丘博保險集團 (CB) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the ACE Limited second quarter 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 today's presentation. If you would like to keep up for a question of the time, you may do so and by pressing Star one on your touch-tone phone. If your question has been answered, you may remove yourself from the queue by pressing the pound key. It is my pleasure to turn the property your host, Helen Wilson. Ma'am, you may begin.

Thank you. Welcome to the Ace Limited June 30th 2004 second quarter earnings conference call. I'm Helen Wilson, Director of Investor Relations, and I will be your how host for today's call.

Our report today will contain forward-looking statements, such as statements related to our financial outlook and guidance, business strategies, growth prospects, competition and market conditions. Actual results to 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 also like to remind you that this conference call and is contents and any tape, broadcast through publication by ACE Limited,are the sole copyrighted property of ACE Limited and may not be copied, taped, rebroadcast or published, in whole or in part, without the express written consent of ACE Limited.

This call is being webcast live and will be available for replay for one month (inaudible) comments at the time of the call and may not be updated to reflect subsequent material developments. You may also listen to the reply of the call at telephone number 877-519-4471 or 973-341-3080 with access code number 4928961.

Now I will introduce our speakers. Our President and Chief Executive Officer, Evan Greenberg, will give an overview of the quarter, followed by Phil Bancroft, our Chief Financial Officer, who will provide additional financial detail. We also have reference over (phonetic) from some of our operating units available for the question and answer session. Now is my pleasure to turn the call over to Evan.

Thank you, Helen. Good morning.

As you can see from the numbers, we had a very good second quarter. The results were well distributed across our primary business segments. Operating income before realized gains or losses increased 33% over a year ago to $380 million. Earnings per share before realized gains was $1.29 a share, up 28% from last year.

Property and casualty net premiums written increased 25%, while net premiums earned increased 27%. The P&C combined ratio was 89%, led by continued improvement in our expense ratio and an absence of cap losses in the quarter. As you know, expense management continues to have been major focus at ACE.

P&C investment income increased 24% and operating cash flow was $1.1 billion for the quarter and $2.3 billion for the first six months. Our continued strong cash flow and increased reinvestment rates will continue to have a significant impact on the growth in our investment income. Finally, our annualized ROE was 16.9% for the quarter, Simply an excellent result.

I think it is important I take a few minutes to comment on the competitive environment and how our company is responding to a changing market. We are well-positioned to manage the balance between growth and profitability in a more competitive marketplace. While I have said it before, it is worth repeating. Overall, this remains a favorable underwriting environment.

Rates are adequate in most classes, both short and long tail, in spite of continued rate reductions, though I must say, in some classes, and particularly in the excess layers, the competition at times defies logic. Unfortunately, this is becoming a frequent and regular occurrence. Between the first and second quarters, competition has increased and we are experiencing growing rate pressures in most, though not all, classes.

It's not only coming from newer players, but certain large established companies as well. I believe their growth rates and the sheer volume of new business they are writing, it is an indication of their aggressive posture. On the other side of the corn remember, in a number of classes, there is a certain element of payback for the past in the rates being charged today. So there is reasonable measure of tolerance for some initial price reductions.

Terms and conditions for the most part are holding. The limitations and exclusions these provide are at least as important as rate. With all that said, our managers and underwriters are clear about our priorities. If rates and terms don't meet our standards, and that means an absolute underwriting profit, we will walk away, even if it means shrinking the top line. We will not purposely write business at a loss. This discipline is evident in our current writings.

Certain of our businesses are relatively flat or declining, such as our CAT and aviation reinsurance business. Our high excess casualty-related lines and in particular, D&O is down from prior year. ACe Global Markets, our London wholesale business, is flat overall, and our Global Energy business is simply not growing.

Even with these businesses flat or shrinking, we continued good growth overall; 25% on net premiums written. This is because of the investment we have and continue to make in building out our organization.

We have far greater capability in terms of product and our physical local presence in the U.S. through ACE USA in Westchester, and internationally through ACE International, than we did two years ago and even one year ago. This provides us a greater opportunity for growth in the retail areas of our business and provides some an offset to the declining rate environment as we become more selective about the risks we choose to write.

The corporate client and brokerage marketplace wants credible choice, and we are providing that option. The number of retail and wholesale brokers we are doing business with in a meaningful way and the number of submissions we are receiving to write business across a broad range of products has been increasing at a substantial rate. For example, our submission count in ACE USA in Westchester increased in the first six months 82 percent.

These two companies led the way in terms of growth for this year. This is also true in many countries where ACE International does business, particularly in the U.K., continent of Europe and Asia Pacific. In short, we are increasing our opportunity to write business in these divisions while at the same time becoming more selective in what we write as the market becomes more competitive. The business we wrote versus the risks be quoted, or what we call the bond business ratio, has been steadily declining and this is to be expected.

Our reinsurance business, ACE Global RE, had a very good quarter. Property CAT loss activity was very light, contributing to strong earnings growth. From a profitability standpoint, all classes continue to perform in line with expectations.

On the revenue side, growth slowed and again, due principally to competition in the property and aviation reinsurance line, we shrank the business instead of following what we believe are inadequate rates and terms. I should add, though still growing, we found fewer opportunities to write new business in the casualty-related reinsurance areas as well.

Our Financial Solutions business, or structured product group, had a good quarter in terms of earnings, though revenue growth was light. We're building our pipeline with new business opportunities and I expect revenue growth to pick up in the future.

So, all in all, while we're facing a growing headwind from increased competition, ACE is well diversified, and we therefore see continued opportunity for growth. I'm confident ACE is positioned to continue to outperform the market. I will turn it over to Phil for detail on the numbers and an update to our guidance, and then we will come back to take your questions.

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

Our second quarter was very strong. As Evan mentioned, Property and Casualty operations produced solid net written premium growth, rising 25% for the quarter. Adjusting for foreign exchange, the increase was 21%. 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 44%. This increased the line's contribution to total premium earned from 44% to 52%. At the same time, all other P&C lines increased approximately 10%. Our P&C combined ratio for the quarter was 89%. There were no capacity losses and we experienced $25 million on an unfavorable P&C reserve development.

Turning to the balance sheet, our total reinsurance recoverables increased by $312 million during the quarter, caused mainly by growth in our premiums, and from a number of well collateralized fronted and captive (phonetic) programs in our overseas general and North American operations. We expect this balance to remain relatively flat through year end.

Since December 2002, our reinsurance leverage or our ratio for reinsurance recoverables to tangible equity has decreased by 43%, principally as a result of our higher premium retention rates and the increase in our tangible equity. We've updated our list of reinsurers with balances greater than $20 million to reflect current reserves and settlement activity.

A review of our asbestos liability is currently underway. Our conclusions are expected in the fourth quarter. Since our last study, actual experience for frequency and severity appears to be tracking with our expectations.

On April 28, 2004, we completed the sale of 65.3% of our financial guaranty operations. We received total proceeds of $1,000,000,035. This comprises $835 million of net operating proceeds and a $200-million-dividend. This was a beneficial transaction for us, as it enabled capital to be reallocated to higher growth, higher ROE businesses, and it reduced our overall credit exposure.

As a result of the transaction, the Company's book value declined by approximately $61 million. $18 million of this amount was included as a reduction to net income and $40 million was a reduction to other comprehensive income. Other comprehensive income is affected because unrealized gains on investments included in the basis of assured guarantee at the sale date were required to be reclassified to a reduction of the loss included in net income.

The investment portfolio increased $546 million in the quarter, due principally to our strong operating cash flow and the IPO and debt proceeds. This was partially offset by the reduction resulting from the sale of AGC and the overall decline in the market value of our portfolio. As results of the IPO, there were no significant changes in our credit quality or duration, which remained at AA at approximately 2.6 years.

In June we sold $500 million of 10-year senior debt with a 5-7/8 coupon. The impact of the issuance will have a temporary impact on our leverage ratios, as the proceeds were used in July to redeem $75 million of callable debt and will be used in August to refinance a maturing $400 million bond. Annual interest savings of approximately $9 million will result from a lower rate on the new bond.

As a result of the issuance, our debt to total capital ratio temporarily increased to 19.8% from 16.1% and our debt plus trust prefers to tangible equity increased to 43.6% from 35.6% at March 31st. Our after-tax realized and unrealized loss for the quarter was $501 million. The change primarily reflects the declining market value of the investment grade fixed income portfolio, due to 100-basis-point increase in market interest rates during the quarter.

As promised, we have been working to assemble global consolidated loss reserve triangles. We have made progress with this, and will be prepared to distribute it, the information, before the end of the third quarter.

Turning to our guidance for 2004, we're updating the estimates we provided in April. In our previous guidance, we expected P&C net earned premium growth of 15% to 20% as a result of higher production anticipated the first half of the year. We now expect P&C net earned premiums to grow between 20% and 23%. The P&C combined ratio expectation remains between 88% and 90%. We have assumed $100 million of CATs for the remainder of the year.

Now that the IPO is complete, we believe that financial services operating income will decrease by 10% to 15%. In previous guidance we expected total investment income between 9$920 million and $940 million. We now expect this range to be between $940 and $960 million, due to strong cash flows and higher yields.

We still expect operating cash flow of approximately $4.5 billion. Interest expense of preferred dividends should approximate $185 million and $45 million, respectively. In previous guidance, we said we expected our effective tax rate to be 18 and 20. From what we have seen so far this year, we now believe hat this is more like it to be in the 20% to 23% range.

We are very pleased with our second quarter results. Our Property and Casualty capital basis strengthened significantly as a result of the IPO. Our financial ratings are strong across the board and we are well positioned for continued growth and profitability.

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

Thank you Phil. We will now be happy to take your questions.

The floor is now open for questions. If you have a question, please press star, then one on your touch-tone telephone at this time. If at any time your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while the pose your question, your pick up your handset to provide optimum sound quality. Once again, to ask a question please press star and one on your touch-tone phone at this time. Our first question is coming from Bijan Moazami of Friedman Billings Ramsey. Please go ahead.

Good morning, everyone. Your casualty premium during the quarter went up something to close to 45% or so. The question is how can you grow this rapidly without affecting the market's negatively? Also, some of your competitors are blaming ACE for the softening of the D&O market. I was wondering how much of your growth rate came from the D&O product?

Bijan, we are growing in a broad range of Casualty products. I'm going to specifically address your question about D&O in a moment.

What I explained in the very beginning of the call, I believe, is we are not growing because we are breaking underwriting discipline and we are writing business at deep discounts and cutting rates and liberalizing terms to win the business. We have been increasing our physical presence and our product line capability for the last two years to such a degree that the number of submissions we are seeing, the amount of activity is we are seeing, has increased substantially.

We all love the market and rate is important, but I think rates overall in most all classes are adequate. There is some give-back. We are disciplined to measure that, and we believe that the loss ratios we have to pegged will produce substantial and reasonable earnings as the business is earned out.

Now, let me turn -- and I think it will put a little more color on it-- let me turn specifically to this question about D&O and excess, which I believe is mostly competitor talk that's out there, and I think you have to weed that out from what is the real substance. And I'm going to give you some specific numbers that I think will help you with it. I'm going to take ACE USA excess and ACE USA D&O.

Year to date, the submission activity in our professional lines in D&O is up 100% from last year -- that's the submission of quotes. In excess casualty, it's up 110%. At the same time, our close ratio, that is, how many accounts do we in fact write for all those that we quote. Last year in D&O in ACE USA, we were closing 40 percent of all the accounts that we in fact quoted. In the first six months of this year, that is down to 18%. So 82 percent of the business, we did not write.

In Excess Casualty, where our submission activity is 110%, our close ratio last year was 46% and it is now down to 20% for the first six months of this year, so more than in half. Let's look at the rate side. On our renewals, year to date on our renewals for D&O business overall, we renewed our business an average of 4 percent lower rate. It is now running currently at 10%. So renewal pricing is down 10% on the current business we're quoting and 4% overall for the year.

For D&O on new business, year to date, we wrote it at 5 % less than expiring on average and currently it too is running about 10% off of expiring. So, on average, that is not bad. Now, the 80 percent of the D&O business we did not write. Our rates were high by 20 to 30%. So the overwhelming majority of it, we didn't write.

Now, I gave you averages. We have looked through most all of the new D&O business we did write, and we did find two outlier cases where we were off 18% from expiring and 22% on another case, and there were very good reasons why both of those occurred.

On the excess business, overall rates are down about 3-1/2% year to date on our renewal business and currently we're running at about 10%. So I hope that gives it to you in very specific terms.

Thank you .

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

Yes, I guess two questions. One being in Tempest USA, where, if I read the numbers right, you reported some very significant growth year over year. If you could explain where that is coming from? And then talk a little bit more about in Financial Services, what appears to be pretty strong margin improvement.

Yes. Good morning Tom. Tempest USA, most of that growth, and a lot of is, you remember, it is booked premium on treaties that we wrote last year and the first part of this year, so on the treaty-year basis that is the activity and now you're seeing it on a booked basis. So that business has been growing, had been growing, very rapidly, though it is beginning to slow down.

And, as I said, we are seeing fewer opportunities, particularly in the casualty related lines. That portfolio is not a CAT portfolio. If is predominantly made up of a wide variety of casualty-related product areas, and I'd say in particular in the excess and surplus lines related arena, as well as risk property--per risk property as opposed to CAT property. And there again, it's both in the ENS-related area as well as for large national accounts.

On Financial Services, you know, Financial Services, is, as you know, it is made up of both our Solutions business as well as the Guaranty business. We had one month of the Guaranty business -- it was still with the Company --- and then the other two months are consolidated in other income.

In the Solutions area, is a volatile area. It's a bit lumpy. That is why we break it out separately. Both the revenue and income will bounce around, because it is more single-deal oriented, though there is an underlying steady stream of income. And I expect that you will see that continue to sort of bounce around. This was a super quarter and I expect that earnings will continue to perform favorably, but it just won't be in the straight line in that area.

One thing I would add to that is that in our guidance, we've said that we expect the income from that line to be off 10% to 15% from the prior year, so that's our best estimate at this point.

Okay, and then, sorry, one quick follow-up. I noticed your bad debt reserves for uncollectable reinsurance went up for the quarter. Is there anything to read into that or is that just fine tuning, or--?

There is nothing to read into it. We have a process that we have described in the past where we, you know, applied factors based on the credit ratings of our reinsurers and you're going to see movement in that. The balance grew the share, so our bad reserve is going to move in relation to the balance. There's also some shifts in credit quality, as you know, and that would contribute to an increase in the reserve.

Okay. Thank you.

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

Good morning . Just a couple quick ones, and then a broader one. The unwindings related to the insured guaranty transaction, some of the stuff that you took back in the second quarter. Was that included in Financial Services and was that outsized?

When you say was it outsized-- I'm sorry, say that again.

There were certain unwinding transactions related to the IPO at the time of the IPO or right before the IPO, some of the business that you took back. Did that impact the bottom line this quarter?

It did not. No .

It did not impact the bottom line. It is not all taken back into financial Services. There were just a couple of pieces taken back and they're in the divisions where it is most appropriate from a Management point of view.

So, for instance, one of them was a trade credit reinsurance portfolio. That is better with our reinsurance experts.

But it wasn't-- it didn't have a material impact on the bottom line.

No.

Okay. How about expenses? You talked about-- that expense management is a focus. Can you put it a little bit more clarity on what the opportunity there is or what your goals are over the next couple of years?

Our goals are to continue to drive down our expense ratio. And I think you see on the operating side, that we continue to make good progress with that. We are a global organization, and that gives us opportunity to rationalize how and where we perform certain services and become more efficient in that kind of centralization and rooting out inefficiencies in that regard.

Systems play a major role and we have a lot of automation coming on line, some of it beginning to show right now, and that improves our expense-ability. It improves both the performance and the quality of service we deliver, while at the same time we can do it for less, and that is in the underwriting area, that is in the finance and accounting area, in particular.

Our expenses, when you remove the effect of foreign exchange in the quarter, our expense growth was about 6% to 7%. And, from my way of thinking, looking at net premiums that were up 21%, excluding the effects of foreign exchange, that is a pretty good mix on ratio. We're aiming to try to continue something in that theme. Thank you.

So, it is not just the high-earn premium, but you're actually-- there are actually expense initiatives programs going on right now where you're either reducing redundancy or limiting expense growth in some meaningful way?

Oh, absolutely. In fact, to just add one more complexity to that, we really have it clear in our own minds and in our strategies and actions, that we're investing for growth on one end while we are eliminating expense on the other, and we have significant expense reduction initiatives. We began them last year in the fall and they continue now.

Okay. Good. My last question is on asbestos. Everybody obviously knows about the fourth quarter study. Last quarter you said that, yes, frequency has increased in front of the prospects for federal asbestos legislation, but that you felt very comfortable with the adequacy of your reserves and the study completed in the fourth quarter of 2000 had captured that increase in frequency.

You know, Phil kind of put a little bit out there, but do you still feel strongly about that and would you be willing to go on the record that, given that outlook when you complete your study in the fourth quarter, you know, similar to what Jay Fishman said at Traveler's St. Paul, that you wouldn't expect anything outsized, including reinsurance recoverables?

You know, I can tell you from what-- I can only speak to the facts as I know them. The facts as I know them right now, and we continue to monitor and to review obviously our asbestos exposures and our development. And our development, both frequency and severity, the actual is in line with what was and is expected as a result of the studies that have been done in the past. So we don't see, and we don't have any signals, that tell us that we are not adequately reserved in the area. That is where I am.

And the studies are beginning now. They will-- there is both the state study that is required every two years, and at the same time, we're doing another internal ground-up, because we constantly do that. And we do them both parallel. And the facts will speak in the fourth quarter. But I tell you what, at this time, again, from what I see, the actual is running in line with expected.

Okay, and just a last quick follow-up, I promise. Related to that then, Ryan has talked about this in the past, but I don't think -- at least here on the public record in terms of answering this question. You know, before you the charge in the fourth quarter 2002, you really never publicly talked about the limited obligation with the State of Pennsylvania. Now it's-- kind of everywhere in your disclosure, you seem be leaning on it more.

What is your position on that? Do you see that as a $216 million after-tax limited obligation, or in fact would that be a more complicated business decision to lean upon that limited obligation? Where do you sit on that?

You know, first of all, I am not going to comment on your number of 216.

That is the public number that you've provided, $335--

I am not going to comment on the number, but I am going to comment on what you asked me philosophically. When ACE bought the Cigna companies, it paid a price that compensated assets and liabilities. As part of that transaction, the liabilities that it purchased were limited contractually by an agreement that Cigna had entered into with State of Pennsylvania.

Now we recognize that contractual limit of liability and what it states. And that is a matter of fact and a matter of the record. And so, while I am not going to comment on what we intend to do or not do, I do recognize that we have that contractual limitation.

Okay, fair enough. Thank you very much .

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

Just a couple of questions. One pretty short one. The higher tax rate, simply because you're making more money in taxable jurisdictions?

That's right, and we project that throughout the remainder of the year.

Right. Secondly, the adverse development you saw in, I think it was ACE USA. Any particular line of business that jumps out that caused that?

Good morning Jay. It's Evan. You know, it occurred in ACE Bermuda. Most of it. About $43 million of it. It came from three or four cases. It was D&O. It's all severity related, no frequency of loss issue. Remember, ACE Bermuda writes exclusively high excess business.

By its nature, it is more volatile, and therefore, it's susceptible to sort of a greater deviation around the point estimate and the loss ratio, particularly quarter to quarter. So I don't see a trend. We don't see any trend and it was simply those three or four cases.

Great. Last question. Probably not a topic you've been asked about a lot. Capital management.

Balance sheet in much better shape, debt ratios have come down dramatically. One would assume that top line growth would slow, earnings continue. You're looking at a year, you may be in a position that you have excess capital being generated or developing. Any views on what your plans are to do with-- assuming that scenario unfolds, what are the plans to deal with that?

You know, Jay, we view ACE as a growth company. We are biased against-- therefore, biased against stock buybacks.

It is a capital management tool, I agree, to be used when appropriate. We prefer to use the capital in the business stuff. There remains in our judgment sufficient opportunity today to deploy our capital. We have adequate capital to support our business growth plans. And I'll leave it at that.

Fair enough. Thanks, Evan.

You're welcome.

Thank you. Our next question is coming from David Sheusi of J.P. Morgan. Please go ahead.

Good morning, everyone. Just a couple quick follow-ups here. Just briefly on going back to the asbestos piece of it and taking a look at survival ratios and trying to reconcile your comments on the frequency and severity piece of it. Can you add some color on that statistic and how the regulatory agencies are kind of overseeing that trend?

From a survival ratio standpoint, I would say that we are right where we expected to be. We had some significant payments that we made in the last two years that were scheduled and anticipated when we did our studies, the studies that we did for the last two years.

The other thing I would point out is that it is a very difficult to look at our net survival ratio, because you recognize that for the next several years now, the payments are going to be made by the NICO (phonetic) cover, through the NICO cover by Berkshire. So we think it is much more meaningful to look our growth survival ratio. As I said, they're right in line with where we expected them to be, based on our studies.

OK. We'll take a look at that.

Secondly, on the competitive environment. Evan, you had mentioned there are certain large underwriters out there. Could you just give a little better feel on where it's coming from, is it primary, is it on the reinsurance piece of it, U.S. versus non-U.S? Give a bit more color on that side.

OK. When I refer to the large incumbent underwriters, that is, I am predominately referring to the primary areas. When I think about the primary areas, I think about primar first dollar plus the first layers of excess, so really the first $50 million of cover. And in those cases, we do see competition.

There are incumbents who have a voracious appetite for business. I do believe that are using their balance sheets to-- as a weapon, as an advantage to write business. And particularly the way it shows up is in terms of offering, in many cases, twice the limit for the same price.

Now, to us, that is obviously simply a rate reduction. We won't follow that behavior. So we see quite-- we do see that.

On the excess, in the excess business, which is above the $50 million, typically that is occurring more with newer players who don't have the geographic presence. They don't have the local capability in terms of servicing, issuing paper, client relationships, local broker relationships. And they are-- they're simply competing using capacity and pricing. So that would be more newer players and that's where you see so much competition in the excess layers.

Just a follow-up on recent news with Convariuim (phonetic). Could you give a sense, I guess, from an ACE perspective on how that is going to impact the reinsurance market? Is it a net neutral, is it positive catalyst in your view? What is your reaction there?

I don't think--it's unfortunate for Convarium, and I don't want to speak about them, obviously, specifically. The news wasn't new news in terms of the years of trouble and the lines it related to. I think we have all been very well aware of that.

I think the surprises in the timing of recognition. But I don't think it changes any of our views of years and those lines of business. There is continuing a-- quite a bit of activity as we see this quarter of prior-period loss recognition in sizable amounts. Just look at all the reported numbers last week alone.

You would hope that this would have an effect on the market and a sobering effect in terms of what is the right price and you don't grow at all costs. You would hope that it will have an effect to keep some firmness in the market.

Great. Congratulations on the quarter here.

Thank you very much .

Our next question is coming from Paul Newsome of A.G. Edwards. Please go ahead.

Good morning . Just a couple of quick ones.

First, I was hoping you could talk a little bit, adding to the great detail on the competition in D&O and excess layers on terms and conditions. Did you mention that some people are adding higher limits for the same price? But we're also hearing changes in definitions like severability, and I was wondering if ACE is participating in that or if you're seeing similar things as well?

Good morning. You know, we-- I think the question -- and let's specifically address that question of severability. We are underwriters, and so there isn't a simple one-size-fits-all answer to that question of severability.

So we look at each individually. We actually have three or four different ways that we address severability, depending upon the company, its industry, its history. And so we look at it case by case, but we do have a set of very firm rules and guidelines regarding that.

But again, as you would expect us to do, you wouldn't expect one size fits all. You'd expect that you assess the risk and then take a prudent, measured approach to it, which is what we do. And I would say, for the most part, what we see in the marketplace is competitors doing the same thing. I think the terms and conditions have remained fairly steady.

There is the some behavior around the margin that you scratch your head now and again, but in the main, I think the market has been disciplined that way.

And on the issue of severability, we don't necessarily agree, case by case, with each underwriter on the other side does. But there has been a rationale. And again, they're not taking a sort of one-size-fits-all. They have two or three ways they approach it.

That is great. Thank you.

Separately, could you comment a little bit on-- give me an update on what is going on with your A&H efforts? effort?

Oh, yes . A&H had a-- I really should have mentioned it in all of this, because actually we are very proud of it.

A &H had a terrific quarter, particularly in our overseas operations, where it was up about 25%-26% over prior year. So it continues to perform very well. It's a line of business, as you know, that we focus on intensely. It povides a lot of the ballast to the organization, and within the supplement that we published, you can see those A&H numbers.

Any changes in that effort, or just--?

Oh, and by the way, as one of my colleagues is reminding me, in the supplement it is headlined "Personal Accident."

Any changes in that effort or is it just kind of steady-as-she-goes from the current strategy?

It's pretty much steady-as-she-go It is about distribution and product innovation, and we continue to sign up and acquire new sponsors to distribute the products through-- particularly on a direct marketing basis.

The areas of the world where it's growing the quickest is in Asia and in Latin America, where you have this growing middle-class that is particularly under-insured, and life insurance is not as prevalent. So there is in particular we see the tremendous opportunities for growth, but Europe is growing well, as well. We continue to place a lot of management on it, so there is nothing I would say that has occurred in the quarter that is noteworthy in particularly. But I don't think it as a steady as she goes. It's a drive-it-as-hard-as-you-can-as-she-goes.

Lastly, I was hoping you could maybe step back a little bit in thinking about the-- give us some thoughts concerned about the future. If we look at a slowing, softening market, presumably more difficult to get profitable top-line growth, what is you tendency or your interest in going to more of the net rider reducing reinsurance versus topline growth? And could you maybe talk about what kind of flexibility you may or may not have in continuing the net earned premium growth by becoming-- by using less reinsurance?

I think as you are shirt you are aware when you look at our numbers, our retention ratio had continued to decline. We continued to retain more of the business in that right. I expect that trend in the near-term to continue. We do have certain major blocks of business by their re nature like the risk management business which is a big business for us where we front for a lot of captives. Under your going to see and much smaller net to gross and that the stores the overall net to gross ratio.

However, any of our areas, particularly in casualty related areas, and out of the growth substantial net to them. We believe in eating our own cooking. As far as the top line goes, in know, the top line is going to continue to grow as long as we find opportunities for growth.

What I tried to demonstrate in my opening comments is, honest Injun. I am not afraid to shrink the top line. We're not afraid to do that. We will shrink the entire top line if we have to in order to provide an underwriting profit. That is what it is about. The growth rates will seek their own level.

Our underwriters are now under some kind of the fear of that top line and by the way, you're going to do it at all costs and you're going to give us an underwriting profit. At times, the students are in conflict and is unrealistic to achieve them. Right now, understand that we're driving our marketing strategies heart. It's a lot more to be for that, we see efficiency, was the we were not that the many areas so left out there and get it.

But we cannot get an underwriting profit and stock don't write. I hope that helps you with it.

At very much .

Thank you. Our next question is coming from Ron Frank of Smith Barney. Please go ahead.

Good morning. A few things that I made, and then. One is your submission rates is up so much, so dramatically cut it seems suggested a significant market segments were you virtually weren't showing up before.

I went have ordinarily you got to be true of this a year or so ago, even allowing for the product at a news that have had and I'm wondering at the foot of the more color there. Perhaps some examples. Second, the contraction in Tampa's Bermuda certainly makes sense in light of what is said and light of the shirttail lines, I was curious about why Tempest Europe was down as much as well.

Finally, don't remember your coomments seemed to indicate that the U.S. retail business. Casualty is holding up better than the number of other markets. I wanted to ask to reconcile that with the idea that a big incumbents are getting more competitive. I would think that is where you receive and showing up.

I think your first--boy, you gave me a mouthful, Ron.

I did my best.

Thanks alot. I think your first question and last question are going to go together a bit.

First, let me take Tempest Europe and get it out of the way. Tempest Europe, I said that aviation pact were both shrinking those at the moment there and no growth and what we see in underwriting. We write some CAT out of London and the aviation agreement is out of London. Plus, I have to say just on the risk property and casualty side, there has been a growing appetite in the London market.

It is more competitive across the board. And we are just not going to follow it. But it was driven substantially files first two areas. So that is one.

Number two, on the said mission activity in this business and expanding lines and all that. Let me even added a more color to that. In the last two years, we have increased the number of underwriters, a number of people we have at the sickly deployed in the field of operation, that is, I'm calling Philadelphia of the home of us ; I'm calling every location had in the U.S. both in Westchester, and home offices buildup there.

We have increased the staff and the operation 54% in the last two years. We have increased in the last two years alone about 35%. We have a far greater presence in those local territories, in those local offices. An example, quite a number of our offices to years ago, we only have underwriters for one product line. Generally, that would have been a risk management.

Today you walk into an ACE office, whether it is in Chicago; it is in Texas, is in the West Coast and severance go, you're going to find the P&L operators, underwriters, that is running before exposure in U.S. multinational, you're going to find those underwriters in the office. You're going to find environmental underwriters, you're going to find client rep those who were there to bring the copay capability of As to a broker in understand the Bruchis capability and help manage a business plan between the told us to develop business.

This week, we can hit the local offices of both the marshland and Wallaces and regional brokerages who are present in those areas. We just weren't there. As many incumbents, many have retrenched or pullback, changed their appetite, there has been this vacuum and we are there killing it on a broad product scale.

That is striking submission activity. That is striking growth and casualty related areas. Ron, I hope I answered your question.

Just one follow-up. You talked about the incumbents' restructuring, retrenching and leaving a vacuum, but also earlier the talks about the relating on the pressure. How to reconcile those two?

Well, there is both going on at once. There are some incumbents with a big appetite. There is not as a recording that takes place in every market cycle as you know.

So on one hand, there has been reordering. And we can then to our on and take a share. On the other side of the coin, there are incumbents who have a big appetite and they sure don't want to see a scheme that ground so some follow way and others grow an appetite.

So Kemper and Brand X gets more press of?

Well, yes. You've got to remember in a hard market there are two things that occur.

On one hand, you grow into very well at that time. At the same time, let's not lose sight but it's a client you're doing business with and not all clients appreciate the way they have been treated during the month of market cycle by incumbents. That also operates opportunity.

Thanks a lot, Evan.

You've got it.

Our next question is coming from Brian Meredith of Banc of America Securities. Please go ahead. I have three questions for you. I notice paid to net losses on investments, one does that need to cover start kicking in? I guess it's zero years saying, right?

It is beginning to right now. They're making payments so going forward they will make the payments for our behalf.

Terrific. And then, just quickly, you keep talking about obviously making an underwriting profit is very important to you guys, there are businesses we're seeing price increases.

Which perhaps character is the probability of your business right now? As kind of excess returns on capital? Is there still room to continue in a gain market share what we will call excess in returns on capital?

I wouldn't characterize it as excess returns on capital. What we believe our good risk adjusted returns on capital for the business that we write.

OK. It sets interest rates set the thing to do with the way you think about pricing?

No . We don't discount our business, and when we look at an underwriting profit, we hold the and director, accountable for simply that. The investment to prop will take care and best preserved.

Last question, we'll talk about how you're going to underwriting business but with all this growth had done anything with respect to the claims part of the business?

Upslope . Thank you and let that not go on said the week continued to improve our claims organization both in terms of each product area and geographically as well. That is what you're selling, your claim capability.

Thank you.

You're welcome.

Our next question is coming from Dan Johnson , Sidell Investor.

Great. Asked and already answered. Thank you.

Thank you . Our next question is coming from Michael Lewis of UBS. Please go ahead.

Thank you very much . I have a couple follow questions. Evan, you talked before about your expanding product in your building out of a geographic reach, as grain asking Ron's question, how much for the do have to grow in building now you're U.S. presence and did so, where?

The other question has to do with asbestos. Real quickly, Capek made a comment that you're very close to the outside parties to do their outside asbestos studies and is another method, they're even more comfortable going into this current said that their numbers will mesh with what the outside part because of their giving us a high level of comfort. There would be any serious reserves threatening.

Do in their outside parties methodology as well? And the last question, you told to, you're a growth company and you don't believe buying in shares. South Korean guess-timate but the fact is you're a highly cyclical company with a very low evaluation. Had you basically become more growth? How much time do have to do it and can you do if you don't have a multiple expansion?

Whopper building and a U.S. presence, we're continuing to build about. It, but at the same rate that it has of the last two years, but we are continuing to build that out. As far as the growth company, yes, we are a growth company. Don't measure that simply quarter to quarter or even year to year.

Remeasure it over a broader period of time and we think that is the right way to view the business. Right now, we see continued growth opportunity NBC that the capital we have can be deployed at a reasonable return. I'll let Phil answer the question on asbestos.

We certainly understand the methodology between third party is utilization. The workers close with them in the study that they did for 2002.

As I said and as Evan said, the experience we have seen since the study has been very consistent with what we expected. The issue would be-- and the reason would be we're not giving absolute culprit the reasons for change, is because they're different points of view of different cases. As things change in the two-year cycle so that is aware reporting it with them on now is the complete the second study.

Just a quick follow-up. I know that no one guarantees the one I'm saying is three or $400 million is not an outsize Reserve rate increase but billion dollars is. Any given parameters and number two, my question had a be.

Can you be a really growth company without expanding their coverage is be on the nine life area? That is my request. And talk about the outside Reserve, the biggest fall on that. Kevin has described CART limit to our obligation to right? So that is undertaken in consideration paid we have disclosed the amount of that obligation that we have remaining. And will address a question about going beyond PNC.

Michael, the question about going beyond PNC and whether we will diversify into other areas of financial services, when the time is right and did precede the appropriate opportunity, and it makes sense to us as part of our strategy, and will be fully prepared to do that. But I am not prepared at this point to go any further in adding color to that.

Thanks very much, and then.

Your welcome Michael.

Our next question is coming from Gary Lane (phonetic) Maverick Capital. Good morning . Thank you for taking my call.

I had three topics I wish to cover. My first, up against the bill.

In August when you're breaking a year and this field in your portfolio that the ratio of the portfolio really extended marginally, but the yield jumped, I think I calculation is correct by 100 basis points,I noticed that your many portfolio had shrunk but you're cashing cash equivalents have also progress. I was wondering if you could add to my to the more sequential changed in yield?

The primary driver that changing of we're talking about a market there, is the decline in our portfolio. The market value of our portfolio. The level just not so as to raise the market appeared, dropped almost entirely because of the sale of ATC. We used to consolidate ATC and now we carried as a one line investment account. They had a very significant investment in U.S.

That is helpful. As one of the key to flush out a little more of the U.S. Insurance growth.

Could you maybe give us some color as to how much of the growth perhaps is coming from excess casualty lines purses risk management is a sealed, CIGNA, INA stuff. I was under if Phil could help there?

I won't give you specific by line and numbers, but I would say that it came from a broad range of property and casualty related areas. P&L and excess did have very good growth rate, and worker's comp. Did, our environmental business, our construction business, our international business, writing for the U.S.

Multex, eight international exposure. Our net no area did. And our risk management had a higher growth. So it is very broad based across the lines.

Thank you. My third question is, when you're divesting and care (phonetic) -- remember the call in the West earlier about it, but they're talking about access and P&L you provided some statistical of permission to help us better understand stuff. Could you perhaps that talk about two other issues. One what is your actual potential and renewal rate was? Can you talk about the average size for the line your actually writing in the excess and P&L for example the dollar per submission or developer close? Was there any real change in that area?

Our overall retention rates, if there is by line of business. Don't hold me to the percentage but it varies between 80 and 85%. Some lines are lower in some lines are higher. So we retain a best-and we watched that.

We know what the rules of thumb and what our past experience was show was at the Times of cycle will be so retain a good deal of the business we right. Of the business we lose, which generally is it because we're unwilling to follow the rates returns and conditions that somebody else provided. So if you want to know how much do we not renew? Just apply that kind of 80 or 85 percent, more like 85, to our net written premium and that opinion idea right there. It is a substantial amount of money. I do want to go into line sizes and get into that level of detail with you.

Would you say they are up, though, you're you're to said they're flat?

I would say they have been up. Our retention ratio has increased. We have increased the gross line that we will put out modestly in certain lines.

Thank you very much for your help.

You're welcome.

Thank you. Our next question is coming from Brad Priddy from Nynex Financial (phonetic).

On page 21 of the supplement on the discussion of reinsurance recoverable some paid losses and expenses, if it looks like the other categories that disputed category has been growing both in absolute terms and it also is a percentage of the total.

I was wondering if you could talk about what you're seeing from a float in the disputed area and why those changes are what they are?

POS account had always been in our overall portfolio and in the. We actually paid claims that need to be reported.

If you can see it that as those move, the 50 million or so that came into that category, there is a very sick Medicare reserve so it is just a movement between and paid and paid. We obviously built in the insolvent carriers because we will collect some amount on the. As I said, we provided a very significant reserve on this balance.

One other follow-up on that. In the future, the best lot of great disclosure but one other request for this page would be just to show what is that meant to reinsurance and we collected during the year. Just a role for the of the analysis here would be extremely helpful because this is very detailed and very helpful and I appreciated.

Thank you operator we'll just take one more question please

Our last question is coming from Mike Paisan of Legg Mason.

My question has been answered but I do have one very quick specific question we have seen a number of companies been released from reserves from the World Trade Center. And I just want to get your thought on that we've seen in terms of your analysis and development those reserves. Thanks.

The reserves we're hoping for the remaining reserves we are holding for World Trade Center on this point, we think is obviously adequate. And required.

I cannot comment on what others may be seeing are what they are doing, but we continue to hold some reserved and obviously we deem them required and necessary.

Thank you.

You're welcome. Thank you. This concludes today's call. We thank you for participating and in your interest in a sad and we look forward to your practice pending a can. Thank you have a day.

Thank you . That does conclude today's teleconference. In the disconnect lines at this time and have a wonderful day.