丘博保險集團 (CB) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ACE Limited first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to Helen Wilson, Director of Investor Relations. Ma'am, the floor is yours.

Thank you and welcome to the ACE Limited March 31st, 2004 first-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 statements relating to our financial outlook, business strategy, growth prospects and market conditions. Actual results may differ materially. Please refer to our most recent SEC filings 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 its content and any tape, broadcast or publication by ACE Limited are the sole copyrighted property of ACE Limited. It may not be copied, taped, rebroadcast or published in whole or in part without the express written consent of ACE Limited.

This call is being webcast live and will be available for replay for two weeks. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments. You may also listen to a replay of the call at 877-519-4471 or 973-341-3080; access code number 4664925.

Now I will introduce our speakers. Brian Duperreault, Chairman and Chief Executive Officer, will give a brief introduction. Then Evan Greenberg, President and Chief Operating Officer, and Philip Bancroft, our Chief Financial Officer, will give an overview of the quarter. We also have some representatives from our operating units available for the question-and-answer session.

And now it is my pleasure to turn the call over to Brian.

Good morning and welcome everyone. I have been conducting quarterly earnings calls for the past 10 years now. We have just reported record quarterly results, and ACE is in the strongest position it has ever been in. It gives me great pleasure to turn this call over to Evan Greenberg, who has been driving this performance and who will, along with Philip Bancroft, elaborate on the numbers. Evan?

Good morning. As you can see from the numbers, we had an excellent first quarter. The results were broad-based, and all of our principal businesses performed quite well. Earnings per share before realized gains or losses increased 37 percent year on year to $1.40 per share, and adjusting for onetime items in the Financial Guaranty segment related to the IPO, the EPS was $1.35 per share, an all-time high for ACE.

Our annualized ROE rose to 18.7 percent for the quarter. Property and casualty net premiums written increased 26 percent, and the percentage of retained premiums to gross climbed to 72 percent. The P&C combined ratio improved more than two points to 88.4 percent, led by a continued improvement in our expense ratio -- an important part of our strategy.

P&C investment income increased 19 percent. This substantial increase is a result of our strong cash flow which in the first quarter alone approximated $1.2 billion. The first quarter's results include 100 percent of the earnings from our Financial Guaranty business, which produced results in line with projections. There were a few onetime transactions related to the IPO which had a favorable net impact on their results for the quarter. Phil will elaborate more on this in his commentary.

As you know, we listed approximately 65 percent of our Financial Guaranty companies on Friday at a price of $18 per share. With the infusion of over $1 billion of cash from the IPO redeployed into our P&C business, our balance sheet will be stronger than ever. We are in the risk business, and our balance sheet is what we are selling. Greater balance sheet strength means greater flexibility.

Now I would like to take a few minutes to describe a number of the important strategies that are producing these excellent results. And I will then turn this call over to Phil for his commentary on the financials.

Our U.S. brokerage business, both retail and wholesale represented by ACE USA in Westchester, experienced tremendous growth. Our strategy to increase our local underwriting and marketing presence on a national basis has paid dividends. This geographic expansion has been coupled with a continued product expansion, particularly into the casualty-related areas. In the quarter, the majority of our growth came from a broad portfolio of lead casualty and specialty-related lines, though our shortail lines continued to perform very well.

The commercial buyers of insurance and the brokers active in this area want and need more choice. The number of major multiline global and, in fact, national commercial P&C players willing to take on risk in this space is very small. We are feeling that vacuum, and the market is responding favorably. I just returned from RIMS where ACE was out in force, and the market reception towards us could not have been more favorable. In total, North America net written premiums, therefore, increased 30 percent in the quarter.

The same strategy substantially applies to our overseas business as well. ACE International, our international retail brokerage business, experienced solid growth with net premiums up almost 28 percent in the quarter. This growth was led by Europe and Asia in particular and is incurring across a large number of countries in those regions as we continue to expand our local market presence. As with the U.S., our growth came more from casualty-related lines than property. So overall our local market presence and product capability continues to expand market by market across the globe.

ACE Global Markets, our international E&S wholesale operation, had a very good quarter. The combined ratio continued to improve. The premium growth rate in AGM was relatively slow. Contrasted against ACE International, which is a retail brokerage operation, AGM is a wholesale operation engaged predominantly in short tail and specialty casualty lines. The competitive environment is growing in the classes where they operate. We are maintaining underwriting discipline, and this is affecting our growth rate.

As you can see, Global Re also had an excellent quarter, and again our growth came principally from Casualty and Specialty classes. In fact, our Property CAT business actually shrank during the quarter due to market conditions, but our efforts to establish ourselves as a multiline reinsurer over the past few years paid off.

Now a word about the rate environment. I would say overall rates are adequate in most classes, both short and longtail. Property rates are flat to down 20 percent, and this varies by territory, by class, by size of risk. Casualty rates overall continue to firm -- albeit at a slower phase -- about 8 to 10 percent, and again this varies by territory, by class and by size of risk. Terms and conditions for the most part remain firm.

Obviously as rate increases slow and in some classes drop, our underwriters will become more selective in the risks we choose to write. However, due to our geographic and product expansion, submission activity is way up and is helping to counterbalance our need to be more selective.

Now a moment on our movement toward more casualty-related business. This has several longer-term consequences for ACE. As we move towards longtail lines, we add longer duration reserves. We believe we are selecting loss ratios and establishing reserves on a prudent basis, and as we do so, we are increasing our invested assets and consequently future investment income. Casualty-related insurance lines in the main tend to have a higher incurred loss ratio and an extended claim payout pattern. This suggests that over time investment income will represent a larger portion of our operating income.

In this regard, ultimately we will benefit from higher interest rates which appear to be on the horizon. In previous cycles, higher interest rates have led some companies to practice cash flow underwriting. At ACE, we expect to earn an underwriting profit on a nondiscounted basis.

Finally, while underwriting margins are favorable, one of our principal missions is to continue to drive down our expense ratio. We believe this provides a competitive advantage over the long-term. As you can see, we continue to make good progress.

Now let me turn it over to Phil for additional detail on the numbers and for an update on guidance, and then we will come back and take your questions. Thank you.

Thank you, Evan, and good morning. I will briefly review our financial performance for the first quarter and update our guidance for 2004. Our first quarter was very strong. Income excluding net realized gains was 411 million or $1.40 per share compared with income of $279 million or $1.02 per share for the same period last year. These results represent an annualized return on average equity of 18.7 percent. This income includes 13 million or 5 cents per share of gains in the Financial Guaranty companies related to transactions that were settled in preparation for the IPO. Net income was 447 million or $1.53 per share.

Property and casualty operations produced solid net written premium growth, rising 26 percent for the quarter. Adjusting for foreign exchange, the increase was 21 percent. Our financial supplement includes a breakdown of earned premiums 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. Quarter on quarter casualty net premiums earned have increased 57 percent. This increase the line's contribution to the total premium earned from 42 to 52 percent. At the same time, all other P&C lines increased approximately 7 percent.

Our P&C combined ratio for the quarter was 88.4 percent. There were no catastrophe losses, and we experienced $6 million of favorable P&C reserve development.

Turning to the balance sheet. Even with our significant growth in premiums and an increase in gross loss reserves of $542 million, our reinsurance recoverables declined by $19 million. Our gross paid recoverables dropped by $85 million, reflecting billings of $781 million and collections of $866 million.

Since December of 2002, our reinsurance leverage or our ratio of reinsurance recoverables to tangible equity, has decreased by over 40 percent, principally as a result of our higher premium retention rates and a increase in our tangible equity. We have updated our list of reinsurers with balances greater than 20 million to reflect current reserve and settlement activity.

The investment portfolio increased $2.2 billion in the quarter, which comprises $1.2 billion of cash flow, operating cash flow, the increase in our unrealized gains, and an increase in collateral from our securities lending program. Despite low interest rates, we were able to record a 16 percent gain in total net investment income. We have kept our portfolio duration short at about 3.4 years, and our average credit quality had AA. There will be no significant change in our duration or credit quality as a result of the IPO.

Our tangible shareholders equity increased by a total of 574 million during the quarter, and as a result, all of our financial leverage ratios continued to improve. Our debt to total capital ratio decreased to 16.1 percent, and our debt plus trust preferreds to tangible equity decreased to 35.6 percent. We are comfortable with these ratios, and they are consistent with the averages of our peer group.

Our after-tax realized and unrealized gains from our investment portfolio for the quarter were 193 million. The increase primarily reflects the increased market value of the investment grade fixed-income portfolio from a 40 basis point decline in interest rates during the quarter. Subsequent interest rate increases in April have resulted in unrealized losses of 270 million. Our book value has decreased as a result of these changes by approximately 75 million since December 31st, 2003.

As you have already heard, today we expect to close our sale of Assured Guaranty Limited. The completion of this IPO will generate net proceeds to us of approximately $1.04 billion, excluding the underwriters greenshoe, but including the return capital from the Guaranty companies of 200 million. If the greenshoe is exercised, the proceeds will total 1.16 million. We are planning to use these proceeds to support our property and casualty insurance operations.

This transaction will result in a second-quarter realized loss of approximately 50 to 70 million, principally due to offering costs and tax expense resulting from a lower tax basis in the companies sold when compared to our book basis. The losses based on a current estimate of book value, which could change, for example, as a result of changes in unrealized gains and losses. The actual loss will also be affected by whether the greenshoe is exercised. Our financial services segment in the future will include the ongoing operations of our financial solutions business, as well as the equity earnings of our retained ownership in Assured Guaranty Limited.

On Friday, Standard & Poor's revised its outlook on ACE and our operating companies to stable from negative based on our strong competitive position, strong capitalization and strong financial flexibility. Our intention to deploy the proceeds from the IPO and our P&C business also contributed to the outlook. As a result of the IPO, our capital adequacy ratios will increase significantly for rating purposes.

Turning to our guidance for 2004, we are updating the estimates we provided in February. In our previous guidance, we expected P&C net earned premium growth of 15 to 20 percent. We now think we will be towards the higher end of this range. The P&C combined ratio expectation remains between 88 and 90%, and that includes $100 million of CATS in our Global Re segment.

Now that the IPO is complete, we believe that Financial Services operating income will decline by 10 to 15 percent. In previous guidance, we expected total investment income of between $920 and 940 million. We now expect to be at the high end of this range. We expect operating cash flow of approximately $4.5 billion, interest expense and preferred dividends should approximate $220 million, and in previous guidance we said we expected our effective tax rate to be between 18 and 20%. We now believe it will be at the higher end of this range.

We are very pleased with our first-quarter 2004 results. Our capital base has grown significantly. Our financial winnings are strong across the board, and we are well positioned for continued growth and profitability.

With that, I will turn the call back to Helen.

Thank you. We will be happy to take your questions at this time.

(OPERATOR INSTRUCTIONS). Michael Lewis, UBS.

It is a surprise to be first. Three quick questions. There were no comments made on the asbestos situation. Are you expecting to do a ground-up study sometime this year, and can you comment on your interpretation and how things are going within the parameters when you set up your reserve additions in 2002?

On the capital adequacy, can you give us some measures on where you stand now with the funds from the financial guarantees business? Do you feel at this point that not only are you adequate but you are in a redundant position there? I know you cannot be redundant if you are basically going more into casualty, but maybe you can give us some parameters there?

And, Evan, I know you said earlier you are in complete agreement with Brian Duperreault on how you should position the Company going forward, but it is well known that you joined ACE because you thought it was a vehicle that you could basically shape to whatever plans you have? Can you give us any ideas on even a longer-term basis on what your vision is for ACE over several years now that the Company has gotten its capital footing and is in a position to go forward to be whatever it fully intends to be down the road besides just a P&C and reinsurance company?

Good morning, Michael. I think I will take the first and the third obviously, and I will let Phil take the capital adequacy question. On the asbestos, yes, we will do a study this year. We do them every two years. And so we will begin a study, the results of which we should know and have completed in the fall sometime.

The study that was done the year before had projections in it for development, and we are comfortable that asbestos -- the experience that we have seen -- is in line with that which was projected when reserves were established. So we do not see a change to that.

On your third question, look, ACE is a global commercial P&C Company. We are a brokerage company; that is what we do. We are an underwriting company. We take risk. Those are very fundamental statements I know. But behind that is a lot of execution and a lot of work to be done. There is a lot of opportunity within that franchise that we have. We have a number of excellent franchises, and we see within that great opportunity globally to continue to build our business. And as we build our business, it will strengthen our capital base further, it will grow our earnings stream, and if we do the right job, it will improve our share price and our currency.

You know I can tell you we are just focused right now over the next few years on simply that task. And while that may not appear as a grand strategy of what we do longer-term and in the future, I think that is plenty for us to handle right now.

I will let Phil handle the second question.

From a capital adequacy standpoint, if you use S&P for an example, the proceeds from the IPO will increase our capital adequacy ratio by about 20 points. So as in their last report, they indicated they felt we had a capital adequacy ratio of 155. On that basis, we would be at approximately 175, which is certainly into the AA capital level.

One of our longer-term objectives is to get a AA rating. So we are going to continue the dialogue with the rating agencies. But we certainly don't think we have redundant capital, and as we have said, we are going to deploy it in the P&C business.

Ron Frank, Smith Barney.

A few things if I could also. First, Evan, in terms of the resurgence of growth across segments really versus the fourth quarter and really versus the second half of last year, I heard your comments about geographic and product expansion. But I was wondering if you could go a little further in positioning the growth you are seeing and anticipating versus some of the cautionary comments we are getting from competitors both global and otherwise?

We are warning about a slowdown in premium growth because of the pricing environment, which you also touched upon. Do you think that ACE is in a distinctly different positioned or phase in its development that would account for what seemed to be somewhat more robust growth?

Second, the expense ratio in Overseas General dropped off very abruptly. I was running 32.5 to 33, and it dropped off to 31 in the quarter. I was wondering if you could comment on that.

Finally, Phil, I apologize, but could you just revisit briefly the comment on the realized loss on the IPO and what the bond market did to you post March 31? Those went by me a little quickly.

Look the underwriting environment, and let me see if I can add some more color to it, I do expect that the whole industry growth rates are dropping. And ACE going forward -- and ACE is not immune. We are a part of the environment overall.

On the other side of the coin, our position in a number of product lines, particularly in casualty-related, and our geographic position and in certain market segments within geography are still developing and still building. We have the capability. We have the parts and pieces, which is more than many have. But we are not mature, and we do not have a great position yet in a number of those areas. So there is room for us to continue to grow because the rate in underwriting environment remains favorable.

Even as rates drop and you have to become more selective on what you write, as I said, we see a far greater increase in submission activity, and that is due to this line of business presence, particularly in the lean casualty-related lines. And what that means when I say that is casualty where the limits are below 100 million. In those areas of primary and access -- GL, AL, DNO, ENO -- on a global scale, that is where we are making tremendous inroads and growth. And as we increase that presence, submissions increase. So even as you may become more selective, we are writing more business. So I expect our growth rates to be relatively buoyant.

On the expense ratio side, on Overseas Gen in particular, both improved. ACE International had an improvement in expense ratio, which we expect, and ACE Global Markets had an even more dramatic increase in expense ratio -- improvement in expense ratio. And that as, you know we have been doing a lot of work on that operation and in our Lloyds business, and we have been shifting some of that to company market paper as opposed to Lloyds paper. And all of that is improving the operating environment and continuing to bring down the expense ratio. I expect for the organization overall we have a lot of room to absorb more growth and do more business with a far more limited increase in expenses to handle that.

And, Phil, on that last one?

We had realized an unrealized gain during this quarter of 193 million. That is net of tax. And in the second quarter now, we have had a net of tax loss of 270 million. The net effect of the two I said were 75 million since the end of last year -- a -75 million in book value.

And that realized loss on the IPO -- the 50 to 70 -- is that an after-tax number?

It is. It is after offering cost and tax. We actually had a small gain pre-offering cost and tax, and the tax and offering pushed it over to the loss of 50 to 70.

And, Evan, in case you didn't notice, Duperreault did not seem too unhappy about the idea of his last earnings call.

I noticed.

David Sheusi, JP Morgan.

Good morning, everyone. Congratulations on a good quarter. Most of my questions have been answered here on the technical number side, but maybe you can give some perspective on some of the ancillary lines in terms of the life, the financial solutions? What is the appetite going forward on that side?

And then second on the capital allocation side, on the P&C, can you tell us where is your greatest focus or concentration going forward? Is it the primary side, U.S., outside the U.S., reinsurance? Can you give us some granularity on that side of it?

Let me see if I can add some more color to that for you. The life business, it is a small specialty, very focused life reinsurance operation that we have. You know it is in the business of reinsuring the guarantees under the variable annuity type products, separate account type products.

We have -- and you know there has been -- and a number of other companies have announced due to accounting changes, there has been some movement around in their numbers. We have been accounting, and we account for this business on a conservative basis, and so we have had very little effect from that. I expect the business -- we risk manage it. We don't take unlimited risks. The pricing and the terms under which we write the business is very very good, and as long as it remains that way, we will continue to do that business.

We measure -- we entirely risk manage and measure our total aggregations in that area; so, therefore, we are able to measure our appetite. We don't have an unlimited one. But I expect that business to continue to perform as you see it performing and continue to perform well.

On the solution side of the business, our earnings increased in the solutions business in line with what we expected. We do see headwind in that business and it is changing. There have been a number of accounting changes that have made it less favorable to clients to purchase the business, to purchase structured products. The business -- but at the same time, we see opportunities increasing in other areas while certain areas diminish. Though again, I don't say it is without its headwind. That is clear.

It is lumpy, and as you can see in the quarter revenues, which are not necessarily a proxy for earnings in that business, some of the business has quite good earnings that produce very little in premium revenue. But as you can see, it is volatile, and the premiums were less than what we wrote last year. It could reverse next quarter. Overall I expect that business to continue to perform to plan during '04. I don't see changes because many of the headwind issues that are there, we anticipated and noticed them quite some time ago.

Brian Meredith, Banc of America Securities.

A couple of just quick numbers questions here. First on the AGO/IPO, Phil, could you tell us what is going to be the impact, net impact on invested assets to the net outflows plus net inflows which will be happening in the second quarter? Obviously ex- mark-to-market adjustments.

On that topic also, what of the businesses that stayed with ACE Limited are you keeping, i.e. the Title Reinsurance, Residual Value Insurance business? And then I have one more question.

Okay. The pieces of the business that we are keeping, and these are described in the S-1 Assured Guaranty Limited, you can read more about them. But the Title Insurance company we are keeping. We have a trade credit book of business that we are going to keep, and there are certain other relatively minor books of business that are going to stay with us. As I said, they are completely described in the prospectus.

Right. But my point is, are you planning on continuing those business ongoing, or are you going to try to ramp them up?

They are really run-off businesses. We expect no significant -- no impact at all on our operations going forward. They are going to be managed by people within the company that have experience in those businesses, so we have moved them into different segments. But we expect no effect on operations going forward.

Great. So they are run-off?

Right. They are run-off.

And the invested assets?

The invested assets we would expect -- let see, I am trying to think of our earnings guidance here, how we have done that. Do we have the net effect effect? I will come back to that in just a second. I am going to look that up.

The last question, this is pretty quick and easy. On the national indemnity coverage, how much longer do we have until we start seeing did that coverage start paying losses?

It is beginning right now to begin to pay losses.

So we should expect very little if any paid losses on the invested environmental going forward?

They will pay the next $2.5 billion of losses.

Okay. Terrific.

Tim Burrows, do you have the net proceeds?

Yes. Our invested (inaudible) assets will go down approximately 1 billion to 1 billion 1.

Mark Lane, William Blair & Company.

William Blair & Company. A couple of questions. First of all, foreign exchange. Can you tell us what the impact was on the topline and also if there was any impact on the bottom line as well?

Yes. On the topline, it was about five points on the premium growth. So the 26 points -- I think 4 percent -- comes down to about 21.5. So it is worth about five points. And on the bottom line, year on year, it is worth -- year on year -- it is worth about $12 million.

12 million positive pretax?

After-tax.

On expenses you mentioned that driving down expenses were strategic priority over time. In the first quarter, if you were at the 27 percent level, where do you think that can go over the next two to three years or longer-term?

Well, you know some of that we are projecting. I expect it to continue, the expense ratio to continue to drop. Some of that gets affected obviously by investments we make to grow our business and expand our business, which we look at separately from ongoing operations, and some of that is driven by mix of business, both productline, geography as you can imagine. And so it bounces around, and I am not going to give you a pinpoint number. But I am going to tell you directionally I expect within each business discreetly the expense ratio continues to drop.

Now when you amalgamate it, all depending on which business grew and which shrink, up you might see it move around a little bit erratically. But I think the real way of looking at it from an operating point of view is to take each business by itself and look at it discreetly and know that within its business it needs to be best-in-class in terms of the expense ratio.

I know there is some disclosure within the supplement on the financial guarantee versus financial solution. But just in terms of pretax income, what would be a good run-rate for just the financial solutions business, including net investment income?

What I would do to estimate the year is to take our guidance. We have said we expect the Financial Services business in the aggregate to be down between 10 and 15 percent over last year. What we are saying in that is that we are going to have the ongoing financial solutions business obviously and also our 25 percent share to 35 percent share of the assured limited.

Okay. All right and then one quick last one. For casualty margins, you have given a line of business breakdown between property and casualty. But where are you booking accident year combined ratios in casualty year-over-year? And how long do you think it will take for you to see that experience where you have some level of confidence that you are seeing the loss activity accurately and you would be able to reflect that in results?

I will take the last part of that first. The casualty business, you have to break it down between shorter tail casualty and longer tail, and then you have to break it down between primary and access within that, and you have got to be looking at whether it is on an occurrence basis or a claims made basis. That helps you to determine even within shorter tail and longer tail how you are going to see this develop.

Some of the business we will know over the next two years to three years how well it is developing, and some of it, you know, it is going to be longer. It is going to take you five years. It may take you even longer than that to know. It is going to vary by class.

Bjion Moazami, FBR.

I have three quick questions. First of all, do you guys have any exposure to that Wyeth case in Texas for $1 billion? Why it?

Second question. Is there any changing the way you use derivatives to hedge your bond portfolio over the past couple of months? And then finally, just a clarification. We should not be expecting any asbestos studies until the third quarter; is that correct?

You should not be expecting results of any asbestos studies until the fourth quarter. Can you repeat your first question again, I am sorry, on the claim in Texas?

Yes. There was a $1 billion jury award in Texas about the Wyeth. I was wondering if your product liability excess casualty business will be hit by that case? It is a company; WYE is the ticker. So I was wondering if you have any exposure there? Finally, if there is any change in the way you hedge your bond portfolio?

I will let Phil handle on the bond portfolio. I am not aware of any exposure of any material nature we might have on the case that you mentioned. That is not on my radar screen in any major claims with me.

On our hedging strategy, we have consistently used interest rate swaps to control the duration of our portfolio. So we use kind of a macro hedge. We have made no significant change in that. As you can see, our duration has stayed fairly consistent.

Susan Spivak, Wachovia Securities.

I was wondering if you could comment a bit on what your appetite for acquisition is? And specifically I am just wondering if you are interested in expanding your presence in the reinsurance market on the property casualty side by purchasing at one of the higher quality firms?

Good morning. On the acquisition side, we do not have any particular appetite. We are not on the hunt right now in particular for any specific acquisitions. You know they are opportunistic, and if something came along that really made us better and we thought we could make it better, and it stood along with the businesses we do now, you know we would obviously take a look at it. But there is nothing on the horizon.

As far as P&C reinsurance, I would have to tell you that does not fall into that category for us.

Okay. Thanks, Evan.

Al Copersino, Columbia Management.

Congratulations. As Evan mentioned, you all have been expanding your product areas, especially into casualty. A quick expansion into new product areas has sometimes created underwriting problems for other carriers, and I am wondering if you can tell us what steps perhaps, maybe what detail you can give us about what your doing to minimize the risks that today's new casualty products do not ultimately come to meet tomorrow's reserving issues?

Good question. That is a very good question. That is one of the ones that we really focus on the most.

First of all, a quick expansion. I want you to have the right picture of that. We have been planting the seeds and building our capability in those areas over the last couple of years. So it was not let's go from zero to 60 overnight because I think that is a disaster.

We have management, first of all, overseeing each of these areas that we know. We know the people, and they have experience in the areas. They are experienced themselves very well. We spent time building our underwriting capabilities, both guidelines for underwriting and risk selection and policy form and thought that out pretty carefully and put in the right underwriters in-place. We have actuarial processes and management information systems in place, and we have spent quite a bit of time on that all-important claims organization and closing the loop between claims and underwriting because as we all know at the end of the day claims eats the cooking to make sure that we have very good post-claim underwriting reviews that will help the underwriters to perform better.

So I think the things that you would expect of an underwriter -- the blocking and tackling in any given line of business to occur -- this is a fundamental we are focused on here.

Tom Cholnoky, Goldman Sachs.

Good morning. I guess I wanted to talk a little bit about your optimism about buoyant growth. How much of that is driven by your appetite to clearly eat more of your own cooking? In other words, seeing your net to gross continuing to rise? I guess if you could give us some sense of within each segment how high the gross ratio can actually go before you would feel that you had extended your appetite, and then I have got a follow-up?

Okay. Well right now in the main, in overall you see the retention rate at about 72 percent. You know it is going to stay in around that range. It will go up a little bit I think 72 to 75 is in the range. So I would hope to see it go up a little bit more.

Taking them by segment, let me knock the easiest one off first. Global Re, well, it can't go much higher. It can't go any higher. It is at 98 percent from memory.

On the international side, we are bouncing around the 72 to 75, and I think that is where you are going to see it roughly settle out. It has been increasing steadily in North America. One of the things to remember in North America more than in any other two segments, we write quite a bit of risk management business that you know you get a large gross premium and very little net, and that is really determined by the client's appetite. That is a big book. But a lot of business that is growing quickly is in these primary casualty-related areas where obviously we have big net, and I expect to see we have a lot more net. I expect to see the North America retention rates continue to go up and to begin mirroring that of the international business.

Okay. That is helpful. Then I guess the flipside of that is, in reinsurance one of the things that a number of companies have been indicating is that for the very same reason I guess you are seeing your net retentions go up, some of the reinsurance companies are not seeing as much premium put to them as their clients are increasing their retentions. I am wondering what kind of impact that that might have on your ability to grow your casualty reinsurance business?

You know I think the clients increasing their net retentions on one hand does affect and have on an effect, and we see that to a degree. On the other hand, many clients as you know given the growth rates they have experienced are more capital constrained, and they have to continue and to continue to buy reinsurance. We participate quite a bit, not just in the casualty, but in the casualty and specialty related lines. We have quite a bit of expertise in that area spread among a number of offices, both London and the U.S.. We have been known to and have developed a reputation for being a consistent quality underwriter in the business, and that reputation has built momentum, and we are seeing more and more of the business that we may not have been shown two years ago. So I think that helps to mitigate what you are seeing as a trend of primary underwriters continuing to hold more net.

I want to return just to the point made of buoyant growth. Remember I used the word relatively in there as well. We are a part of the market as it is, but I do expect that ACE will continue to outperform many.

Paul Newsome, A.G. Edwards.

Good morning. Just a couple of questions. One is, I want to make sure I got this straight. As I am looking at the reinsurance recoverable, it looks clearly like the Brandywine piece is shrinking as the national indemnity gets paid off. But it looks like given what is going on with the U.S. operation with the use of reinsurance, that the recoverable is actually growing for the non-Brandywine business. Is that correct, or am I thinking about this incorrectly?

That is correct. It is growing, but obviously our business is growing. So it is growing in relation to the business. Not at the same rate that it had in the past because we have significantly increased our retentions.

So is the thought here that that will grow but at a slower place than relative to equity; is that kind of the corporate goal?

Absolutely.

And then separately, I have been told from a couple of different sources that there is a fairly big push by ACE internationally into accident and health products. I wanted to be able to confirm that, and if it is true, if you could add any color to it?

Yes. We have a fair sized business in the accident business. It is accident more than health, and in the health area, it is supplemental daily indemnity type products in particular. So it is not a basic medical and hospitalization business. It is accident business.

We have been doing it on a global basis for some time. We have a substantial portfolio in Europe and Asia and in Latin America. We are experiencing our most substantial growth in Asia and Latin America where we see great opportunities continuing for that business. You will notice within the supplement that we had relatively low growth in the first quarter in that business. That is really due to one transaction, there was one book of business that just did not meet our underwriting standards and we eliminated it. It affected our growth rate. You eliminate that, and the natural underlying book grew at about 17 percent a quarter. That is after adjusting for foreign exchange. So that is a business that we know a lot about, and we have a lot of attention on it, and our objective is to grow that business.

Charles Gates, Credit Suisse First Boston.

Good morning. It is a clarification. Here is the question. What you have indicated with regard to asbestos to the best of my knowledge is the first ground-up review of your asbestos exposure since year-end 2002. So there is my first question. Is that comment correct?

My second question, you have implied that basically you possibly will announce the results of that review when you report third-quarter results?

Let me clarify that. First, we do our own internal ground-up study every year. We have a team of people that goes through all of our major claims, evaluates the potential for new claims. A very long process with mountains of documentation. So we are looking at this very closely internally.

What Evan was talking about was, every two years we are required by the state of Pennsylvania to have a third party come in and evaluate our review and do their own detailed ground-up study. So that was last done -- we completed that study in the first quarter of 2003. We recorded the results in the fourth quarter of 2002. So our next study now we believe will be completed in the fall, and we will be reporting the results in the fourth quarter. Our next internal study and outside study will be done in the fourth quarter.

Dave MacGown, Morgan Stanley.

Two very quick ones. One is for Phil. Phil, you said 400 million of maturities up at ACE INA in August I believe. Have you given any thought -- I am sure you have given it some thought -- any comment on what your plans are for that refinancing or payoff? And then I am not sure who this one is for, but have you guys seen any inquiry or expect anything to come out of the brokerage investigations that we started to hear about over the last week?

First on the debt. We would expect to refinance that debt. There is no reason in our minds to reduce our leverage any further. We are very comfortable with where we are.

On the Spitzer and maybe to become Garamendi investigation, you know we only know what you know. We just know what we see in the papers. We have not been subpoenaed, and we have not been contacted by the AG's office.

Bill Wilt, Morgan Stanley.

A corollary I guess to some of the business questions that have been asked. I noticed in Standard & Poor's press release on Assured Guaranty they decided that the use of funds would be to strengthen ACE's international position. I wonder if you got any clarity to that? I did not know if that was perhaps a reference to the accident and health business.

Good morning, Bill. A very succinct answer. That was S&P's own speculation and comment. That was not ours. And so I don't take ownership in that comment.

Very good. Thanks for the feedback.

Jay Cohen, Merrill Lynch.

Most of my questions have been answered. Just one maybe for Evan. As you look at the U.S. and expand both geographically and by product, any thought of moving down into more of the standard small commercial or middle market business?

Good morning, Jay. You know for specialty lines, yes, but not for traditional commodity commercial middle market packaged type business. That is not what ACE is about. We really entered the businesses where an underwriter can make a difference.

Good answer. Thank you.

(OPERATOR INSTRUCTIONS). I am showing no further questions at this time. I would like to turn the floor back to the presenters for any further comments.

Thank you, everybody.

Thank you. This concludes today's call. We thank you for your participating and your interest in ACE, and we look forward to speaking with you again at the end of next quarter. Thank you. Good day.

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