丘博保險集團 (CB) 2003 Q4 法說會逐字稿

Good morning and welcome to the ACE Limited fourth quarter year end earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to introduce your host for today's call, Helen Wilson. Ma'am, you may begin.

Thank you and welcome to the ACE Limited December 31st, 2003, year end fourth quarter earnings conference call. I am 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 and business mix, market conditions, pricing, policy terms, profitability, growth, premiums, cash flow, income, expenses, capital resources and deployment, investments, ratings, reserves, reinsurance recoverables, financial guarantee and initial public offering and potential legislation. Actual results may differ materially. Please refer to our most recent annual report on Form 10(K) and quarterly report on Form 10(Q) and other documents on file with the SEC 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 statements.

I would also like to remind you that this conference call and it's contents and any tape, broadcast or publication by ACE Limited, are the sole copyrighted property of ACE Limited and may not be copied, taped, rebroadcasted, 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 during 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 telephone number (877)519-4471, or (973)341-3080, access code number 4434407.

Our speakers today will be Brian Duperreault, Chairman and Chief Executive Officer and Philip V. Bancroft, our CFO, our senior executives Evan Greenberg and Dominic Frederico will also be available to take your questions.

It's now my pleasure to turn the call over to Brian.

Thank you, Helen. Good morning and welcome everyone.

I know I am stating the obvious when I say it was an outstanding year for ACE. We achieved record highs in every important financial category; revenues, cash flow, book value and net income.

Our 2003 results reflect the significant earning power that ACE has built up over the last three years. Over that three-year period we experienced a compounded annual growth in net premiums written of 28%, invested assets of 20% and shareholders equity of 18%, all key components of earning power. In 2003 alone we added $5.3 billion to our cash and invested assets. This boosted investment income by 7% despite record low interest rates. Income before gains and losses for the period totaled $1.2 billion, and this excludes $197 million in capital gains and represents a new all time high for ACE.

To put this in, this rapid expansion into perspective, ACE's 2003 net income matched ACE's total revenues of only five years ago. Moreover I am confident that we will continue to grow at double-digit rates throughout 2004. ACE has achieved a pre-eminent position in the global property and casualty marketplace. Our geographically diversified service network and extensive infrastructure is a key factor to making ACE an insurer of choice. This is evidenced by the good start to 2004 with an increase in submissions across all business segments. Consequently while we are seeing a softening of property prices, and a moderation in casualty rates on a worldwide basis, we are nevertheless recording a sustained growth in gross and net premiums written for the January, 2004 renewal season. Terms and conditions have generally remained firm, which coupled with rate adequacy are permitting us to write new and renewal business at acceptable margins. We are also continuing to add to our insurance products, facilities and new markets. I'm confident that our position will continue to strengthen relative to our competitors in 2004.

Phil Bancroft will walk through the details of our finances and in order to leave the most time possible for Q&A let me - touch on a few highlights and then some of the more important industry issues. Our consolidated property and casualty operations continue to experience high levels of growth. In the fourth quarter alone net P&C premiums written grew 32%. Our reinsurance segment, which is included in consolidated P&C, reflects the expansion from catastrophe underwriting to multiline reinsurance. Net written premiums in this segment increased 134% for the quarter and 58% for the year. Margins remained strong, with the result that ACE generated $740 million in pretax underwriting profits on the P&C sector, this is the highest level of underwriting income ever achieved by ACE.

In our financial services segment there's been a lot of activity. In 2003 the financial services segment which includes financial guarantee and financial solutions operations produced a 14% increase in income before capital gains and losses. Consistent with our guidance. We previously announced that we intend to sell 65% to 75% of the financial guarantee operations through an initial public offering in the first half of 2004. The registration statement was filed in late December and should provide answers to any questions you may have about that entity. Financial solutions production was down compared to 2002 and increased in the fourth quarter and our transaction pipeline looks solid. This business of course is highly opportunistic and written only when market demand pricing terms and conditions are attractive.

Let me touch briefly on the political and legislative outlook. Now it seems possible that the U.S. Congress will enact some form of class action reform. We view this possibility favorably because it could lower the cost of insurance which has been a sore spot among consumers. In addition there may also be some constructive movement with regard to asbestos legislation in 2004. Just the prospect of providing certainty of an outcome to the asbestos issue would in itself be a positive development for ACE.

All in all this was a great year for ACE and I want to thank all those people in our organization who made it so.

Now let me turn the floor over to Phil Bancroft for details on our financial performance, additional guidance for the current year. Phil?

Thank you, Brian and good morning. I will briefly review our financial performance for the fourth quarter and the year and I will update our guidance for 2004.

Our fourth quarter was very strong. Income excluding net realized gains was a record $328 million, or $1.12 per share compared with a loss of $99 million, or 41 cents per share for the same period last year. Last year's fourth quarter included a $354 million charge for asbestos and environmental reserves. For the year income excluding net realized gains was up 142% to a record $1.2 billion, or $4.21 cents per share, compared with $494 million, or $1.74 per share for 2002. This year's results represent a return on average equity of 15.8%. Property and casualty operations produced solid net written premium growth, rising 32% for the quarter, and 40% for the year.

Our financial supplement includes a breakdown of earned premium between property and casualty lines to better explain loss ratio trends. On page six of the supplement you can see the continuing shift to casualty. Year-on-year casualty net premiums earned have increased 59%. This increased the lines contribution to total earned premium from 38% to 43%. Our P&C combined ratio for the quarter was 90.5%, including $35 million of catastrophe losses and $14 million of prior period P&C adverse reserve developments.

Turning to the balance sheet, paid recoverables had a slight decline of $20 million reflecting both billings and collections which exceeded $1.1 billion for the quarter. For the full year we billed and collected over $4 billion in recoverables which is over five times the general collections average balance. In addition we've updated our list of reinsurers who have balances greater than $20 million net of collateral offsets reflecting our actual credit exposure to various reinsurers. We added $15 billion to our investment portfolio in the quarter and $5.3 billion for the year, representing a 28% increase in invested assets. Despite low interest rates we were able to record a 13% gain in net investment income for the quarter and 7% for the year. We've kept our portfolio duration short at about 3.4 years and our average credit quality remains at double A. 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 $466 million during the quarter and increased 66% for the full year. Our debt to total capital ratio improved to 17% and our debt plus trust preferred to tangible equity to 39%. These ratios are much improved and are now consistent with the averages of our peer group.

Turning to our guidance for 2004, we are updating our previous estimates provided to the Bermuda Angle of December. The following are consistent with our earlier guidance. We continue to expect the financial guarantee IPO to close in the first half of the year. We expect P&C net earned premium growth of 15% to 20%. The P&C combined ratio expectation is between 88% and 90%, and that includes $100 million of caps in our global resegments. We expect a decline in financial services income of 15% to 20 % and that's due to the IPO. Interest expense and preferred dividends is expected to be between $210 million and $220 million.

We are changing our guidance for investment income, cash flow and our effective tax rate. We now expect total investment income of between $920 million and $940 million, and operating cash flow of approximately $4.5 billion. We expect our effective tax rate to be between 18% and 20%.

We are very pleased with our 2003 results and with ACE's many accomplishments during the year. Our capital basis grew significantly. Our financial ratings are strong across the board and we believe we are well positioned for continued growth and profitability.

With that I would like to turn the call back over to Helen.

Thank you. At this time we would be happy to take any questions you may have.

Thank you. The floor is now open for questions. [Caller Instructions]. Please hold the line while we poll for questions.

Our first question today is coming from Jay Cohen of Merrill Lynch. Sir, please pose your question.

Good morning. I guess a couple of questions. Paid losses in the quarter were particularly low, obviously helping (ph) the cash flow, I know that number can jump around, should we be reading anything into the low paid number in the quarter?

No, I don't think you can read too much into it, Jay. I mean our combined ratios have been coming down. I think it reflects kind of an overall improvement in the business over time. You are absolutely right. I mean a quarter’s paid activity can vary quite widely.

Great. Next question, asbestos, you are probably aware that Chubb added further to their asbestos reserves in the fourth quarter of '03, suggesting that some of the claims trends they saw deteriorated in the year '03 since they took their last charge and I'm wondering if you can update us as far as what you see from an asbestos claims standpoint?

We review the asbestos reserves every quarter and we feel comfortable and haven't made any changes to it. Certainly there is some increase in frequency and severity. I think that's probably true. It was within our range of expectations. So I think we certainly have built in expectations of that kind of activity so we are very comfortable and continue to be comfortable with the reserves we set.

Great. One more question on the overall reserves. There was $14 million of adverse developments, a small number, but behind that are there any larger increases or decreases that are netting out any other areas where you added or released reserves from?

I wouldn't say, Jay, of course, the $14 made up the numbers but I wouldn't say that there was anything significantly large in any of that. Pretty reasonable development this quarter.

Great. Thanks for the answers.

Next question today is coming from Bill Wilt of Morgan Stanley. Sir, please pose your question.

Hi, good morning. A couple of numbers question. The combined ratio in the financial guarantee segment ticked up this quarter. I was wondering if you could add some color for that? I think $1.09, from memory...

Yeah, I guess Dominic will do that.

Sure, the two activities in there are the bookings that we do for loss portfolio transfers of which there were two large ones in the quarter as well as the equity CDO's on the financial services side. Both of them book at extraordinarily high loss ratios.

Thanks. The loss portfolio transfer would show up in financial solutions?

Yes.

Okay. So financial guarantee the increase would be from equity CDO's?

Right.

Very good. Second one for you on the reinsurance, wondering if you are anticipating a meaningful change in the reinsurance program for '04 versus '03? There was really a big change in '03 versus '02. Does the program going forward going to be more similar to the one that's been in place for the past year?

Bill, I will let Evan answer that.

You mean our—Bill, I gather, just to clarify you are talking our reinsurance.

Outward bound insurance, yes.

No significant change. The net to gross will continue to go up. We, as our capital basis increased and our mix of business has shifted, there will be a continued, and we like the way the profile of the business, the net to gross will continue to increase in '04, you can anticipate that.

Very good. Thanks.

Okay, Bill.

The next question today is coming from Mark Lane of William Blair. Sir, please pose your question.

You touched upon class action and Federal asbestos legislation. Can you just talk about what you think are the one or two key sticking points in each of those obstacles that we can really get something moving there.

Key sticking points in asbestos, I mean, you got enough time? I think in class action, I think it has something to do with the size of the class, venue issue, states rights, how many people within a state would mean that it should stay in a state, so those kinds of issues. But I think most of those have been basically resolved and there is a bill that could pass and I think it's just a question of whether the senators who had signed up for this thing at the end of last year continue to support it. They had more than 60, which you know is required for closure.

So I am optimistic about the class action, frankly. I think it will get done. Nothing goes in a straight line in our Congress so it's going to have some movements but I would say that I don't think there are a lot of sticking points left to the get past closure.

Asbestos is a different story, Senator Frista said he wants to bring this thing forward, wanted to bring it forward in March, which is not too far from now. A lot of the, there are a lot of moving parts to any bill, the asbestos bill is particularly complicated. One of the issues is just the mechanics of it, how is the administration actually going to work, and that's been an issue that labor has been particularly concerned about, wanted it to be in the Labor Department so to speak. And there's been a lot of progress there. So those parts are moving. I would say the, a wide range of other issues, allocation, what goes into the bill, all those things, I think a lot of movement has been made.

So you really get down to money and there's a bit adds, the bit adds are still quite wide and in fact we don't quite understand why there is such a wide difference in reality the fact that it would go back into the Federal court means in a way there's no limitation to it. So if you accept that for a second then the rest of the issue really boils down to how much each injury would get in that table and particularly the seventh categories where the cancers are is a sticking point. That may or may not get resolved.

I think there's still a lot of goodwill and a lot of goodwill across the board, both sides of the aisle, labor, management and will there be a meeting of the minds about values remains to be seen. I'm an optimist about this. I think it should work it's way through. You've seen, asbestos still makes the headlines every day in our country and I thought the ruling that came out in bankruptcy the other day really pointed out the abuses in the system and I hope that's a spurred action in Congress. I hope that answers the question, Mark.

Appreciate the insight. Next question is on World Trade Center reserves.

Right.

Where are you right now and how long do you think it will take to get some more clarity on whether you can definitively say that you feel that you are in potentially in an over reserve position?

Yes, Mark, over reserve position, to be clear about the reserves, I think we have a little over $300 million, $320 (million).

That's good enough, $320 (million).

$320ish million in net reserves and that's coming down as we pay our claims. Yes , the program ended with a lot of participants, 98%. That's good news. But it's still, there's still at a lot of uncertainty, frankly; in this thing. I don't know how long it will take to resolve itself. We look at this reserve like we look at every other one. We are very comfortable with the level of it. We think we've covered our liabilities. As I said it becomes smaller and smaller as we pay the claims. And past that I guess we are not much else to say. It remains to be seen what happens but we think we have the right reserve up.

Okay. Then last quick little numbers question, the LPT that was written in the fourth quarter, you show it as $270 in the supplement on 14. But then if you look at the next page, you've got a relatively equal split between financial guarantee and financial solutions and my understanding was that that $270 was all in financial solutions. Did it not all get booked this quarter or?

Dominic will answer that.

Yeah, the complication here is there is against that, it's all booked in solutions but counter that premium in solutions was an unwinding of an intercompany reinsurance arrangement between solutions and services. And as we look to set up the companies to be independent we are taking care of a lot of the internal plumbing, so to speak. So counter to that is this reversal or rescinding of reinsurance agreement which affected the net written premium in solutions to the benefit of services. So you are seeing that.

Were all the intercompany relationships with the financial guarantee business unwound in the fourth quarter?

Not at all because understand there is going to be a relationship between the two companies from a service point of view. It's just a matter of getting all the contracts documented so that everything is very clear. Some of this is disclosed in the S1 so you can go through that and read further detail on it. But this was just a reinsurance contract that we unwound in the fourth quarter and that's affecting the net written premium between financial guarantee and financial solutions.

Thank you very much.

The next question is coming from Brian Meredith of Bank of America. Please state your question, sir.

Good morning. Two quick numbers question and one broader question. First, Phil, could you talk about why there was a big drop in the tax rates in the quarter? It seems considerably lower than your projections for '04? Was there something unusual in the quarter?

Not really. We just had more income in nontaxable jurisdictions. That number bounces around as you can see from the history. Just really depends on where the income emerges.

Therefore if we look at your 18% to 20 % more income obviously especially merges, you could be potentially lower than that.

It could be but based on our projections we believe that 18% to 20% is a good range for next year.

One other quick numbers question, any foreign exchange gains or losses in the quarter?

The foreign exchange net income effect is about $14 million.

Terrific. Last question. As you look currently at the environment are there any lines of business that you are just unhappy with right now and you are actually pulling back from?

No, there are no lines of business that we have in the last couple of months and most recent times have examined, that I can think of, and determined to pull back from them. Obviously there's an ebb and flow in each line of business depending on market terms and conditions and that, but we haven't determined to exit any businesses.

What about scale? Another company yesterday reported who basically said that there were a couple of markets that were starting to look a little bit too competitive for their hurdle rates?

For their hurdle rates, too competitive for their hurdle rates. Look, we are shrinking a little bit in our cat business; as an example, but we are maintaining good hurdle rates on the business that we retain. That business is under a bit of pressure and so it's shrinking a little bit. We are very active in all the property markets but property is growing at a very slow rate right now because we have to be more selective in the business we choose to write. And so there's an underwriting judgment but as far as wholesale exiting a line of business because we don't like the terms and conditions and pricing, no.

Terrific. Thanks.

The next question is coming from Michael Lewis of UBS. Please state your question, sir.

I just wanted to follow up a little bit on the asbestos. I guess what happened going back to the Chubb story they felt by their trends, and because of the shifting nature of the increase in claims as people were running to the courthouse because they thought there would be some legislative solutions they felt it was really important to do a grounds up study.

How often do you do a grounds up asbestos study or are you just basically taking trends and moving it forward from last year? And again how good is that an indicator of ultimate exposures?

Michael, we do a ground up, a thorough ground up study with outside actuaries and internal actuaries both, every two years. We just completed that last year. We do in the other year, so at the end of '03, we did a review of our actual experience during the year and we reflected against that study. So in essence you are looking at an actual result versus an expected result. And what we have seen is, yes, an increase in some frequency, asbestos hasn't peaked yet. An increase in severity, all in line with generally with what we expected to see. So that's why we are comfortable with the reserve.

Do you happen to use Tillinghast?

I don't think we tell what we use.

Chubb told us.

Okay. That's great.

Another question. What are you more concerned about right now? The ultimate work out of asbestos reserves or reinsurance recoverables and there were some articles recently written on reinsurance recoverables and one major mutual fund has changed it's reinsurance reserving practice, reinsurance recoverables dramatically? What can you tell us about how that's developing going forward? I know you give us a lot of data but I hear there's a lot of arbitration going on between willingness to pay by some of the reinsurers. Can you bring us up to date on that?

Michael, certainly I would say asbestos certainly has more variability and has had a proven track record of difficulties for the industry. There are, our recoverables are very steady. As Phil pointed out, we billed and collected in the last quarter alone over $1 billion. If you look at the velocity that goes through that thing it's quite high. We are not experiencing a collection issues. So, yeah, I feel very comfortable with our recovery situation with the reserves. I mean, there's always an issue here and there but overall, yeah, it's working out very nicely.

Just one follow up, why did the total paid reinsurance recoverables go down yet the bad debt provisions go up significantly? Is that a signal that you are more concerned about your ability to collect or is it just a cautious way of approaching the business?

It's really just the mix of our reinsurers. What we do each quarter is we evaluate the credit quality of our reinsurers and their current position and if reinsurers are downgraded then we would reflect that in our reserve position. So we would use, for example, S&P ratings or other ratings to estimate how much we would ultimately lose on the portfolio recoverables and that's going to move around as ratings change and as the mix changes.

Okay. Thanks so much.

Next question today is coming from Nick Haskins of Moore Capital. Please state your question, sir.

It's actually a follow on from the previous question and maybe just a mix issue; which is just on the reinsurance recoverables. If I look at page 25 and 26, at the presentation that you give out, I notice that there's sort of a big shift from previous quarters figures that we got from the other reinsurance balances of greater than $20 million in terms of the bad debt and the shift went down into the balances below $20 million. I just wondered what it was that was specifically driving that change? Is it just a shift of carrier from one section to the other?

One thing that we did and I'm not sure exactly what you are looking at from the prior period but one thing we did is we applied collateral to our balances in this display. So we thought that was a better way to reflect it as I said in my opening comments. If in the past we were showing them gross precollateral and now we are showing them after collateral so there has been a mix change amongst the groups.

Right. Thanks.

Your next question is coming from Mike Paisan of Legg Mason. Please pose your question, sir.

Good morning everybody and congratulations on a very solid year.

Thank you.

One think Brian, that you mentioned in the beginning, I guess sort of an overall big picture issue that I'm interested in, is you talked about future growth in new products as well as by entering into new markets. I was wondering if you could get a little specific as to what types of products and what markets you are looking at currently? Thank you.

Thanks, Michael. You want to talk about that, Evan?

Let me take markets, first. It's not so much of entering a new market in terms of geography it's increasing our presence in a far broader way in geographies where we are already present. So, for instance, we have a major effort underway to increase our national local presence in the United States to the brokerage community and bring our underwriting and marketing closer to the coal face in a broader way and we see a lot of headroom for growth in that.

At the same time we are, as you know we have been focused on expanding our presence in a number of product lines, particularly in casualty related areas over the last few years broadly. I mean when I say broadly on a broad geographic basis but particularly in North America, in Europe and in AustraliasiaAustralasia. That's where there is a tremendous amount of emphasis and in a number of casualty related lines in particular we see good growth opportunities.

Thank you.

You're welcome.

Next question is coming from David Sheusi of JP Morgan. Please pose your question, sir.

Good morning, everybody. Great quarter.

Thank you.

Just again on the big picture side, it looks like the last three years it was a lot of balance sheet rebuilding. Now we have the spin-off of the financial guarantee business. And as we look ahead for the next three years, can you give us some bench marks or some big picture strategic goals that ACE wants to achieve, just your top three that we can look to and benchmark going forward?

I think I'd say that there was more going on I think in the last three years than just the balance sheet. We started to flesh out our capabilities, our structure. We spent some time putting the thing together. We needed to do make sure that it was running well. So for next three years, really, it's taking this structure that we put together which is global and maximizing it. I think at any rate increase questions or anything, I'm sure everybody is interested in those things, the market continues to be a good market, a hard market, but it's in a different phase. And now the difference will be whether the company has the capability, the service structure, the reputation to win the business. The business is worthy of winning. It's good business. The rates are good but now it's a difference of who's got the capability to provide the kind of coverage and structures that the insured wants and the brokers wants. So for the next three years we are going, we expect to separate from the pack because we have that.

Evan said that, in the past, capital in a box could work. Now you need a whole lot more than just that. You need the service capabilities which we have. So you should watch us grow and grow across the board and in all our regions and that includes the U.S. I think Evan pointed out a very important initiative which was our regional movements which we started some time ago and we are starting to build up. It really has to do with whether we are winning the business globally. That's it.

I think you'll see our balance sheet continue to improve. I don't think we will change the level of our debt but the ratios will go down as our value, our book value, intangible and book value goes up. I think you will see the reinsurance recoverable issue become a smaller and smaller event as the reinsurance recoveries balances start to come down. They basically are flat year-over-year and now they will start to come down and, again, that's another leverage issue that will become less and less important I think, in your minds. It's not that important in our minds. We believe that we are in great shape from a reinsurance recoverable point of view but I think it will just get less press. Those are the two I would point out, that we take over positions in markets and that our balance sheet will continue to improve.

Thank you. I appreciate it.

Any time.

Thank you. That does conclude the question and answer session for today's call. I would like to turn the call back over to the speakers for any closing comments.

Thank you. If there are no more questions we will conclude this call. We thank you 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 for your participation. This does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you.