丘博保險集團 (CB) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the ACE Limited Fourth Quarter, Year-End Earnings Teleconference. 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, Ms. Helen Wilson. Ma'am, the floor is yours.

Thank you, and welcome to the ACE Limited December 31, 2002 Quarter, Year-End Earnings Conference Call. I'm Helen Wilson, Director of Investor Relations. I will 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 and business mix, market conditions, pricing, policy terms, profitability, growth, premiums, cash flow, capital resources, investment income, financing plans, rating agency actions, tax rate, exposures and reserves including asbestos and reinsurance recoverable. Actual results may differ materially.

Please refer to our most recent annual report on Form 10K and quarterly report on Form 10Q and other documents on file with the SEC, particularly our safe harbor language, 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 statement.

I would also like to remind you that this conference call and its content, and any taped 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 can also listen to a replay of the call at 877-519-4471 or 973-341-3080, access code number 3681314.

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

Now, I'll turn the call over to Brian.

Thank you, Helen and welcome everybody. We spent a considerable amount of time and effort last week disclosing the ascent of our asbestos reserve development, so today, I would like to focus on the highlights of last year and provide you with some insight as to how we view the current year.

By the fourth quarter, we had achieved many of our strategic objectives. We regained profitability in all our ongoing operations. We increased our earnings power materially and we strengthened our balance sheet. In addition, we dealt with the overhanging asbestos issue through a charged income which offset our fourth quarter earnings. I would hope that we have now put that issue behind us.

Allow me to say a number of important achievements, exclusive of the asbestos charge. First, growth. In the fourth quarter, net earned premiums were up 63% in our North American operation, 31% in Overseas General unit and 140% in the Global Reinsurance unit. The total for all P & C operations, which constitutes 83% of our aggregate earned premiums, increased by 54%.

As we enter 2003, we expect to see our growth continue as we benefit from the strong market presence that we have achieved in the property and casualty sector. We find ourselves among a very select group of insurance companies who can both manage and underwrite the very largest global P & C accounts.

A plan decrease in certain life reinsurance lines resulted in an 87% decline in that segment and a 19% drop in our Financial Services segment, limited the consolidated corporate gain in earned premium to 12% for the quarter. We do not expect this to recur in the current quarters of 2003.

Second, profitability. The ongoing business in our Insurance North America segment produced a 90.8% combined ratio, exclusive of the asbestos charge, while our Overseas General unit, which includes our Lloyd's business, returned to underwriting profitability with a 94.1% combined ratio.

Global Reinsurance had a stellar quarter with a 75.8% combined ratio on top of triple digit growth. Given the very strong improvements in rates, our tight expense control, and most importantly, the large volume of premium we are seeing from the brokerage community as one of their preferred providers, we expect that our combined ratio for the P & C business should improve 2 to 4 points from the 94% ratio that we posted pro forma, excluding asbestos. Our actual full year combined ratio for all businesses, including all charges, was 101 .7%.

The rapid growth we posted for the year produced two collateral benefits. Cash flow from operations increased to 2.4 billion dollars allowing us to maintain over 800 million dollars in investment income in the face of sharply falling yields. And we reduced our consolidated expense ratio by nearly a point. Given the continued growth projected, I believe that we can generate an additional 2 1/2 billion dollars in positive cash flow in 2003. These funds, added to our investment portfolio, increase our earning power.

I'm also pleased to report that we weathered the turbulent financial markets reasonably well. Our overall realized and unrealized gain from investments was 43 million dollars, which on a portfolio of nearly 20 billion dollars, amounted to a net increase of 2/10 of 1%. When taken together with our average yield on all invested assets produced a positive total return in excess of 5%.

Investment income as a percentage of average equity totaled 13% pre-tax for 2002. Clearly, if we can sustain that return and achieve a significant underwriting profit as well, we would be well on our way to obtaining the 15% or better after-tax target ROE that we have set as our long-term objective.

The result of all this, is that despite poorly performing financial markets, a large asbestos charge, an increased dividend, and a slightly greater number of shares outstanding, we were nevertheless able to increase our book value per share by about 2% to $24.16 a share.

We believe that we have the capital resources to support our business plan for 2003 and that we are generating sufficient capital internally to support our growth for the foreseeable future. On our asbestos call, we noted that we intended to raise 300 to 500 million in either debt hybrid or trust preferred securities to contribute to our operating companies. We feel that this will adequately meet the rating agency concerns that were expressed following our announcement of an increase in the reserves.

Let me take a moment to comment on ACE's overall reserve position. In closing our year-end, we don't only look at asbestos reserves we look at all our reserves. Throughout the year, we also subject them to verification by independent actual firms who have confirmed their adequacy. We are well aware of the stresses in the market, and all year long we have seen other companies take reserve actions on casualty business written in the second half of the nineties.

ACE's exposure to the affected casualty lines, specifically excess liability and DNO during the '90s, was both very modest and very conservatively under it. And we didn't write healthcare.

Let me quickly show you how firm we were during the soft market. Between 1996 and 1999, ACE reduced the volume of excess casualty premiums written by 63%. We reduced our DNO book by 57% over the same period. We are not afraid to lose volume when conditions are not right.

Next, other than worker's compensation, the Cigna business we acquired in 1999 had very little exposure to these casualty lines. With respect to worker's compensation, almost immediately following the acquisition we shed the small commercial C I S business where most of the guaranteed cost workers compensation business resided. In short, we played defense during this period. Now, it's time to play offense.

Now let's get back to an issue at hand, capital adequacy. We have no plans to raise equity at this time. We also believe that, as the year progresses, we will continue to demonstrate our earning power. There are a great many constructive things happening within our company. I have just cited a few.

Now, I would like Dominic and Evan to give you some of the other highlights before Phil goes into greater detail on our year-end financials. On that note, I will turn it over to Dominic.

Thanks, Brian.

Let me begin with Insurance North America. The insurance North America segment houses all of the charges related to the reserve increases we announced related to the Brandywine runoff operations.

Overall, this segment reported a net operating loss of 236 million dollars for the quarter. The loss was a result of a net loss reserve increase of 318 million dollars for the asbestos and environmental liabilities at Brandywine. Add to this a provision of 145 million for related potential bad debts in our reinsurance recovery and 53 million dollars for the ACE Bermuda's 10% participation in the Niko cover. Our total charge was 516 million pre-tax, and 354 million after tax.

Now, I'd like to discuss the strong operating results of our ongoing operations in Insurance North America, excluding the charge related to the runoff operations. The demand for our traditional property and casualty risk transfer business written in the U.S., Bermuda and Canada continues to rise. As a result of higher rate levels, and our elevated position in the marketplace, we have seen significant premium and net operating income growth as compared to the same period of last year.

Exclusive of our reserve adjustment, Insurance North America produced operating income of 118 million dollars versus 88 million dollars in the same period last year, an increase of 34%. This business posted a combined ratio of 90.8% in the quarter versus 94.5% in the same period one year ago.

We have continued the trend of reducing our combined ratio each quarter over the previous year due to our sound underwriting practices as well as our discipline over expense control. This discipline is reflected in the 8.3 point improvement in our expense ratio which is the result of our expandable infrastructure we have built to allow us to process more volume.

Net written premiums also showed significant growth in the fourth quarter increasing to 819 million dollars versus 468 million dollars in 2001. A 75% increase over the same period last year.

Through the end of the year, we have seen a continued hardening in the North America insurance market and a reduction in competition. Overall, rate increases continued in the quarter with 25% for property over 75% for casualty and 97% for the U.S. D N O book.

The Bermuda operation also continued its outstanding performance delivering D N O increases in excess of 250%, again due to their strong position in fortune 500 businesses and reduced competition and capacity in the market. All of our business lines have continued to implement favorable changes in terms, conditions, attachment points and exposure limitations. As a hard market moves into 2003, we have been able to maintain these preferred terms on January business and expect the market to continue.

During the fourth quarter, all of the ACE USA businesses made significant contributions to our results. ACE Risk Management grew its net written premium over 130% versus the same period last year. Ace Global Solutions grew its presence in the global property, marine, international casualty captive/, and other sophisticated cash flow and multinational programs for U.S. based clients. This business continues to expand its reputation in the global arena by utilizing ACE's global underwriting network.

The new products we introduced during the year, A & H, medical risk, excess casualty, environmental, and stand-alone terrorism have significant momentum, contributing over 200 million dollars in gross written premiums in 2002. We are running these businesses at solid rates and expect this trend to continue.

Westchester Specialty Group, a leader in the ENS marketplace continues to be a significant contributor to the Insurance North America underwriting profit, led by the property division which reported favorable loss experience in the quarter. This was somewhat offset by a modest underwriting loss in the agricultural divisions crop hail line due to the severe summer Midwestern drought.

The Terror Risk Insurance Act of 2002 played a significant role in our planning process during the fourth quarter. Even before the act was passed, we had a multi-discipline team working together to implement the act and respond quickly. Our core strength of accumulation management and the knowledge we have gained from underwriting our stand-alone terrorism product made us well prepared to address the exposures presented under the act.

To date, it's too early to determine the take-up rates and to profile the accounts that are purchasing the cover. However, we can say that we are beyond the free coverage period of property due to the earlier mailing of our premium notification. Hence, if any insured did not elect to purchase the coverage and pay the additional premium, our terrorism exclusions are now reinstated. Also, with respect to worker's compensation, the act does provide protection for this line that did not exist prior to the passage of the act.

2002 was a strong year for Insurance North America. The strategies that we have implemented to date have given us a strong position in the core risk transfer markets and we are focused to take full advantage of the opportunities presented in 2003.

Moving on to ACE Financial Services, we experienced a reduction in gross written premiums for the quarter of 52 million dollars. However, such volatility and production results are not uncommon for this segment. Operating income in the quarter remains steady at 50 million dollars.

For our credit-based businesses, net operating income for the fourth quarter and the year are up 11 and 17% respectively. At this time last year, we noted the challenges for 2002 posed by our expectation of declines in both average credit quality and interest rate. Looking back on 2002, both of these concerns turned out to be very real. This makes our operating results all that much more satisfying.

Countering negatives in both the credit quality and interest rates have been positives, including firmer pricing, better risk selection, refund premiums, lessening competition and the reaffirmation of our AA and AAA financial [INAUDIBLE] rating for ACE Capital Re and ACE Guaranty.

In that regard, I would like to remind you of our recent name change from ACE Guaranty Re to ACE Guaranty Corp. This change reflects our increased involvement in the direct provision of credit enhancement to structured and municipal finance, which will supplement our traditional reinsurance operations.

We are not counting on the challenging market conditions to change in 2003. We expect again to manage these conditions through a combination of increased pricing, risk selection and expense management. Also, please note that we have expanded our derivatives disclosure in the financial guaranty supplement to include credit quality distribution and exposure maturity.

Market conditions, while challenging, have allowed us to improve the overall credit quality of our in force portfolio through many opportunities to write higher rated credit risks. In addition, in our single name credit derivative book, average tenure is now less than two years while the entire below investment grade portion will run off fully this year. The mark to market position has improved materially on our credit derivatives book this quarter as narrowed credit spreads mitigated the pronounced volatility in the third quarter.

Demand for our financial solution products continues to be strong. We had an excellent start to 2003 with a number of new contracts already bound, with in most cases, new customers to ACE. Our presence in London has proven to be extremely valuable in developing new business opportunities, especially in the property retrocessional market. We expect to see a strong demand in 2003 for our products as companies continue to be faced with pressure on self-insured retention, changing insurance programs, and the need to solve complex risk management challenges.

The results achieved this quarter and this year by both Insurance North America and Financial Services solidify our presence in today's markets as we continue to expand our business reach, introduce new products, maintain our premium service level, and create tailored business solutions.

Now, let me turn the call over to Evan for a detailed review of our international and reinsurance segment.

Thanks, Dominic.

ACE Global Re Property and Casualty had an excellent quarter. Net written premiums were 94 million, up 422% over the fourth quarter of 2001. This growth continues the trend of earlier quarters, resulting in full year gross and net written premiums of 887 million and 777 million respectively, surpassing 2001 by over 100%.

Operating income for the quarter was 72 million and the combined ratio, 75.8, bringing the full year to 291 million and the combined ratio to 68.9, a significant achievement and particularly poignant given that this is the 10th anniversary of the founding of Tempest.

All three operations, Bermuda, U.S. and London, have performed well during the quarter with tremendous growth coming from both the U.S. and London. Underwriting conditions were consistent with prior quarters. Relatively little property cat businesses placed during this period and casualty lines made up the majority of our underwriting activity. This area continues to offer increased opportunities, due to a combination of recent withdrawals in the market, rating agency downgrades, and continued prior period loss emergence.

2002 represented a landmark year for ACE Global Re. We have successfully diversified our business and now are a significant multi-line reinsurer. We fully capitalized on the best underwriting environment in the last decade. Fully half of our portfolio is from non-cat lines now and half of our business was generated by our London and U.S. operations, with the other half coming from the Bermuda cat division.

We have recently concluded the very important year-end renewal season. Overall, market fundamentals remain strong.

We have experienced greater competition in the property cat business, and rates on an exposure adjusted basis were down in a number of territories. We have commented in the past upon the importance and uniqueness of our analytical and underwriting capabilities in this line of business, which distinguishes us from other companies.

In this environment, risk selection and analytical pricing capabilities becomes even that much more important in discriminating the properly priced from the underpriced risk. Our capability has enabled us to write a portfolio in January 1 that will continue to generate attractive risk adjusted ROEs. Casualty lines continue to harden in most areas. But most notably in general liability and professional lines. At the same time, specialty areas such as marine and aviation offered continued opportunity for growth in January 1. Following January 1, ACE Global Re is well positioned to continue to deliver strong growth in 2003.

Now, let me turn to ACE Overseas General. Ace Overseas Gen, which is ACE International and Ace Global Markets, had a good fourth quarter and so a strong finish to the year. Net written premiums were up 28%. Net operating income for the quarter was 72 million and the combined ratio was 94.1. Let me briefly highlight each of the operations. ACE International's net written premiums was up 42% to 514 million for the quarter. Foreign exchange benefited our growth rate by about 5 points . For the year, we were up 34% to 1.9 billion. The combined ratio for quarter for Ace International was 90.8%, bringing the year to date combined to 95 .6. Operating income for the quarter was 73 million at 144 million for the year. With the exception of Japan, ACE international continues to experience rapid net premium growth in all regions of the world.

During the quarter, Europe grew by 55%. Asia-Pac about 49% and Latin America was up about 13%. All classes of P & C and personal accident lines are experiencing good growth. Underwriting conditions remain firm in the major territories. Rates for our P & C lines were up about 33% during the quarter and as important, policy terms are greatly improved.

Looking ahead, overall, these conditions continued into the first quarter. In most regions of the world, property rates continued to increase though the rate of increase has slowed while casualty rates continued to move up at a good rate of increase. In fact, in a number of classes and territories, the rate of increase is actually accelerated.

2002 was a good year for ACE international while many companies are growing weaker, we are gaining strength, not simply in terms of our financial results but in terms of our presence and capability globally. We have diversified our product portfolio and we have significantly upgraded our management and underwriting teams. I expect the momentum we have built in 2002 to continue to translate into strong revenue and earnings growth during 2003 and beyond. We are now one of the only true global players.

Let me turn to ACE Global Markets. As expected, ACE global markets our London E N S operation continues to show improvement in the fourth quarter. Net written premiums were up about 10% and AGM reported an operating loss of 1.2 million on a combined ratio of 103.4 for the quarter.

While these results are unacceptable, they are in line with previous guidance we have provided and operating results continue to improve each quarter. Growth in most lines was quite strong during the quarter as property, professional lines and marine all experienced growth in excess of 50%. For the majority of our A GM lines, we continue to see improvement in rate as well as terms and conditions.

On average, with the exception of aviation, P & C rates were up 46% in the quarter and an excess of 40% for the full year led by our E & O and property lines of business. We are major writers of aviation business and the fourth quarter is the major aviation renewal season. This market actually began softening a bit in the quarter and we maintained underwriting discipline. As a result, our business in this class was essentially flat for the quarter and this impacted our overall net premium growth.

I considered the year 2002 a transition year for A GM. We transformed the operation from more of a gross line trading oriented culture to more of a net line underwriting shop, a significant shift in strategy and attitude.. As I mentioned previously, ACE global market is essentially an E N S operation with a relatively short tail of book of business. I expect results to continue to improve as we put historical underwriting issues behind us. I expect net premium growth to accelerate and I expect us to earn an underwriting profit in 2003. I have the utmost confidence in our management and underwriting team. We have a great organization and I fully expect ACEGM to be a solid contributor to the group in 2003.

Now, I will turn it over to Phil Bancroft.

Thanks, Evan and good morning.

Today, I will talk about our fourth quarter operating results and important balance sheet items. And I will provide an update of our quidance for 2003. I will make some references to our fourth quarter financial supplement which is available on the website.. In the fourth quarter, we reported a net operate loss of 99 million, or 41 cents per share. Our results included charge of 354 million after tax to strengthen our asbestos and environmental reserve.

Our operating income prior to the charge for A & e would have been 255 million or 92 cents per share. We also had realized losses after tax of 69 million and unrealized gains after tax of 157 million which I'll cover in a couple of minutes. Our P & C earned premium growth for the quarter which excludes the Financial Services segment, was 54%.

The fourth quarter growth was strong across the company. The most significant was an ACE global Re which, excluding life reinsurance, reported 140% increase over the prior year quarter. The North American segment was up 63%. The increase in earned premiums in the quarter came from growth and net premiums during 2002. For the fourth quarter our net written premiums were up 54% . Most of the fourth quarter written premiums will be earned in 2003. Our net investment income was up slightly when compared with last quarter.

As Brian said, our operating cash flows were substantial at 833 million for the quarter, bringing our total for the year to 2.4 billion. The cash flows offset declining interest rates and our investment income didn't move much. The investment environment in 2002 was definitely difficult. The equity markets experienced record declines and interest rates fell to historic lows.

Throughout the year, we maintained a conservative approach in our investment portfolio and a combination of both realized and unrealized gains produced a positive return of 43 million. We've predominantly invested in high-grade, fixed income securities with an average credit quality of AA and our duration is three years. Our exposure to equities is 3.5% and the current average portfolio yield is 4.4% down from 4.7% last quarter.

Now, I'll recap the changes in our portfolio values for the quarter. We booked 138 million of realized losses by recognizing impairments of equity and fixed income securities. We also realized 30 million of gains on the sale of securities and a change in the value of our S&P index derivatives. We realized a gain from the change in fair value of our credit default slot portfolio of 20 million pre-tax, because credit spreads narrowed during the quarter. Remember, that the gain is not included in operations because we don't believe that changes in market value of these swaps are indicative of our earnings. We also had unrealized gains from both equity and fixed maturities of 186 million.

The sum of all of this is that, in the fourth quarter, the net realized and unrealized gains and losses after tax added 88 million to our book value. The markets have been volatile since December 31 but based on our latest review, our net position has not changed significantly from year end. With respect to loss reserves, we provided a roll forward of both reserves and reinsurance recoverables in the Supplement so you can see the impact of the items that affect these balances. Gross loss reserves related to our ongonig business increased by 886 million reflecting our growth in business. Runoff reserves increased by 1.8 billion because of the strengthening of our A&E reserves. Reinsurance recoverables relating to our ongoing business increased by 385 million while our runoff book increased by 1.5 billion. Page 23 of the supplement shows the current status of our World Trade Center reserves.

We continue to monitor our exposure and we are very comfortable with the reserves we established in 2001. Our outstanding debt is on page 25 of the supplement. During the quarter, we reduced our short term debt by repaying 75 million of ACE Financial Services notes that came due during the quarter. During the year, we reduced our overall debt by 349 million which is part of our plan to reduce leverage. Given the announcement of our recent charge for A and E losses, we now plan to raise additional debt or trust preferred securities of between 300 and 500 million.

After the proposed debt with the conversion of our mezzanine equity in the second quarter and our earnings in 2003 we don't expect any significant change in our leverage ratios between year-end 2002 and 2003. The rating agencies are in the process of their review and we are in close communication with them on our financial plans. When our mezzanine equity converts in May 2003, our shareholders' equity will increase by 311 million . Our outstanding shares will also increase by 11.8 million and will eliminate the preferred dividend.. If we assume that the mezzanine equity converted at the beginning of this quarter, our operating E P S before the A&E charge would have been reduced by one cent per share.

Our shareholders equity decreased by 59 million in the quarter because of the net operating loss and dividends declared partially offset by unrealized gains. Our diluted book value per share was 24.16 at December 31 . It was 24.37at the end of last quarter which is a drop of less than 1%. Updating our guidance for 2003, we now expect a growth rate and earned premium in our P & C business of between 30 and 33% for the year. That's up from 27 to 30% as of our last estimate. Our 2002 combined ratio for our P & C business excluding the A & E charge was 94%. We now believe we will be in the range of 90 to 92% for 2003. We have assumed 100 million of CapEx for the full year for our catastrophic reinsurance business.

In the Financial Services segment, we said that premium is not a good indicator of earnings because in each transaction, we generate a stream of income overtime. We expect the growth of operating income for the year will be 15 to 20%. We now expect that investment income to be in the range of 845 million to 865 million for 2003, compared with 802 million in 2002. That's because we have increased our operating cash flow estimate to 2.5 billion and we have included the proceeds for our planned financing.

If you assume that we will issue 300 to 500 million of debt or trust preferred securities in mid-February at rates ranging from 6 to 8%, our interest expense should range from 215 million to 225 million in 2003. Also, we expect that our tax rate will be in the 18 to 20% range. It's dependent on the mix of earnings from different jurisdictions and various tax rates. We do expect the rate to be in the 16 to 18% range in the first quarter and increase slightly during the year.

So far in 2003, we are continuing to experience favorable conditions in the insurance and reinsurance markets. We are confident that the increase in our A and E reserve puts the issue behind us for the foreseeable future. And I'm very comfortable with our overall loss reserve position.

And now, I will turn the call back over to Helen.

Thanks, Phil. We will be happy to take your questions.

Thank you. The floor is now open for questions. If you have a question or a comment, you may press the number 1 followed by 4 on your touch tone phone. If at any point your question has been answered, you may remove yourself from the line by pressing the pound key. And we do ask that while posing your questions to please pick up your hand set to provide optimum sound quality. Please hold while we pole for questions. Thank you, your first question is coming from Brian Meredith of Bank of America Securities.

Good morning, everybody.

Good morning, Brian.

A couple of quick questions. Phil, just a clarification on the tax rate, you expect it to be 18 to 20% for the year?

That's correct.

But 16 to 18 in the first quarter so you are actually are going to have a pretty decent ramp up, aren't you?

It's just based on the way we project our earnings to emerge and where we expect it to emerge. So, you know, it is just a mathematical exercise after we have a projection of our earnings by unit, by taxable jurisdiction and by non-taxable jurisdiction.

Okay. A couple of other, just two questions on the financial supplement. One, do you have what -- you've got this other category for reinsurance recoverables and you've got it for the paid losses, I believe. Do you have a category for unpaid losses? Do you have that category for unpaid so we know what the balance is from -- and the potential trouble reinsurers where you have got reserves outstanding with them?

You are saying in our paid-losses we have.

you have a reinsurance [UNINTELLIGIBLE] for paid losses on the other categorY and you offset your gross by that. Do you have the number for what your case reserves outstanding are or the recoverables due on case reserves?

We're going to do -- I'll give you a little bit of back ground about how we do the calculations first . We take each of our recoverables. We allocate them to the reinsurers based on contracts and then we assign ratings to them and make judgments about what we think is ultimately going to default based on the ratings, based on our history of disputes and our history of collections with insolvent companies and that's how we built up our reserve. We're going to be providing you in the 10k more details about what's in our portfolio.

Okay, terrific. And last question, Dominic, I don't know if you mentioned this, but could you give us some sense of what the take-up rate right now is for clients on terrorism insurance and what kind of rates you anticipate charging?

Well, I'll duck the rate question, but in terms of the take-up, we still have some time left based on the response period that they have to come back to us. It's been pretty much -- we see a high probability or high percentage of take-up where there is either debt or other restrictive covenants regarding the property or the facility in question. On the more optional side, to date, we are at a number that would be below, say, 30%, but as I said, it's still very early in the process and we are monitoring that very, very closely. Rates really, you know, vary, Brian, to be very honest with you. Because of the fact that we had a thin loan terrorism product, because of the fact that we think we were way ahead of accumulation management, not only of physical property but of human capital as well, we really targeted pricing specifically to the individual entity, operation or facility. And, therefore, it really did go across the board and I'd say that we were probably at the conservative end as well as to the marketplace. You know, we think we'll have a lot better data at the end of this quarter because we will have the results of the rest of the analysis of the take-up rates as well as first quarter activity being nailed down. We do have a lot of open quotes. So, you know, I'm not trying to beg off the question, but there is still a lot of balls in the air right now.

Do you you think you may lose business because of your conservative approach in terrorism insurance?

Remember, they always have the ability to decline the cover. You know, we will write it on a with or without basis. We just wind up putting the exclusion back in. We don't think that's going to be significant at all.

Great. Thank you.

Thank you. Your next question is coming from Ron Frank of Salomon Smith Barney.

Good morning. A couple of questions. One is, usually, the fluctuations in your Financial Services volume are driven significantly by L.P. Ts but if I'm reading the numbers correctly, your L.P. T volume was about constant year over year. So I was wonder if you could give us some more insight into what kinds of lumpy transaction or what have you were involved in the big year-to-year decline in volume? Also, Brian, I was wondering if you or Phil could go over the quality distribution of the reinsurance recoverables and specifically address your exposure to Kemper which there has been some discussion about and finally if you can talk to us about the extent of the independent review of reserves that you alluded to in your comments.

Dominic can do the basically the Financial Ser-vices area. Then Phil can talk about recoverables and you want me to talk about the reserves? Okay. Go ahead, Dom.

Okay. Well, Ron, we have lumpiness this across the board in financial services. We did have a drop-off in Financial Solutions business in the fourth quarter. And once again it gets back to large unique transactions done in '01 that were non renewable in '02. I think if you do a further analysis of the numbers, we can demonstrate that to you. As importantly, we now see large transactions in what I will call the guaranty business either through these equity credit default swaps or other what I will call portfolio type reinsurance arrangements. There was a significant drop-off in volume in the guaranty business as well, principally in the mortgage line where we had a unique transaction in 2001, not renewable in 2002 and, as I said, the Financial Solution there is specifically Bermuda had a dropoff in volume '02 to '01 as well.

How about '03, Dom

'03, as I mentioned, we had a great start for the first quarter with a lot of transactions booked in Bermuda as well as the U.S.. And as I said, with customers that were new to ACE. You know, as we continue to look at that business on a global basis and with the support of ACE international, we are seeing a lot more opportunities and especially in the international marketplace followed principally through the London operation which, as we talked about last year, we specifically increased and really brought up the quality of staff there to address what we see is the opportunities and, as I said, utilizing our global networks.

Phil, you want to do the recoverable

One thing I'd say is I mentioned earlier how we have done the analysis. We have decided that we're going to postpone the disclosure of that until we get to the 10k. It's just a fairly time consuming at year-end to do all the projections and put them into allocate I B and Rs to all the reinsurers. Disclosure will be made in the 10k.

So, does that preclude any comments regarding Tempest's specific exposure as well at this time?

I was looking at our last disclosure, and I don't see Kemper on the list. Yeah, I don't see. You know, we disclosed our major reinsurers, the top 10 and the other 20. After that, the balances fall down below 20 million. I don't see Kemper in any of the two major categories. And I would not have expected any significant change.

Yeah, I wouldn't either. Ron, what did you want to ask me about the reserves?

You mentioned, Brian, that independent actuaries look at the reserves and I was wondering if you could elaborate on the extent to which the independent actuaries looked at the year-end reserves, whether they specifically [UNINTELLIGIBLE] favorably on where you are relative to their range, who they were, if you can tell us that.

Okay. I think, you know, the one thing to point out, you know, we have independent firms. We don't just have one. It depends on the area. And they look at all our reserves every year. We don't do it all at year-end because, you know, you have to spread it around the year but throughout the year as I mentioned earlier, we have them reviewed. Every year. I think that's certainly best practices. And in that process, they do an independent verification, as I pointed out, of the reserves, and, you know, they come up with their opinions, but they have, you know, confirmed certainly that our reserves -- and I'm particularly want to point out this casualty question, that they are very comfortable with the level of reserves that we are carrying. You know, I think there is a reason for that and that is because we were quite careful in our underwriting and exposure accumulation in a period of time when the market just did not allow you to underwrite large volumes with any kind of profitability expectations. So, you know, we are the beneficiary I think, of that conservative approach at a time when you should have been conservative. Now, as I said, now it's time that, as the prices rise and the terms and conditions improve, you can write business at a profitable level and we are.

Okay. Thanks very much.

Ron, we don't discount anything. I want to point that out.

Okay. ..

thanks, Ron.

Great.

Thank you. Your next question is coming from Hugh Warren of JP Morgan.

Good morning.

good morning, Hugh.

One quick question for you. Will you disclose what the accident year loss ratio was for the P & C operations versus the calendar year in the quarter?

Yeah, I have that right here.

Phil is going to give it to you.

great.

We had about -- this is before the charge for asbestos. We had about 200 million of prior period development and that puts us --.

that's for the whole year?

For the whole year.

I was going to say wow.

That put us for the year at about a 91% combined on an accident year basis.

91 for the accident year.. And then for the quarter, did you have...

We don't really have it for the quarter because we have not broken out the prior period development by quarter.

I think 91 is a good number for the year.Talk about an accident quarter that's a pretty thin number.

The question I have is in the Insurance-North American business and maybe this is for Dominic if you strip out asbestos, you are looking at a loss ratio of 68.4% and then that compares to a 63.8% in the 4Q of 01. Why we would we see deterioration in the North American business with all the actions that's been going on in the rate side, deductibles, retentions everything that we talked about?

Most of the time, it's going to come from mix of business. As we expand now the casualty lines of business, the professional risk area and even our A and H business which comes in with a fairly high combined in the early years,and our Consumer Solutions were dramatically changing the kind of face of that portfolio through the interduction and specifically on the causality line, the long tail lines, that carry a higher loss ratio.

That helps future profitability because obviously we hold reserves then which is part of the foundation of ultimate earnings off the investment income.

Basically what you are doing is on the mix from the reserving standpoint, are you being more conservative than you have been in the past in the establishment of reserves for these new lines?

I would say we are being as conservative. I think we always have maintained, as Brian refers to in terms of our reserving policy, for instance we don't discount Workers' Comp. et cetera, we always believed our reserves to be conservative. We've maintained that conservative view going forward because at the end of the day, we still don't know what we don't know.

Sure. Inside of the North America, if you look at the, let's say, you know, it's roughly the 2.5 billion of premiums written for the full year, how much of that would be the new products, roughly, that you just mentioned and the switch over?

200 million in 2002 --.

that was 200 million?

Yes.

Great. Thanks a lot.

Thank you. Your next question is coming from Michael Smith of Bear Stearns

Good morning, Brian, I have two questions. First of all in the third quarter, or at the end of the third quarter, you had suggested that the net premium retention would increase over the next several quarters when, in fact, in the fourth quarter, it declined and the number of units and overall, it declined by about 2 percentage points and I'm wondering why the reversal?

I'll stand by that for a comment about, you know, year over year. You know, again, as you look from one quarter to the next, I don't think you should overdo any kind of trends. We clearly are taking, we are taking more net. There is no question about it. But, you know, if one area just happens to grow a little faster than another, then, you know, you are not going to see. For instance, like reinsurance is not a big -- it's not a huge quarter, necessarily, from a written premium point of view. That's been carrying a very high net. I think you have to stay by. Our nets are increasing. They're going to continue to increase into '03.

Following up on another statement, Evan Greenberg, I think I heard you say that rates on an exposure adjusted basis are down. I wonder if you could clarify that or if I mis-heard you.

I did qualify that. That was about the cat business.

Oh, okay.

and all other lines rates are up on an exposure adjusted basis.

Thank you very much.

.

Okay, Michael. Michael, I'd point out, by the way, the cat business is well priced and, our return analysis gives it high marks. So, you know, the fact that it's flattening out, is really a reflection of how good it's been priced.

I understand. Thank you very much. I appreciate that.

Thank you. Your next question is coming from Jay Cohen of Merrill Lynch.

This might be kind of a technical question, maybe industry related really but when you set up a big I B and R for asbestos, as you did, how do you allocate that to the various reinsurers when you are looking at the recoverables? You mentioned that's difficult but what's the process you go through?

I don't know it's that technical but Phil is going to take it. [ laughter ] We hope it's not, right.

That's why Phil is taking it.

In this case, we mentioned to you in a call last week that we put a task force together that reviewed a large number of our cases. The vast majority of the cases where there is a lot of variability. And what we did for each of those cases, once we established the company's liability, we went to the coverage charts and looked at our liability and then we went to the reinsurance contracts and established specifically who those reinsurers were. So for a large part of the population we decided definitely who they report to, I mean who they're going to be reported to. For a smaller cases, we looked at payment patterns in the past and expected that our payment patterns in the future would be similar so we've allocated on the basis of our history. Okay. Jay?

What about unallocated I B and R?

That's an area where we would use our history of payments to allocate their reinsurers.

I see, okay.That's great. Thanks.

Thank you. Your next question is coming from Mark Lane of William Blair & CO

Goof morning.

Good morning, Mark.

Just a few questions. First, just to clarify some of the guidance, the combined ratio estimate, the 90 to 92, is that before or after the corporate expenses?

That includes corporate expenses. What we have done is just backed out the financial guaranty companies.

Okay.

All the Financial Services.

And the life business?

And the life, yes.

And the 100 million dollars of cats that you've built into your assumption for '03, what would be the equivalent number in '02 be?

Roughly the same.

We're going to hit a 100 million this year.

Okay.

Which is probably good as any number.

And then what -- can you give us some idea of what net written --.

Let me clarify something for you. That's the cats in the property cat area so for our property cat writing, that's where we call that 100 million.

So 100 million of property cat losses in 2002?

From the property cat reinsurance operation, yes.

And what about P & C, if you could give us any idea of what written premium growth in P & C overall was in January, roughly?

This is all of our business. I can't give you -- I don't think I can give you a precise number, Mark.

A range excluding financials .

I'll try to help you out on trends. We had, actually a very good start to the year and we gave you guidance for the year in terms of production and the early part of the year, I'd say, would fit in line with what we thought would and should happen for us to be able to give you that guidance. Now, there is, you know, those interesting things going on in the marketplace. You know, we talked about the fact that maybe property rates are flattening a bit. Property cat is flattening a little bit but the casualty rate increases aren't. And actually properties are not flattening in Europe. Rate increases there continue to go up in properties. So, there is a price, a rate momentum that is continuing into '03. It's starting to be more casualty oriented. Maybe we are turning into a classic casualty hard market but when you wait it out it's still very positive. There's also been a continuing decline in competition on a general basis, not across the board. Certainly there's competition in property cat. But in general, particularly in the United States on the direct side, we were the beneficiary of other companies dropping out. So we had a very good start to our large account business in the year. So we had a good start. We are very, very positive and feel very comfortable increasing the amount of production we thought would flow into '03 now.

Last question is Financial Services in the fourth quarter. Net investment income is up, sequentially. Underwriting income has been kind of flattish. Are there above average incurred or paid losses in the fourth quarter? Was there any clean-up in the Financial Services business in the fourth quarter? I mean, outside of net investment income, why are you confident that you can grow that business 15 to 20% in 2003? You're talking about the harder market pricing, et cetera, et cetera, but you are not really seeing it in the bottom line in. You didn't in 2002.

Yeah, I agree. The 2002 -- this is Dominic -- for Financial Services, was extremely flat. We actually were satisfied to a certain extent based on what 2002 actually had in it. So as you are aware, we did take some credit losses in 2002 for some of the, you know, more public defaults that were out there. Additionally, we did go back and in the financial solutions area increase reserves on a couple of deals where we saw continued deterioration in losses. And those two things, really suppressed income for the period. But when we look forward, you know, exactly as you described, the hard market, the change in the competitive balance in the market place, the lack of a lot of historic competitors that were out there providing solutions type businesses who are no longer in the marketplace, and there is many that are no longer available, provides us a great opportunity in 2003 to go forward and continue to grow the book. Notwithstanding the results of 2002. We thought 2002 was going to a tough year. It was a tough year. We are not walking away from that. We took our lumps like other people did in the credit markets and we are going forward well positioned, well reserved and with one the few platforms out there that can still respond to that opportunity.

Thank you.

Thank you. Your next question is coming from Bill Wilt of Morgan Stanley

Good morning. Just a few short questions for you. The first one to following-up on the last speaker. Could you just talk about your view on the growth prospects, specifically in the financial guaranty segment. Are you actively allocating capital and thinking of that as an area to grow Or less so considering opportunities elsewhere?

We have a lot of capital as you can appreciate in that area based on rating agencies concerns. What we see is two things. One, as we talked about, we are moving more into the direct business as opposed to the reinsurance business and the credit arena. And we really believe with kind of a direct distribution strategy. That can be very effective and allow us to, you know, take a position alongside the other direct or primary writers of that business. The second thing is there have been rather publicized down grades in that marketplace that is really taking away some of the more aggressive competitors in the market. So we see that competitive side of the landscape being a lot more favorable to us and, yet, at the end of the day, one of the biggest pressing issues around the world is credit. So the demand for the product is there. We believe that there is an environment to continue to attract higher pricing at more favorable terms and as we shift our business from reinsurance to the primary side, we see a huge benefit and especially in light of the current down grades that have existed to some of the other players in the marketplace that now will not play at the at the same level. They have garnershed as much capacity as they have in the past.

This is Alice Schroeder, I am here with Bill. And just as a follow-up to that, if you're looking at 15%-20% earnings growth in that line , what kind of return equity underlys that since it's coming off a year where you had a below average result.

We are talking once again Financial Services?

Yeah.

Yeah. I'd say, you know, we always maintained that minimum of 15, and , you know we think that market could provide returns in excess of that. Obviously on the Solutions Business, we always try to target about a plus 20% because of the nature of that piece. But, you know, we see, as I said, this competitive arena, the kind of current spreads that are available in the marketplace and where we think we can position pricing. But what I would say to you, it allows us to be a whole lot more selective. The amount of flow of transactions is incredibly increased, you know, very significant for us which really allows us to drive pricing on the kind of risk that we prefer. And obviously, if you look at our strategy, we've kind of got a two-fold strategy to be way up in the credit spectrum like the super AAA and down at the equity, where now the rate on line for even the equity portion of the portfolio is going north of 85 to 90% and we would like the return characteristics of both. So, Alice, we always shoot for that, you know, really in the solutions and services area 20% and we think we can be very selective to try to achieve that based on where we stand competitively in the marketplace and the amount of demand for the product.

That'st great. Thanks. The other question I had for you, I'm wondering if you can give a flavor of the discussion you are having with the rating agencies? I'm wondering if the focus is on debt to capital, looking at pro forma debt to capital, debt to tangible capital, just what some of the specific pressure points are with the rating agencies?

Okay, Bill. I'm going to have Phil talk about that.

We had obviously discussions with each of the agencies, and I'd characterize it as they are in the course of their review. What they told us, S&P, for example, had said there are two conditions for them clearing the negative credit watch. One is that we execute on the debt that we've talked to them about. We haven' talked about a specific structure but we will be. And the second point is they are in the middle of their year-end review and they are not going to make any decisions until they get through it. So that's about all we can tell you at this point.

Okay. That's great. Thanks very much.

Okay, Bill.

Next question, please.

.

Thank you. Your next question is coming from Gail Golightlyof Wachovia Securities.

Could you give us a little bit more color on the comment about the aviation business and that you are seeing some softening? Is that specifically out of the Lloyd's market or out of your direct placement business?

Okay. Evan, go ahead. Talk about aviation, please.

It's direct placements and the direct placements are mostly out of the Lloyd's market. I would say that on the major season is October, November, as you know, for renewals. Rates on average they were off a bit. They were off, I would say, in the 10 to 20% range. There was more competition that came into the market. We are one of the largest writers in the world of that business. We maintained and wrote and continue to write a significant portfolio. We just didn't grow the business because more underwriting selection was required because, if overall rate levels are adequate, when rates start dropping, not every risk is the same. So more risk selection. There was more pressure on the portfolio that way.

Okay.

Okay?

Thank you. And you sort of also have announced the strategy that you really sort of want to build some of your direct business because you think that the expense side of that business is more attractive. Can you give us a flavor for how that mix of business played out?

Gail, are you referring to what we are doing in London with Lloyd's?

Yes.

Go ahead, Ev.

Yeah, that's right on target, moving right ahead. We did, as we had said to you, ACE global markets, we just gave them another venue to underwrite through. ACE global markets continues to grow. Less of the business will be written on Lloyd's paper, more on ACE I and AU K paper. We begin that shift. We announced last year, the word is, the arcane term is deemption where we reduce our capacity in Lloyd's. And at January 1 we are right on target.

Okay, thank you. And my last question had to do with you seem to have increased your sort of your mortgage-back security holding. You sort of [UNINTELLIGIBLE] because that was the paper that was available or is that a definite shift of trying to bolster that segment?

Phil can attempt on it.

Maybe Tim.

I can take that. That increase came from a restructuring principally in our U.S. portfolio. And you will note that, even with that increase, we are still on the high teens with regard to our complement of mortgages within the investment portfolio. So whereas the market capitalization is near 40%. That change occurred earlier in the year when we felt that the mortgage sector would outperform corporate so that's how that switch was made.

But you are not really sort of changing your philosophy and looking to move closer to the market?

No, not at all. There was an imbalance there we wanted to get closer to what the market was.

Thank you.

Thank you. Your final question is coming from Ron Frank of Salomon Smith Barney.

Phil, you may have addressed this in an earlier comment, but could you go over for us the current view on capital generation and/or consumption at the Financial Services operations overall? Are they currently consuming or generating and over what period of time do you expect that to change if it's going to change?

That's the ACE Guaranty Re?

Primarily the guaranty and derivatives operation, the credit operation.

And Cap Re.

Right. All the guaranty related operations. I'm interested in their current positions vis-a-vis generating capital or consuming capital and the trend.

I'd say that, you know, they hold a great deal of capital and that's required by the rating agencies. We have been doing some work just recently to communicate with the rating agencies to extract some capital from the business, especially from the CapRe piece of it because we feel that their generating capitals and we would like to dividend that to the rest of the group. The guaranty folks seem to be doing fine. There is no capital infusions expected and they are maintaining their growth with organic capital creation.

Brian, you have expressed the view that you are not go have to raise equity. Does that view rely upon being able to extract that capital from CapRe?

It's not relying on, you know, getting capital out of CapRe. It'sreally based on the fact that our business is performing very well, Ron. You know, we gave you some indications of the kind of combined ratios we are expecting. Our growth rates are within our capital capabilities. So we are generating capital through our underwriting efforts. And that's the biggest single reason.

Okay, great. Thank you.

One thing I would add to that is the capital that we were expecting to get from CapRe is relatively small. I would just mention that they are generating some additional capital. The other point I would make is that when we look at our capital, we look at it somewhat different than the rating agencies do. A number or at least one of the rating agencies use a model -- uses a model that stranger capital for premium growth. And we are saying, at this point, that a large part of our growth is coming from rate increases. So it's counter intuitive to us that premium growth that's coming from rate would create a capital need.

But, Phil, in fairness, that's the same fight that a lot of your peers are fighting right now, right?

Yep.

And I will say, Ron, we are cognizant of the model. We know the kind of ratios they produce. We are within those ratios. It is not, you know -- we are not dependent on the -- you know, the discussion going our way with respect to rate versus exposure, but it's -- I think a discussion worth having because the model has to recognize the realities of the business and we are -- you know, I think we are making some head way there.

Okay. Thanks.

You're welcome, Ron.

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

I just have one more capital question, Brian. Most of the risk managers we talk to expect the hard market to continue into 2004. First of all do you agree with this and do you still think you would have adequate capital to support another year of double digit growth?

Well, yeah. That's good to hear, actually. That's how the risk managers feel. You know, it's really how longs a piece of string kind of question. Just to stay on that a second before I get to capital, yes, we do. I will say more about it. You have to look at the conditions that exist in the market. You know, reserve increases for casualty lines, recognition of a mismatch between price and exposure, et cetera. That all still is flowing through. We have reduction in the number of competitors. There is still that demand out there for the business. All of those indicate that prices will continue to go up in particularly in the casualty and I think certainly it could stretch well into a 4. I don't think there's any question there. We look at our capital not just on a moment-to-moment basis but we do think about how the capital would be used as we grow, and we certainly think that we can handle double-digit growth. But, I got to tell you that if the growth rate is very large because the market continues to tighten, tighten, tighten, why sure, I would change my opinion.

Okay. Thank you.

Thank you. Your next question is coming from Hugh Warren of JP Morgan.

Hi, guys, just a follow-up. The full year was 91% accident-loss ratio and your target for 90 to 92 for '03, just being conservative on that number? Can you give us a little color on that 90 to 92 guidance that you gave us?

I'm glad to talk about it a little bit. There are a number of things one has to recognize when you -- you know, when you look into the future in terms of our business. And one is the mix of business. Dominic pointed out the growth in casualty lines. Evan pointed out the growth on the reinsurance side between casualty, which is now 50% of the book of business from a time when we only had property cat which carries a very low combine. So there is a weighted average issue going on within the book and we, as the casualty business, as the rates and casualty continues to rise, it becomes more and more attractive a business for us to write. Now, they are rising for reasons like they are needed and, you know, so it doesn't necessarily mean that, you know, combined ratios are very, very low. In fact, casualty tends to run high. High loss ratio, high combined business. So as you add to your portfolio, that kind of business, your combined ratios have to go up. That's one thing. And, you know, I think the other thing to recognize is '02 was a relatively benign year. I mean, we talked about cat losses, but it was a relatively benign year across the board. So you can have an expectation for an accident year at a certain level but you have to recognize that, you know, there is statistical variation around that and there is a statistical variation around it. So if you have a relatively benign '02, that doesn't mean that your expectations for '02 should have not have been higher.

So outside of the 100 million cat adjustment that you already built into your assumptions, you've also implicitly built in an assumption for a normal loss period.

Right. An reversion to the mean. When you weighted average with casualty and you refer to the mean, you say, what is a more likely scenario for combined ratios? We recognize things are improving and we did lower our guidance a bit to recognize that. You certainly see the cash flow coming in, but, you know, I think that kind of combined ratio is appropriate for the market conditions we see into '03.

If you look out into your crystal ball, can you give us a sense if you aggregated up between the property covers and the casualty covers where you at the end of '03 you'd be relatively on a mix on the premium basis on the P & C side?

That's a good question because there's an awful lot going on.

understood. We can follow up later on. I'm just kind of curious how that's going to gravitate over time.

My gut feeling is -- and it remains to be seen as casualty rates rise, that will start to weight that way. You know, the property guys have something to say about that. We have consumer solutions business. We have A and H all of which have started out the year pretty well. So it is a race to the finish line. We'll see who gets there.

Great.

You're welcome.

Thank you. There appear to be no further questions at this time. I would like to turn it back to the speakers for any closing comments.

Thank you. If there are no more questions, we'll conclude this call. We thank you for joining us and for your interest in ACE and look forward to speaking with you at the end of next quarter. Thank you and good day.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. O -CF1 O