丘博保險集團 (CB) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the ACE Limited third quarter earnings conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. If you would like to register to ask a question, you may press one followed by four on your touch-tone telephone. At this time, it is my pleasure to turn the floor over to your host, Helen Wilson. Ma'am, you may begin.

Good morning and welcome to our third quarter, 2003 earnings conference call. I'm Helen Wilson, Director of Investor Relations and 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, market conditions, pricing, policy terms, profitability, growth, premiums, cash flow, tangible equity, income, balance sheet strength, interest expense and dividends, tax rates, exposures and reserves, reinsurance recoverables, LPT production and asbestos legislation. Actual results may differ materially.

Please refer to our most recent annual report on Form 10-K, quarterly report on Form 10-Q 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 Web site for more information.

I'd also like to remind you that this conference call and its contents and any taped broadcast or publication by ACE Limited are the sole copywrited property of ACE Limited, 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 Web cast 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 4224312.

Our speakers today will be Brian Duperreault, Chairman and Chief Executive Officer, followed by Phil Bancroft, Chief Financial Officer. Our senior executives, Evan Greenberg and Dominic Frederico, will also an available to take your questions. And now, I'll turn the call over to Brian.

Thanks, Helen.

This was an excellent quarter for our company. We demonstrated sustained growth in our principal business segments, increased earnings power, a satisfactory return on equity and book value per share growth, all noteworthy achievements.

The numbers speak for themselves, and in case there are some further questions, Phil Bancroft, Our CFO will go over the financial highlights of the period. Our senior executive staff is also available to answer any questions you may have. This format is in response to a request to keep our prepared remarks short leaving more time for questions and answers.

Taking things from the top, I think that ACE is ideally positioned for the current insurance environment. We have an irreplaceable global platform, strong policy holder financial strength ratings and an appetite for assuming risk. All this at a time when pricing is permitting us to earn excellent returns.

Initially property rates returned to satisfactory levels and now same is true for the casualty business. All this is occurring as many of our competitors are withdrawing or becoming more risk adverse.

With fewer and fewer risk takers around, ACE is an increasingly positioned as an invaluable market for clients who are having difficulty in assembling the large capacity needed to protect them from the severely stressed casualty environment.

As a result, we are experiencing sustained, rapid organic growth in our property and casualty business. We continue to be offered participations on nearly all of the largest and most complex multinational risks and because of adequate pricing, we find ourselves closing on quite a few of these cases as well as many smaller risks.

This is evidenced by the fact that our North American net written premiums were up 23% in the quarter while overseas general business was up 26% over year ago levels.

I'm sure you've noted from our press release that gross premiums for the North American segment increased by 2% for the quarter. This apparently modest gain was due primarily to a conscious decision on our part to significantly reduce our participation in program business and concentrate our capacity on those lines we write directly for our clients.

Program business is heavily reinsured while direct business is largely retained. In the aggregate, gross premiums for the North American segment topped $5 billion for the year to date, making us one of the most important insurers providing capacity in the U.S. market.

And while we're clearly an important force in the United States market, I'd also like to point out that we've become a much more important presence in the European market. For the first nine months of this year, our overseas general unit produced approximately $2.8 billion of net written premiums. 38% of which was in ACE Europe and another 29% was in ACE Global Markets, our Lloyd's unit.

ACE Europe's net written premiums were up 30% for the latest quarter. We are clearly filling a void caused by the retrenchment of several important European insurers. More importantly, underwriting profitability on this business has been outstanding.

ACE is also a large presence in Asia and the far eastern countries. We're producing gross premiums of about $1 billion on a trailing 12-month basis. There are few western-based companies with this level of volume.

Another segment of our P&C business that I'd like to call your attention to is our global reinsurance business, principally ACE Tempest Re. We've previously disclosed that ACE Tempest Re was diversifying from property catastrophe reinsurance into nearly all lines of reinsurance.

Non-CAT business now accounts for over 60% of total premiums.

For the year to date, net reinsurance premiums written totaled $1 billion, a gain of 47% over the prior year with underwriting profit margins approaching 25%. The significant growth in our reinsurance segment comes at a time when many primary insurance companies have been exiting the field.

Another subset of our operations that deserves special recognition is our personal accident business. It is included in our P&C segment, but has somewhat different characteristics.

It is individually marketed, principally outside of the United States, has relatively stable margins and is quite profitable. This should not be confused with health insurance which is impacted by medical cost inflation. ACE's personal accident business is generating approximately $1 billion in premium annually.

Finally, ACE Bermuda started to grow rapidly again with net premiums up 16% in the quarter. During the soft market, ACE Bermuda reduced it's [inaudible] B&O business significantly. With rates now adequate, this unit is once again increasing its volume.

Our current results continue to demonstrate the fact that ACE has an outstanding worldwide business platform, generating an income stream that is widely diversified by line of business and by territory. In addition, many of ACE's specialty businesses possess different volatility characteristics and are not precisely correlated with the traditional P&C business.

Naturally, diversification also means that some specialties can go in a different direction. This was true for a sub segment of our Financial Services, namely Financial Solutions, which did very little business during the quarter and, in fact, in the nine months.

We have always cautioned you on the fact that the production in this line is erratic and, indeed, it has been. On the other hand, we have also emphasized the fact that this sector produces a steady stream of income. For the quarter, the entire Financial Services sector showed an overall gain in net operating income of 18%.

Let me touch briefly on the Washington scene.

I was disappointed by the fact that Congress failed to enact some form of class action reform despite the fact that a majority of Congressmen were in favor of curbing abuses. The action failed by one vote and I hope that one or more senators will reconsider their position before Congress adjourns because the current U.S. tort liability system imposes a punitive burden on U.S. business activity.

I should also note that we have been very active in trying to bring reason to the disfunctional asbestos liability compensation system. Every important constituency, Congress, the manufacturers, organized labor and the insurers have -- and even many lawyers have agreed the system is broken.

A lot of progress has been made to date and Congress remains committed to producing a bill that as of today no one can predict the outcome. From ACE's point of view, however, I can say that we have not seen any change in our asbestos liability since we took the reserve charge last year and we continue to be confident that we are viewing the outlook under the present tort system realistically.

To sum up, ACE is well positioned in the current environment. We are growing rapidly, benefiting from our appetite for risk, solid underwriting skills, product and geographic diversification and strong balance sheet. Our earnings power continue to grow by double digits and our annualized return on average equity totaled 15.2% for the quarter.

Now I'd like Phil to touch on some of the more important numbers. Thank you.

Thank you, Brian and good morning. I'll briefly review our financial performance for the third quarter and our guidance for the rest of the year.

The third quarter was again strong. Our income excluding net realized gains, was up 105% to a record $304 million or $1.04 per share compared with $148 million or 53 cents per share for the same period last year. This resulted in an annualized operating return on average equity of 15.2% or 16.8% excluding FAS 115.

Property and casualty operations produced solid net premium written growth, rising 27% for the quarter and 43% for the year. Premium growth was strongest in the casualty lines with a 58% increase on a year to date basis, twice the rate of the growth in property lines.

On a consolidated basis, growth written premiums were down 2%, but this was primarily due to two items. First, there was a 78% reduction in our Financial Services segment because we moved out of equity CDOs and experienced lower LPT volume, and second, we continued to de-emphasize certain heavily reinsured program business in North America.

As we commented in the last earnings call, we've included in this quarter's supplement a breakdown of net written and earned premiums between property and casualty lines to better explain loss ratio trends.

On page 6 of the supplement, you can see the significant shift to casualty. Year-on-year, casualty premiums earned have increased 70%. This increase delines contribution to total premium from 36 to 44%.

Our P&C combined ratio for the quarter was 91.6%, including $42 million of catastrophe losses and $62 million of prior period P&C adverse reserve development.

Turning to the balance sheet, paid recoverables had a slight decline of $6 million, reflecting both billings and collections, which exceeded $800 million in the quarter. For the full year, we billed and collected over $3 billion in recoverables which is four times the general collections average balance.

In addition, we provided our list of reinsurers with greater than $20 million in balances net of collateral offsets. This presentation better reflects our actual credit exposure to various reinsurers.

Outstanding reinsurance recoverables increased in the quarter by $141 million. This was principally due to the continued growth in our P&C gross premiums. As we continue to increase our net to gross premium retention ratios, we expect to see a modest decline in the overall recoverable balance beginning in 2004 and thereafter.

We added $1 billion to our investment portfolio in the quarter and nearly $3.5 billion for the year, representing a 20% increase in invested assets. Despite low interest rates, we were able to record a 9% gain in investment income for the quarter.

We've kept our portfolio duration comparatively short at about 3.4 years, sacrificing current yields for safety of principal. Our strategy is to both protect the balance sheet and accelerate the rollover to new rates in the event that rates increase sharply from current levels.

We estimate that a 50-base increase in treasury rates would reduce our shareholders equity by less than 3%, which represents about one quarter's investment income.

We continue to remain focused on capital adequacy and all of our financial leverage ratios continued to improve during the quarter. Our tangible shareholders equity increased by a total of $168 million during the quarter and has increased by 53% year to date.

Our debt to total capital ratio improved to 17.7% and our debt plus trust preferred to tangible equity to 42%. These ratios are relatively conservative and consistent with the averages of our peer group. We expect these ratios to continue to improve for the balance of the year.

With three quarters of the year now complete, I'd like to make some minor refinements to our 2003 guidance.

We now expect P&C net earned premium growth of 45 to 47% compared to our previous guidance of 42 to 45%. We said last quarter that we expected our combined ratio to be at the high end of a 90 to 92% range, we now believe that we'll be close to the middle of the range.

We estimate that Financial Services income before net realized gains and losses will grow by approximately 15%, compared with our previous guidance of 15 to 20%. Net investment income will be approximately $850 million, compared to our previous estimate of between 845 and $865 million.

We expect cash flow of 3.3 to $3.5 billion versus our $3 billion prior estimate. And finally, we expect tangible equity growth of between 55 to 60% for the year. There are no changes to the interest expense per dividends effective tax rate guidance.

We plan to give guidance for 2004 at the Bermuda Angle conference just scheduled in early December. Again, we're very pleased with our third quarter results and with ACE's many accomplishments during this year.

With that, I'll turn the call back over to Helen.

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

Thank you. The floor is now open for questions. If you do have a question, please press the number one followed by four on your touch-tone telephone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you please pick up your handset to provide optimum sound quality. Once again, that is one followed by four on your touch-tone telephone at this time. One moment while I poll for questions. Thank you. Your first question is coming from Bill Wilt of Morgan Stanley. Please go ahead with your question.

Hi, good morning.

Good morning, Bill.

Hi. I wanted to check in, could you add some color on the lines of business that you exited, I guess it was, you said it was program business in North America, just some color on those lines of business?

Sure. Be glad to. Maybe Dominic can get it. Dom? You want to talk about that?

Sure. You know, as I think we've stated in previous quarters, we wanted to use more of our what I'll call brokerage marketplace businesses where we, you know, directly control all aspects of the underwriting, et cetera. So, starting with second quarter of last year we began to exit the program business and that really touches across multiple primary casualty lines.

It really isn't specific to any one given area, it's written, as I said, in the form of a group type of approach. And as you've seen the impact pretty much quarter-to-quarter this year, we're finally thinking that we're getting to the end of the influence of that in our published financial statements.

Okay, Bill?

Thanks. I guess as part of that, I think Brian, based on your comments, I would have thought that the net to gross ratio in the North America segment would rise, I guess, with this decision, but if I'm not mistaken it stayed flat in North America and was ticked down for the quarter. Is there anything, do you still expect it to rise from this point forward?

Actually, Bill, I think it's up, actually. Over prior year. You know, quarter-to-quarter, this -- and this year you might see a bit of fluctuation depending on what business is being renewed, but we're generally speaking on the rise.

Bill, we really measure, this is Evan, we really measure year-on-year, in particular, more meaningful because you're comparing like periods. And there is certain seasonalities to the business and that's more meaningful to us and when you look quarter-on-quarter, year-to-year, it's a significant increase and it's 10 points and 9 months, it's up in the aggregate it's up significantly.

Sure. That's helpful. And last quick question, I guess I can take from your comments on asbestos that you're not seeing any surprising increase in claim filings, you know, was the talk yesterday with Chuck's comment.

Exactly. We're not seeing anything surprising. And as I said, we're very comfortable with the liabilities we set up.

Very good. Thank you.

Okay. Next question?

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

Good morning, two questions.

Good morning, Jay.

The first is the $62 million of adverse development. I want to know what areas that was in? And then secondly, you had a couple of companies say they saw an increase in liability claims, Excel and Markel, specifically. I wanted to see what you guys are seeing there?

Well, Evan, do you want to do the adverse development?

Yeah. Jay, as you noted, $62 million of prior period. It came from two segments. Approximately half of it came from North America and the other -- so about $30 million, and the other half came from overseas gen. Again, about $30 million.

North America was a few large individual case loss reserves that were revised upwards, one-time event, it was in casualty-related lines. Overseas general was an upward revision to prior year loss pecs on a couple of classes of business in Europe.

Now, these reserve actions we took were a consequence of routine and ongoing reserve reviews and as you know, we're constantly reviewing our reserves on all our books of business on an ongoing basis. And these reviews are conducted by both internal and external actuarial resources and our claims organization and so this was just part of that routine review. There was no special events.

Okay, Jay, so, now you want to know about whether we've seen an increase in liability claims, casualty claims?

Yeah, coming from the '97 through '01 years, I guess.

Remember, we will get back to what we said before. First of all, we had a very relatively low small book of business as we cut back in that area in Bermuda and in the I&A segment, they were actually relatively modest in that area themselves, so, we don't have a big, compared to some others, we don't have a large book of that business and if I recall correctly I think some of it, you know, it's across a wide number of lines of business based on what I can see from the press. But we're not seeing significant changes in frequency.

I think, you know, there might be a bit, you know, if we look at trends, you know, medical cost inflation is up a bit, but not a frequency issue. And I think because we were playing defense in those years we've -- you can't completely insulate yourselves from trends, but I think our position is good relative to some others.

Thanks for those answers.

Okay.

Thank you. Your next question is coming from Adam Klauber of Cochran. Please go ahead with your question.

Good morning.

Good morning.

Can we expect the Financial Solutions growth to stay pretty minimal? And also what impact will that have on earnings going forward?

Oh, okay. Well, I'll let Dom answer that part and then I'll talk about the earnings. Dom, you want to talk about what you're seeing in Financial Solutions?

Yeah. Obviously there's been a little bit of a change in the marketplace, driven primarily by two factors. One, the low interest rate environment really affects any program that involves kind of the use of return and that's specifically in the area of lost portfolio transfers, where interest plays a fairly significant role in how those programs are ultimately priced.

And then number two, there is an obvious very extensive scrutiny now from an accounting point of view as the rules and interpretations of how things have to be accounted for evolve that's having an effect on the value of some of these programs can deliver. So, the combination of the two is really causing a little bit of a drop in demand, which is obviously evident in our reported financials and we look at that business kind of on a, you know, what is the maximum amount or what is the portfolio we think we can achieve year-to-year? That business doesn't really renew.

There's a segment of our book that does renew, but the majority of it is individual risk written on a one-time basis, so, each year you're out there looking for a certain amount of new business. We tried to maintain a target value for both the U.S. and the Bermuda operations of around $500 million each, total portfolio of about $1 billion.

We still see activity, however, you know, as the market is hard in the traditional insurance area, that will drive more people in to consider other alternatives or approaches to how they put together protection and fill in certain areas where they might now no longer have coverage provided or are not able to buy as much limit as they were in the past, so, demands there, just the what I'll call period of closure is extending significantly.

So, deals that would have taken in the old days three to six months now are taking nine to twelve months. But we maintain a good pipeline, we see opportunity and, you know, we think that ultimately production will return to these areas.

Yeah, the only thing I'd add is that one of the offsets to that is the market itself. The margins in that business, actually, have gone up relatively speaking. So, it's a little slower to close, you have a fewer transactions, the transactions you do close usually have better margins.

We've always said that, you know, as I said earlier, you know, the business doesn't come in some steady state on the top line, but it has relatively stable bottom line characteristics and so when we kind of give you guidance for the year we talk more about that as both Phil and I said we're looking at something like 15% for the year growth. And, you know, going into '04, well, I think, you know, we're going to give you the guidance coming up in December and we'll talk about it then, but, you know, we still think this business has good earnings characteristics, frankly.

Thank you. One more question. Could you talk about your worker's compensation book? Obviously your worker's comp book has a different profile than many other competitors. How is it performing in this environment?

Yeah, we do have a different profile. I mean you kind of touched on the earlier question I got about, you know, what's going on in the marketplace. You know, predominantly that comp book has been in large account self-insured areas.

So, it, you know, the activity tends to be born by the insured and we're providing services. We do have, obviously, some risk in that book, but it's got a different characteristic than guaranteed cost comp and I think the guaranteed cost comp business, particularly in the late '90s, was significantly underpriced and when we took over the INA we discontinued that business. We didn't like it. I thought it was underpriced then, it's becoming apparently even more underpriced. We have also insulated that book, our own book, with reinsurance, particularly in that period of time.

So, I would say our comp book, it certainly, you know, suffers from the same kind of pressures that others are seeing but it's better insulated I guess is the way to put it. In the current environment, we are starting to look at guaranteed costs, if we can get the rates and in many instances we're starting to get those rates. I can't say that we're rushing in wide-eyed and innocent about it. We're very cautious about this business, but it is starting to show some characteristics that make it a better book to write. Hope that gives you some color.

Thank you very much, Brian.

You're welcome.

The next question is from Hugh Warns of JP Morgan. Please pose your question.

Good morning, everyone.

Good morning.

Quick question, Brian. On the asbestos side, any comment, I mean there's obviously rumblings around again, there's a new proposal, sounds like it's floating about $128 billion trust fund. Trying to split the difference between the 114 and the 158 that the AFL-CIO wants. Any thoughts there? Gut reaction maybe?

Yeah, I said I've been pretty active myself trying to get something done. It's a hard one to call, I have to tell you. I mean, the interesting thing is, I don't care who you talk to, and you can talk to labor and labor will say that something needs to be done. They recognize that this isn't -- this -- the current system is not in the best interest of their members. So, there's an awful lot of good intentions, let's put it that way.

You know, as I said even in my opening remarks, you know, the Senators get it, the, you know, the House gets it, Democrats and Republicans alike. So, and no one seams leave the table. That's all I can tell you. So, there continues to be discussion.

Everybody says something ought to be done but how and what and when no one has an answer to that and I'm not smarter than anybody else, I don't have a crystal ball on this thing. I just think that you have to continue to work, this thing needs to be fixed. It is bad for the United States, everybody gets it. It kills jobs. Hurts the -- you know, hurts the injured, rewards the uninjured. I mean, you know, I will go on and on, don't get me on a soap box, But, you know, I hope that reason prevails here and there is enough recognition across all lines that something positive should be produced and I hope it will be and I really can't give you much more than that.

Okay. The other question, and you knew I was going to ask this, the page 6.

Yeah.

So, we have some of the splits now.

Yes.

I'm looking at the dramatic growth in the reinsurance business.

Right.

And I guess the one thing we were hoping for was to be able to look at growth and reinsurance with mixed changes. Should we be assuming with the dramatic growth in the reinsurance business that that's driven by the casualty side?

Ha ha! Okay. [ Laughter ]

You knew was I going to ask!

You should assume that it is driven by the per-risk business versus the CAT business. It is a combination of both the casualty and risk property business. That also grew as a percentage of the total. The CAT business was relatively flat, the balance is growing. It is correct that -- and you should assume that of that risk business, a substantial portion of that is casualty-related lines that are growing rapidly. Particularly you would note that in the USA, the Tempest U.S. portfolio.

Okay.

Versus let's say the London portfolio, where you see a lot of growth. And that's less casualty and more physical lines, I would say, related businesses.

Okay. And the Tempest USA business is more than doubled year-to-year.

Yes, it has.

Okay. Okay, I mean, I guess one of the things we would still love to be able to figure out is try to look at just North America and look at reinsurance and try to be able to balance these product lines. Is that something that you guys would think about again as you continue to kind of give us greater disclosure? This page is very helpful, but I guess it doesn't answer all the questions.

I know, I know, I know.

I mean, I understand you have to have a degree of, you know, a degree of transparency with investors but you also have to protect your secrets.

It's a propriety question here and it does weigh on us a lot. So we're trying on go as far as we possibly can to help you and get you understand it, but, you know, I have to be careful not to, you know, there are things that probably wouldn't be good for us to put out into, you know, the general knowledge of our competitors. So, we're going to do what we can. That's all I can tell you.

All right, last question -- Dom, if we look at North America, I mean how would you -- how can I kind of relate this page 6 to North America? I got a pretty good sense now on the casualty side for Evan's group.

Let's see. Phil, you haven't said anything all day! [ Laughter ] Phil's going to the page now. So...

Okay.

How can we relate it to -- really, you're trying to get a North American breakdown?

I'm just trying to understand --

Of property and casualty.

I guess we can talk -- go ahead --

Clearly you've seen the combines in the loss ratio on the reinsurance business accelerate which you expect is --

Exactly.

I'm trying to understand the magnitude of what is impacting North America, as well.

North America, the trend you see in the aggregate here has been, is fairly representative, more exaggerated in Global Re, but fairly representative across all segments. So, you would say in North America, as well as in overseas gen, there has been an increase, a substantial increase in casualty as a percentage of our total premium written and earned.

Okay. That's fair.

You have, to you know, you have to point out, of course, outside the North American sector, casualty is not that important, a line of business relative to its importance in North America. So, even if you're growing rapidly in casualty outside the states, or outside of North America, it just -- it gets balanced by the property books. So, it would be predominantly, you know, the growth rate would be higher in North America than it would be outside.

Okay. Great. Thank you.

Okay.

Your next question is coming from Stephen Labbe of Langen McAlenney. Please pose your question.

Good morning, congratulations.

Thank you.

Two quick questions. One, you alluded to, I believe that the personal accident business isn't subject to medical cost trends and I guess I don't completely understand what it is you offer on the personal accident side. And given how large it is, maybe can we do a one-minute 101 on what it is that you write there and why it's a good business? And then second, I believe it was last quarter, but again this quarter, when talking about the program business and talking about your shift in North American from not writing as much program business, can you discuss how the nuts and bolts it works with regards to the impact on the loss ratio within North American?

Okay, yeah. I'll take a shot on the programs, but Mr. Personal accident will take the first. Evan?

The personal accident business, a quick thumbnail and lesson on that. It's mostly -- it's two kinds of products. It's like poor man's life insurance. It's accidental death and dismemberment coverage and daily indemnity accident disability. So, the peril of loss is an accident, not an illness or a natural death. And we market it through direct marketing primarily. We also market it through agents and we market it directly to corporations who buy it for their employees during business travel. It's payroll deducted. It's marketed in many ways and so that's the nature of that business and it is pretty stable.

The other kind of product that is sold there is what they call supplemental health-type products, which are not subject to any medical inflation because it's a daily indemnity product. For everyday you're in the hospital, for instance, we pay you $50, or $100. It's other supplemental health like dread disease, cancer, heart, stroke-type products. The stuff that you would know American Family for as a for instance. That's the kind of A&H business, personal accident business, that we focus on that we like a lot. And it has a need globally.

Okay. So Phil wants to answer.

The second question asked us about the impact on the loss ratio. If you look at the third quarter of '02, just to give you an illustration, we had gross written premium of about $240 million, but the net was only 30 -- call it $40 million. We've retained very little net. It has very little impact on our loss ratio. And in this quarter, we had virtually no business. So, as I said, the impact on the loss ratio is very small.

Does that help you?

I guess I'm talking more in general. I mean about the -- with writing less program business, does that have an impact on the loss ratio?

Well, because the program business has very little impact on our net earned and that's really the denominator in that loss ratio, since there's very little in it, the, moving it in or out has a marginal movement on the total. You know, you're taking $40 million in and out. I mean you can do the differential on that. It's going to have, you know, tenths, hundredths -- like in basis points movement. It won't have much of an effect.

Okay.

It might have a little bit of affect on expenses because you get finding fees for that, but that's the biggest difference.

Okay. Thanks a lot.

You're welcome.

Your next question is coming from Mary Pershlak of The Boston Company. Please pose your question.

Hi, it's actually Tisha Jackson.

Hi.

How are you doing? Good quarter.

Thank you very much.

Very happy to see that.

Good.

I actually just had a pretty basic question on the investment portfolio. It seems like you guys are increasing your allocation to the mortgage-backed securities and asset-backed securities and I was just concerned in terms of don't these types of asset classes have extension risk if interest rates start to go up? And kind of maybe you could talk how you're thinking about the investment portfolio in general?

Sure.

In this low rate environment.

Okay, yeah. So, Phil, let's go over the investments more, you know, our allocations and if you want to touch on the mortgage-back and how we're looking at it.

Yeah, mortgage-back we made a conscious decision to move to mortgage-backs because we were underweighted relative to Lehman AG and so it was a conscious decision, not a major move. Overall, we've kept the portfolio very short. As we've said, we had a 3.4 year duration and we're positioned to roll the portfolio if interest rates rise very quickly. So that's what I'd say.

So, I think it's more just kind of truing up from a, you know, Lehman AG point of view. It's not some conscious decision to move wholesale into mortgage-backs. So, overall our philosophy is just to stay short and, you know, the good news is our cash flow is good and so our investment income is rising and we think we're taking a very prudent, protective approach to the portfolio.

And we still remain underweighted relative to Lehman Ag for mortgages.

Okay, Tisha?

Great, thank you very much.

You're welcome.

Your next question is coming from Ira Zuckerman of Nutmeg Securities.

Yes, could you update us on what's happening now with the Brandywine litigation?

Brandywine litigation?

Yeah.

Well, it's -- I don't think any movement's actually taken place at this point. We don't have anything said in court, so, there's no court date. I'm not even sure a judge has been appointed yet, is that right, Peter? So, we're kind of in limbo, frankly on it.

Okay, thank you.

You're welcome.

Once again, if you do have a question at this time, please press the numbers one followed by four on your touch-tone telephone. Once again, if you do have a question at this time, please press the numbers one followed by four on your touch-tone telephone. There appear to be no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Thank you, if there are no more questions, we thank you for your participation and look forward to having you join us at the end of next quarter. Thank you and good day.

Thank you for your participation. That does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.