丘博保險集團 (CB) 2004 Q4 法說會逐字稿

Good morning and welcome to the ACE Limited year-end fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions). At this time, I would like to turn the call over to your host, Ms. Helen Wilson, Director of Investor Relations for ACE Limited. Please go ahead.

Thank you and welcome to the ACE Limited December 31, 2004 fourth quarter year-end earnings conference call. Our report today will contain forward-looking statements, such as statements relating to our financial outlook and guidance, business strategy and practices, growth prospects, competition and market conditions, receipt of licenses and the industry-wide investigation and related litigation. 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'd 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 and may not be copied, taped, rebroadcast or published in whole or in part without the expressed written consent of ACE Limited. This call is being webcast live and will be available for replay for 1 month. 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 with access code number 5527078.

Now I'd like to introduce our speakers. We have Evan Greenberg, President and Chief Executive Officer, and Phil Bancroft, our Chief Financial Officer. Then we will take your questions. Also with us to assist with your questions are several members of our management team. And now it's my pleasure to turn the call over to Evan.

Thank you, Helen. Good morning, everyone. You have all received and reviewed our earnings supplement and I believe it speaks for itself. It speaks to our earning power, our momentum, and the increasing strength and depth of our balance sheet in general. Let me take a few minutes and describe the highlights of the quarter and the year and expand on this theme.

The quarter's results were obviously results by the reserve actions we took in the Brandywine run-off operations we announced in early January. This action masks the fourth quarter performance by the ACE active companies, which as you can see were excellent and broad based across all segments. We had good growth in net premiums written, strong underwriting gains, and excellent growth in investment income. Property and casualty net written premiums were up 14 percent. The combined ratio was 104 percent, and excluding the asbestos charge, the combined was about 87.5.

Our underwriting results in the quarter were impacted by the outstanding 2004 performance of our short-tail business, property lines in particular. Based on our regular reserve reviews as the '04 exposure periods expired, we realized a considerable benefit from these lines in the quarter in both the ACE Overseas General and North American operations. At the same time, substantially offsetting this, we also strengthened prior-year reserves, particularly in the U.S. casualty areas as a result of our regular review process. Phil will describe this in more detail.

Our overall loss reserve position is strong. As I've mentioned in previous quarters, premium growth rates, while good overall continued to decline in the quarter and are in line with the trend we have been experiencing all year. This is a reflection of our underwriting discipline in the face of a softening market. Offset, to some degree, by our increased market and product presence, both in the U.S. and overseas. While the market in the main remains stable and rates and terms are overall reasonable in most classes, rates continue to drift down. In many classes, fewer submissions met our underwriting standards. Our bound business ratios for new business reflected this fact and we're at levels I'd expect to see.

There are areas where current rate levels in a large portion of the class have in our judgment overshot the mark and are too low. Public D&O and particularly the excess layers, excess casualty in a number of areas, property CAT and certain areas of energy to name a few. So far in the first quarter, 2005, we do not see much difference in market conditions for the fourth quarter, so it's overall relatively stable.

The fourth quarter of 2004 will be remembered by all of us for the terrible human tragedy that occurred in Asia. As we've previously reported, the Tsunami disaster will have no material impact to our Company financially. We did experience a modest deterioration in our reserves for third quarter CAT losses of approximately $20 million net.

Turning to the year in considering the events, CATs, A&E action, the industry-wide investigation into business practices and Sarbanes. ACE performed extremely well, and I believe this speaks to the strength of our organization. P&C net premiums written increased 22 percent for the full year. The combined ratio for the year was 96.6 and was 92.4 before the reserve charge for the run-off operations taken in the fourth quarter. Our P&C expense ratio for the year declined over 1.5 points and this speaks to the actions we are taking to improve operating efficiency.

As a result of our underlying earning power, our balance sheet continued to grow stronger during the year. Our book value increased 10 percent, and our tangible book increased about 17 percent. Our ROE for the year was almost 11 percent. This is all after we absorbed 739 million after tax for the third quarter CATs and the A&E charge. Our net income exceeded 1.1 billion for 2004. All in all, quite a good performance given the events of the year.

Our net loss reserves grew by 3.2 billion to over 16 billion. And our invested assets grew by 5.1 billion to about 28.5 billion. We have -- now have an invested asset to equity ratio almost 3 to 1. Our increased growth in casualty business has contributed significantly to our increase in the amount and duration of loss reserves, which in turn has led to the corresponding increase in invested assets. The combination of strong cash flow coupled with a short duration investment portfolio places us in a good position to benefit from rising interest rates. This was demonstrated by an over 16 percent growth in investment income last year. More than double the rate of gain a year ago.

As you know, one the strengths of our organization is our global reach and diversification. Building the presence in areas of the world that will themselves grow in prosperity in the future is part of our long-term strategy. We announced the other day we will have our life license in Vietnam before mid-year. We have been requested by the Vietnamese government to proceed immediately towards the establishment of life operations. We also expect to receive P&C licenses before the end the first quarter in Poland and Russia, and expect to receive a life license for a new life subsidiary owned by our P&C joint venture company in China, Huatai. ACE will initially own 22 percent of this life subsidiary, but we have an agreement in place with Huatai to increase that percentage to 50 percent in the near term.

We have been working on this for sometime. In fact, we received our preparatory license last June so we plan to hit the ground running the day the license has been granted. We don't expect these 4 new country operations to contribute meaningfully to earnings in the medium term. But again, we are planting the seeds for the future.

Regarding the action taken by the Connecticut Attorney General. We have investigated the complaint, and both we and our outside counsel believe it's without merit. We will be proceeding accordingly beginning with a motion to dismiss, which we expect to file in the near future.

With that, let me now turn the call over to Phil, who will get into more detail and then we'll come back and take your questions.

Thank you, Evan, and good morning. Today, I'll highlight major items related to our balance sheet and our earnings, and I will also update you on a couple of other matters. First, our balance sheet. We ended the year with shareholders equity of 9.8 billion. This is an increase of over 11 percent for the year. We're very pleased with this growth rate in light of the severity of the third quarter CATs and the A&E charge we took in the fourth quarter.

Our tangible equity increased 18 percent to 7.2 billion for the year and has grown a full 97 percent since the beginning of 2003. Our assets totalled 56 billion as of December 31, and for the year our invested assets grew 22 percent to 28.5 billion. For the quarter, our investment portfolio increased 1.1 billion, due principally to our strong operating cash flow, a foreign currency movement of 360 million, and an increase in the market value of our portfolio.

There were no major changes in our credit quality, which remained a AA, and we've kept our duration short at 3.4 years. Our average market yield increased to 4.1 percent during the quarter. In addition to the growth and assets and shareholders equity, we have continued the reduction in our financial and reinsurance leverage. Our debt-to-total capital ratio decreased to 16.3 percent from 16.8 percent, and our debt plus hybrids to tangible equity decreased to 33.3 percent from 35.1 percent at September 30th. We remain very comfortable with our financial leverage.

The ratio of our reinsurance for recoverables to shareholders equity has decreased for the year to 155 percent , in spite of the increases in the third quarter for the CAT activity and the fourth quarter increased relating to the A&E charge of approximately 600 million, a foreign exchange translation adjustment of approximately 170 million, and certain large fronted claims for which we have collateral of approximately 160 million.

With respect to our earnings, we had net income for the quarter of 282 million, bringing net income for the year to 1.1 billion. Income before net realized gains totalled 166 million or $0.54 per share for the quarter and 988 million for $3.30 per share for the year. Our earnings for the quarter included growth in P&C earned premiums of 19 percent compared to the fourth quarter of 2003. Earned premiums for the year grew 25 percent to 10.4 billion. Foreign exchange adjustments contributed about 2 points of growth for the quarter and 4 points for the full year. Our combined ratio for the quarter was 104 percent. We incurred after-tax charges of 302 million due to the A&E losses, and 31 million due to catastrophes.

Excluding these losses, the combined ratio would have been 86.6 percent, compared to 90.7 percent in 2003. We had 101 million of adverse prior-period development in the quarter, primarily relating to longer tail lines, which we discontinued shortly after the Signa acquisition, including workers' comp and excess casualty in our North American segment. These losses related to the 1997 to 2000 years. The quarter also included a benefit of 130 million from the reduction of reserves relating to 2004 short tail lines for which the exposure periods have expired.

Our operating cash flow for the quarter was 875 million, down from 1.6 billion in the fourth quarter of 2003. The decrease is primarily attributable to CAT payment activity in the fourth quarter of 2004, and for the fourth quarter of 2003, we had higher premiums relating to LPTs and proceeds from our reinsurance computation.

I would like to briefly discuss 2 other topics. The first is our rating agency status, and the second is where we are with respect to Sarbanes Oxley. Rating agency actions following our A&E reserve charge were mixed regarding our ratings and outlook. AM Best and Fitch, both affirm their current financial strength ratings with a stable outlook. Moody's changed the outlook on our debt ratings from stable to negative, and put our U.S. pool companies under review. S&P placed all of our ratings on credit watch with negative implications.

We have thoroughly briefed the rating agencies on the circumstances surrounding the asbestos charge and the planned sale of certain reinsurance run-off units. We continue to have discussions with them so that they will fully understand our strategy of dealing with Brandywine and our asbestos exposures, both now and in the future.

With respect to Sarbanes Oxley, the process is proceeding according to our plan. We are completing our testing of our internal controls, while our auditors are performing theirs. This process will run through the completion of our Form 10-K, because of the controls over the preparation of our financial statements are important. We will be making our report with respect to our internal controls in our Form 10-K.

Our balance sheet remains strong and we're well positioned for continued profitability and growth in book value. With that, I'll turn the call back to Helen.

At this point, we would like to take your questions.

Thank you. (Operator Instructions). Our first question is coming from Mark Lane of William Blair.

Good morning. A few questions.

Good morning.

First of all, just real quick. On net underwriting retentions, given no changes in major business mix for 2005, how many points higher do you see retentions going in '05 versus '04? Net as a percentage of gross?

Mark, I don't have a fixed number in my head, but it's going to be roughly similar, roughly the same.

Similar retentions, okay. On the regulatory investigations, can you give us an update of where you are with your internal review and if you found anything new relative to your update that you had given at least in your initial findings last quarter?

I -- as you may recall, we put out a release about 3 weeks ago updating all of you and our employees on where the investigation stands. Our internal investigation will conclude by the end of this month. It's an internal investigation, as you know, run by an outside law firm, and it's managed and run by the Board of Directors, our audit committee. So it's very arms length, and it's a truly independent review. To date, nothing, and boy we're sure glad to report it. Nothing has been discovered that smells anything like what we had found in that access unit so far. It's all confined to that. I expect that's how it's going to conclude.

Okay. And then lastly, on contingent commission arrangements, can you give us some insight as to the discussions you are having with carriers, particularly the large brokers about where that's going to fall out? Or in your mind, theoretically, where would you like the compensation agreements to come out relative to either the economics of the contingent commission arrangements or prior to that? Obviously, a lot of discussion on this point.

Mark, as you know, we announced last fall that we were discontinuing contingent PSAs with brokers. So we don't have any discussions going on with brokers in the United States on PSAs or on contingents --.

Not necessarily on continued commissions, but the whole -- I mean, obviously the large brokers have lost economics by giving up contingent commissions and there is a concerted effort to try to push to make up some the economies to go back to the previous periods to try to capture some of those lost economics.

Mark, we don't have -- I will say it like this, we don't have any discussions going on with brokers that I know of at this time to push front-end commissions up to replace contingent or PSAs, number 1. Number 2, we're on record, and I will go on record again to say that the industry needs to look at itself and drive its own reform process. And we are very clearly on the record, and I am personally, that we believe brokers should be compensated by those who they work for, their clients.

Okay. Thank you.

Thank you.

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

Good morning. A few things if I could. First of all, I want to clarify the reserve movements. As I understand it, the strengthening was prior year and the release was current year; is that correct?

That is correct.

Okay. And the release was for shorter tailed lines, both overseas and domestic and the strengthening was mainly for those discontinued lines domestic?

Yes, sir.

Okay. Second, the magnitude of them -- the magnitude of them, they were fairly close to each other. Like 101 for the prior, and about 130 for current year. Okay. All right. And the second question then is, conditions, you mentioned, Evan, were fairly stable with fourth quarter competitively, yet you also seem to imply that bound ratios were down and North American premium growth did indeed slow markedly from any period last year. So I'm trying to reconcile those a little bit. I was wondering if you could give us some more color.

Well, one thing that I'm sure you will keep in mind is, that you know very well, is that -- and I'll give you if you want a little more sense about rate levels, but first of all, the rate levels, as they go down, they find their way into your renewal business. So you have to write a little more business on exposure basis, you are taking on a little more exposure, writing more business just to get back where you were. And then, obviously, you have greater selection. Your selection is going to be tighter because terms and rates drop.

To give you an idea, and let's see, let's take the U.S. Property rates in the U.S. are off around 10 to 20 percent. Casualty rates, particularly excess casualty is around 0 to 5 percent. So it's really kind of stabilized there. D&O is off around 0 to 5. Marine was off 5. So property in particular. And that's on the U.S. retail. On the U.S. wholesale, very, very similar. Property was off just a little bit less. Overseas, property rates off roughly the same, around 15 to 20 percent. Casualty was off around 10 percent. Financial lines, so D&O was off more like 15 percent. Submission activities overall for the organization and by division continued to go up. They are up substantially. And close ratios continue to decline, though they are relatively stable now. It varies by line. But it bounces around between roughly 15 percent and 20 percent.

Okay. And finally, Evan, I was wondering if you or Phil could give us some color on paids which seemed to jump in the fourth quarter. Was that a function of the cash payments maybe?

Yes.

Okay. Thanks a lot.

He was a man of many words.

Do I get 10 minutes for rebuttal on that one? Thanks, Phil.

Thank you, Ron.

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

Hi, first I want to make an observance. The comment you made, something about planting the seeds for future growth, didn't we hear that from a headquartered company on Pine Street once. Anyway, just thought that was interesting. A few quick questions. Number 1, could you give us the impact --

I'll change my phraseology.

Hey, it's a good phrase, use it. Impact of -- what's the impact of the absence of paying PSAs in the quarter? That's 1 question. Number 2, can you give us some idea on the use of finite reinsurance, how extensive is it in your operations? And lastly, just a little update, Evan, on the offloading of asbestos exposures, I know you had nothing to say here right now, but maybe you can give us a little idea on how attractive or how many -- is this a number of parties out there who are interested in that type of business as we have seen when you made your prior announcement.

Okay. The impact of PSAs, there was some benefit from the discontinuation of PSAs in the quarter, but those were more than offset by Sarbanes' costs and legal expenses. So, frankly, and again, it was more than offset by that. So you don't really see a benefit of PSAs in the quarter.

The finite, we have a couple of legacy contracts on finite that go way back. Mostly before ACE purchased Signa operations. We have a rule in the organization, we are not buyers of finite to manage our business. So we don't have finite contracts that I know of that we have purchased for our own benefit. As you know, we have structured units that among other structured products will sell finite, but we are not users ourselves of it.

Regarding the sale, Brandywine, and I'm glad you raised it. Because I think we were clear about a month ago when we talked about this, but I want to really make sure that I restate it again. First of all, the 3 operations that are -- that currently we have entered into a definitive agreement with Randall to sell, that's our focus. We filed the Form A. They filed the Form A yesterday with the State of Pennsylvania. So the clock officially begins running on that. That's what receives our attention. We are exploring options to reach finality, and as is intended under the order, and because we -- our obligation is fixed in finite and we want to receive -- we want to realize the benefits of that in our balance sheet as is intended. Sale is only one of the options there. So we are exploring other options. But I also made it clear that we will, as there is progress, we will update through the year of '05, but there is nothing imminent and I don't expect something to take place imminently.

Thank you very much.

Thank you, Michael. I hope that answers it.

Absolutely does.

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

Good morning, everyone.

Good morning, Jay.

2 questions for you. The first is, it looks like the allowance for uncollectible reinsurance went down in the quarter. Maybe I'm missing something. If you can explain why that occurred. Then secondly, it appeared that the tax rate for the full year was lower than you had guided us to previously. I'm wondering what the difference there was.

I'm going to have Phil answer both of your questions.

With respect to the bad-debt reserve, in the fourth quarter we did a review of our portfolio and we've had a number of writeoffs, if you will. So we have written off the gross balance against the bad-debt reserve that was established for some long outstanding items. And there was no net P&L effect to that.

And then with respect to taxes, there is really 3 things driving that. First, we had the A&E charge and that was in a taxable jurisdiction. We also had the prior-period development that we talked about that was in a taxable jurisdiction, and a substantial portion of the benefit of our short tail line reduction was in a nontaxable jurisdiction, so the net of that is driving our tax rate down.

Makes sense. Thank you.

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

Could you talk about the level of capital management flexibility that you feel like you have during the course of '05. I guess, specifically in light of the rating agency reviews?

We don't expect any significant capital actions, if you're talking about share buy backs or anything like that, we don't expect that. We would expect that the capital that we have we would deploy in our business over the course of next year.

And we have adequate capital to meet our '05 objectives. And maintain rating agency standards.

Thank you for that. I will look at the rating agency press releases, et cetera. Are there any specific year-end '05 targets that they've set out as expressed by risk-based capital ratios, et cetera?

If you look at the press releases that they've made, they said that they expect us to remain a capital adequacy ratio, this is S&P, of 150 percent.

Great. Do you know what it is presently or year-end '04?

It's in that neighborhood. We believe it's in that neighborhood at the end of '04.

Thanks.

And we also project that it would stay in that neighborhood throughout '05.

Great. The second question, could you just talk about some of the business opportunities you are pursuing in the North American reinsurance segment, I guess Tempest USA, small base, but saw premium growth. Some color on that would be helpful.

Absolutely, Bill. We wrote a substantial -- we grew substantially from dust, really, at the end of '01 through '02, '03. And what you see in '04, on a written basis, is a lot of the momentum from the '03 treaty year, flowing through into the '04 booked, if you will, net written premium. When I measure it on a treaty year basis, obviously, given the state of the market, I expect to see it slowing down and becoming more in keeping, if underwriting selection is our number 1 priority, then given the market conditions, I'd expect to see that reflected particularly on a treaty year basis. And when you look at the '04 treaty year, versus '03 for Global Re, we grew that business about 9 percent on a treaty year. So the written is getting a tremendous benefit from the '03 and '04 activities. But the underlying, which to me measures the exposure better is treaty year is in line with what we'd expect to see.

That's helpful. It makes sense. I guess just to say it another way, it sounds like some of the policies or treaties in '03 were written on a, would it be a risk attaching basis, and would that be the dynamic that leads to the written growth in '04?

That's a pretty good way of looking at it. It's risk attaching and it's loss occurring. It's a combination of both. And you have to -- it's really a class by class. There is both a proportional account and an access account.

Very helpful.

We also had in '04, and I should mention it, we also had in '04, and you recall, in the AGO transaction, when we spun that off, we transferred some business that -- reinsurance business, trade credit related from AGO into Global Re and that came into the U.S. account and that also impacted their growth rate a bit, modestly, but it impacted their growth rate.

Thank you very much.

You're welcome.

As a reminder, for any additional questions you may press star and then 1 on your touch-tone phones. Our next question is coming from Brian Meredith of Banc of America Securities.

Good morning, everybody. 2 quick questions. Phil, maybe first, the foreign loss ratio, if we X out the reserve movements in the quarter, what's the underlying accident quarter loss ratio we should expect going forward? It looked pretty low in the quarter.

You are saying for foreign general?

Yes, foreign general. If you look at your supplement, it looks like the accident quarter was very, very low.

The foreign gen --

For the Overseas General.

The loss [ph] ratio was 48.6, without the A&E charge, it was 48.1. And without CATs, well, there were no CATs, without prior-period development, it was 45.8.

Right, but is there something unusual there?

I know where you are going. A way to help you with that, Sean, how much of the current accident year, if you would, was related to -- released, was related to.

To foreign gen, right about 90 million.

Only 19 million. So still was there anything else unusual in the loss ratio?

90.

90, oh, sorry. That makes sense. Great. Thanks. And then the next question, Evan, class action tort reform looks like it will pass here maybe in the next couple of weeks. When you think about that, what are the potential implications you think on your business with respect to not only claims inflation, but pricing or underwriting. How would you tell investors to think about that?

Well, I would say that any thoughtful underwriter will wait and see and see how it plays out. Our legal environment is very difficult to predict, very complex. Every action will have unintended reactions. So we will watch it play out and find its way through the system. And unless there is imperical evidence, we will not be crediting.

Thank you.

You won't do it in the first instance, you will wait until you see evidence.

Okay. Thanks.

You're welcome.

Thank you. Our next question is coming from Steven Lebbe of Langen McAlenney.

Good morning. Am I to take your absence of updating '05 guidance to mean that you aren't changing any of it?

That's right, we're staying with the '05 guidance.

Thank you.

You're welcome.

Our next question is coming from Karen Lamark of Merrill Lynch.

Going back to the question about the absence of paying the PSAs. Could you still quantify it understanding that it was offset by Sarbanes Oxley in legal cost. Could you give us like a gross number? And since you will have 3 quarters ahead before you anniversary it going away. Can you suggest maybe a ratio or relationship we should assume in order to quantify it going forward. Thanks.

We gave, in the previous quarter a dollar amount that we had paid for PSAs globally. I believe it was either the last quarter call or the quarter before that. And it was a very modest percentage of our premiums. And I think if you go back to that and you notice that, we don't expect it to have any material effect, because they just weren't big amounts that we paid in total. On passed that, I don't have a fixed number right now on the quarter with me for -- and I don't believe Phil does for what the number was for the quarter or so. I would rather not speculate and go there.

Thank you.

You're welcome.

At this time, there appears to be no further questions. I would like to turn the floor back over to Helen Wilson for any closing remarks.

Thank you, Anthony. Thank you, everyone, for your time and attention this morning and we look forward to speaking to you again at the end of next quarter. Thank you and good day.

Thank you and thank you, callers. That concludes today's conference. You may disconnect your lines at this time and have a wonderful day.