, that's what we plan to do. About 150 million of our de-lever plan for the next few quarters is buyback of securities that are in the market, and what we're expecting is that we will pay some penalty because the coupon is very high. It's just an interest rate -- like a realized loss, if you will. The other thing that's going to happen is that our mezzanine equity, the 311 million, will convert. So the combination of those two things is what we have in our de-lever plan.

I should say, when I say "out in the market," I mean the securities that we're buying back are private, but we are paying a premium because of the interest rate differential.

Very helpful, thanks a lot.

Okay, thank you, next question, please.

As a reminder, if you would like to ask a question, please dial the numbers 1 followed by 4 on your touchtone phone at this time. Our next question is coming from Bill Wilt-ph of Morgan Stanley. Please go ahead with your question.

Good morning.

Good morning, [Bill].

I want to revisit the earlier D&O question. I guess Dominic commented that much of the growth was post-event, and I guess by that you mean the recent and rapid deterioration in the credit environment. Can I take that to mean that many of the D&O policies you've written have retroactive dates to January 1 of '02, for example, that would exclude much of the acts from the late '90s and into 2000?

Most of the policies have prior acts exclusions where, in the old days, that was always an inclusion.

I think it's the nature of the market right now in terms of conditions changing.

Okay, that's helpful. As a follow-up on that specific question, then, would be can you provide some thoughts as to what you're including for loss activity in the D&O arena in the context of the guidance of the 91 to 93? I mean, assuming that environment will stabilize, that the protective underwriting action that you've taken will keep losses there minimal?

[Bill], let's see if I can answer this question. Without giving you a specific number, in our estimates for 2003, we expect that business will produce an underwriting profit. I think that's where you're going, isn't it?

Yes, that's helpful. The second question is realizing that much of the premium growth is from rate increases, I wonder if you could quantify even, just broadly, the growth in submissions.

Growth in submissions?

In submissions, in submissions, just quotes -- I guess what I'm trying to gauge is the strain or the extra workload on the company's underwriters and production staff with the rapid growth in premiums and wondering if you're in the process of hiring underwriters and increasing production staff.

Do you want a job?

[crosstalk]

When would you want me?

I'm glad you said you can't afford us. Well, let me -- Dominic, why don't you start on that, and then Evan can follow up, because it's probably true across the board, but let's give you a flavor by region.

I think if you look at it, submission activity is up significantly. I think Evan made the comment in terms of still turning down more than we write. I don't think we have that same issue so much in the U.S., but it does indicate in Bermuda as well, the significant growth in submission activity, understand, in certain areas we have new businesses where, say, the medical mal business, we had -- I think the number is, like, 500 submissions in our first two months of activity, so that would be just, you know, infinity growth because we had virtually -- we had none before.

The one thing we talk about, though, is we think we have -- or, we know we have, an infrastructure that was really built to handle the volume of activity. As you can see, the significant benefactor of our growth has been our expense ratio, where we're able to keep costs fairly consistent, although there has been a tremendous surge in activity, but we have gone out and hired specific underwriting help where we deemed it appropriate. You know, our Westchester specialty operation submission activity is up there significantly because of the change in the A&S marketplace in the United States, where a lot of business now has to seek that market as an alternative because of the breakdown of certain program structures and other group structures. Once again, we've got systems in place, procedures, people, that can handle the volume without a significant increase in personnel, but those increases have been made where necessary.

We've actually improved service over the last six months from the standpoint of backlogs, policies, et cetera. So even in spite of the volume, you know, we are able to not only meet that demand but actually improve from where we were in the past, and we've got quantitative numbers on that that we discuss internally as part of our management review.

So, all in all, submission activity is up significantly, but we're built to handle it, thank God. Evan?

You know, I want to correct one thing that you said, and that is the majority of our growth is coming from rate increases. We have a substantial volume of new business that is contributing to our growth as well. And, you know, the submission activity varies by line of business, and it's varying by area of the world. As kind of an anecdote, something trivia that you wouldn't probably know or focus on -- Australia is probably the hardest market in the world today -- harder than the U.S., harder than Europe, harder than anywhere, where the submission activity -- we're looking at every piece of business in the country. There are only a couple of underwriters there, and rate increases are just -- we haven't seen anything like this in our careers, as to how high rate levels and how tight terms are.

We are adding underwriters. We are building out infrastructure. In particular, that's happening, that's been happening in the UK, Europe, Asia Pacific, not in Japan. We tightened down dramatically in Latin America. So, you know, where we need to put it on, we've been planning, and we've been putting it on, and we can handle the business.

That's great. Thanks for the color.

You're welcome. Next question.

Thank you. Our next question is coming from Alice Cornish of Prudential Securities. Please go ahead with your question.

Thank you and good morning. Is there anything about the [Niko] contract that would prevent you from accessing the remaining portion by simply setting up IBNR reserves?

No.

Is there any reason why you wouldn't want to do that?

Well, I guess, you know, we've put up the reserves we think are appropriate, Alice, and, you know, the access to the [Niko] contract, to be clear, you know, you'd have to work on a paid basis, and as Phil pointed out, there's a lot of paid left to go before we start recovering from the [Niko] contract. So it's more an estimate of how much we think we will recover under the [Niko] contract, and if we feel that we need to put more up, we'll put more up.

Okay, thank you.

You're welcome.

Thank you. Our next question is coming from Steven Labbe of Langen McAllenney-ph. Please go ahead with your question.

Thank you, good morning.

Good morning, Steven.

There's actually been some mentioning of several marine incidents that have occurred globally this quarter, the fourth quarter. IPC Re actually mentioned several by name -- the Diamond Princess, the French liner off the coast of Yemen, Hurricane Lili, having done serious damage to some drilling rigs. Are you willing to comment at all about these events in the fourth quarter for you? Do you think they'll be manageable within the context of expected losses and so forth?

Yeah, Steven, I guess -- we will comment on it. I'm going to let Evan do it. Normally, we don't do these things, but I guess when there are specific events, we might as well. So, go ahead.

I'm putting on my mariner's hat, as we speak. We're aware of all of these -- all three that you just named. I think the Lindbergh was the name of the other one, the one off the coast of Yemen. We do have an involvement with Diamond Princess, we do have an involvement with Lindbergh. They're normal losses, normal claims that you'd expect coming in on marine business. I'm not going to comment on specific dollar amounts of exposure or the status of them, but we don't have -- there's nothing at this moment in time that I would say we have some dramatic catastrophe loss from any of these.

There is, in every quarter, we have losses, and I would say that this is probably normal activity for us. If it was extraordinary, we would have said something.

Okay, thanks. My other questions were answered, thank you.

Okay, Steve.

Thank you, our final question is coming from Arun Komar-ph of JP Morgan. Please go ahead with your question.

Good morning, gentlemen. A couple of questions on the fixed income side here, I mean, following the same line as some of my peer group has asked. On the financial guarantee/financial solutions business, we see that business growing quite a bit over the years, and this is more philosophical -- at what point do you say that business is getting too big a portion of your overall profile? Secondly, what kind of returns are you targeting for that line of business? It was a lot easier with the CNC and the reinsurance talking in terms of combined ratios, but in terms of your overall Financial Services business, if you will, what kind of return, what kind of targets are you looking for? And, lastly, now that you have a new risk manager in Don Watson, when does he say, "Hey, enough, let's slow this thing down?"

Well, you know Don. I'm sure he would if he felt that way. He hasn't said it yet. Let's see, Dominic, do you want to talk about the returns, and maybe I'll talk about how much is enough.

Yeah, well, hopefully, you'll say it's never enough. You know, understand, that business is written under very strict terms of liability against premium. So in terms of really exposure to the group, I think you'd find, contract-by-contract, the exposure is a lot less. And I think some of those equity CDOs is a good measure. You get in at 80 percent of the premium, you get it up front, and we honestly believe you will not get the default rate up to the level that would exhaust the premium level of the value of the physical funds in hand. So we have to set that as the premise.

In terms of target array, we've always looked at the solutions business at kind of a minimum 20 to 25 percent, and why do I give it a range? It's kind of fluid because we actually go back and have to allocate capital on a deal-by-deal basis based on, in effect, the Monte Carlo stimulation of what we think the probable or possible results are, and then pick kind of a 95-percent confidence level at the level we establish capital on the loss side. So you have to understand that we hold that business to, obviously, a lot higher requirement. The second thing is that it is very well structured from the standpoint of limiting liability against the value of the premium that really creates a smaller loss position than the gross numbers in the portfolio on a premium side would indicate.

Just to add a little bit to that -- if you took it to a pure financial guarantee business, of course, the rates of return are lower. You know, you might be in the 12-percent range ROEs if you just look at the guarantee business, and I think it was the guarantee business you were really saying is enough's enough, and everybody has, you know, opinions about things. We kind of like this business. It's, from an underwriting point of view, it's something you can get your hands around; it's got lots of data. Underwriters and actuaries have lots of things to work with, and we think it's good balance. The limiting factor, of course, is rating agencies, ratings of the business and the amount of capital that one needs to put against it. We believe the capital we have in those businesses can sustain additional growth, and we certainly want to use that capital to have that growth. Clearly, the business in the rest of the P&C area is growing much faster. I think that's going to continue to be the case into 2003. So it's going to be a smaller percentage of what we do, but we certainly want to take advantage of the quality of the underwriting and capabilities we have to grow that business as much as we can grow it.

Just a follow-up -- you said you wanted 20 to 25 percent returns -- how will you define that -- in terms of what? In terms of premiums? In terms of equity?

Once again, that's for the solutions business, and that profit per deal against capital allocated to the deal.

Okay, thank you.

Okay, you're welcome.

Gentlemen, I'll turn the floor back over to you for any closing remarks.

Thank you. We'll conclude this call. We look forward to having you join us again next quarter. Thank you and good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a great day.