丘博保險集團 (CB) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the ACE Limited second quarter 2005 earnings conference call. Please note that in order to ask a question or make a comment during this call, please press the star key followed by 1 on your touchtone phone at any time. I'd now like to turn the call over to Ms. Helen Wilson, Director of Investor Relations for ACE. Please go ahead.

Thank you. And welcome to the ACE Limited June 30th, 2005 second quarter 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, CAT losses, leverage, potential legislation, regulatory approval in 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 the 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 copyright of property of ACE Limited, may not be copied, taped, rebroadcast or published in whole or report without the express written consent of ACE Limited. This call is being webcast live and will be available for replay for one 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.

Now, I'd like to introduce the speaker. First we have Evan Greenberg, President and Chief Executive Officer; followed by Phil Bancroft, Chief Financial Officer. Then we'll take your questions. Also -- 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, everybody. As you can see from the numbers, the Company had an excellent second quarter. We had record earnings and strong growth in our per share book value. Shareholders equity exceeds $10 billion, a milestone. Net income for the quarter was a record 467 million, up 10 percent from the same period last year. Our quality of earnings this quarter was excellent. We had a combined ratio of about 90 percent. The expense ratio was in line with expectations, reflecting what I believe was good expense management and on the loss side our loss ratio reflects what we believe to be prudent accident year loss picks.

For the first time underwriting income and investment income were about equal, each contributing approximately 50 percent to our income. Our invested assets now exceed 29 billion on the back of continued strong cash flow. In the quarter, net loss reserves grew over $500 million, and in the past 12 months growth in net loss reserves has exceeded 3 billion. And this is almost all IBNR with case reserves remaining flat. This is a consequence of our strong growth in casualty business which has in turn contributed to our growth in invested assets. As expected, revenue growth has slowed in line with market conditions. We're maintaining discipline on our growth of 4 percent on the gross and 2 percent on the net reflects just that. Quite simply, we grew where rates and terms justified growth and we shrank in areas where they didn't.

A few words on market conditions. Generally speaking, short-tailed business is more competitive than long-tail business. Casualty rates are fairly stable although drifting down. In the excess layers of casualty, competition is much more pronounced and I might add in many cases irresponsible. Property rates continue down and they vary by geography and size of risks with declines averaging 10 to 20 percent. Casualty rates were off single digit depending on class and territory. The professional lines rates were off about 0 to 10 percent depending on size of account.

These rate movements upon the portfolio we renewed. Much of our focus like many other companies was on preservation of renewals. New business was harder to come by and business that went to market was often lost to competition for much greater price reductions. Sometimes as much as 30, 40 or even 50 percent. The market is chaotic and varies by territory. There are a number of incumbent companies trying to hold what they have and maintain discipline in each market. There are also a number of competitors trying to grow in what we believe is an irresponsible fashion. Who they are varies by territory and line of business and whether it's large or middle market customers.

Speaking of markets, whether it is insurance, wholesale or retail or reinsurance, London and the U.K. market is the most competitive major market in the world. On the other hand, the continent of Europe is probably the most stable and the U.S. is somewhere in between. We're seeing more pressure on terms and conditions, especially in short-tail lines such as property and onshore energy. Any changes are incremental and as of yet there has not been a wholesale erosion of terms and conditions.

In total, we wrote far less new business and we did a good job holding renewals where the rates and terms made sense. With that said we still experienced growth in two general areas. The first was where our global advantage and service capability made a difference. Examples include insuring companies with international exposure or our risk management business and our ESIS claims service business. The second area where we grew was in those classes of business where our presence is still relatively small, rates and terms were good and we're growing off a small base. Examples here include small and medium sized workers comp, medical malpractice and some classes of E&O. In both cases, both classes, examples I gave, we're growing exposures in those areas where we like the pricing.

Our A&H business continues to grow at double digit rates, over 12 percent year-to-date. And I expect even stronger growth in the second half of this year. Concerning CAT losses, specifically hurricanes Dennis and Emily, we do not yet have exact numbers but based on reports so far we estimate net losses of around 30 to 35 million in total for both insurance and reinsurance combined. We do not expect these storms to impact our guidance for the remainder of '05.

Before I turn the call over to Phil, I'd like to make some remarks on a few other subjects. First, the pending sale of three of our Brandywine runoff reinsurance entities. As you know a hearing was held on July 12th by the Pennsylvania Department of Insurance. The hearing went quite well and was in line with our expectations. We continue to believe that this transaction has been crafted in a responsible and thoughtful manner, that it is in the best interests of all parties. We also believe the department will reach that same conclusion. I expect a conclusion somewhere between the end of the third and middle of the fourth quarters. The timing is in the hands of the department and they are conducting themselves in a thorough and professional manner.

The Terrorism Risk Insurance Act of 2002, or TRIA, there's been a lot of activity on TRIA of late including the Treasury Department's recent report. As you all know, TRIA is scheduled to expire at the end of this year and we have joined members of the industry as well as the policy holder community in calling attention to this critical issue which we believe is one of economic and national security importance. TRIA is a good public private sector solution protecting our industry from the risk of ruin. There are those in leadership positions in Congress who understand this. While one cannot predict I'm cautiously optimistic that TRIA will be renewed. It only makes sense.

Concerning asbestos legislation, there are a number of companies and we are one of them, that are supportive of a trust fund solution and are actively engaged in the legislative process. There are other companies in opposition but they do not speak for the entire industry. We continue to believe a trust fund is the right solution although we believe this legislation as currently crafted is unacceptable and still needs work. We continue to have confidence in the legislative process and the opportunity for favorable legislation. Let me now turn the call over to Phil and then we'll come back and take your question.

Thank you, Evan, and good morning. Today, I'll highlight major items related to our balance sheet and our earnings and I'll also update our guidance. I would like to note that all prior years, quarters and segments summarized in our financial supplement have been updated to reflect the impact of our restatement announced last week. This quarter, income excluding realized gains and losses was 443 million, a 13 percent growth over the second quarter of last year. This represented a return on average shareholders' equity of 17.9 percent and a return on our average tangible equity of 24.8 percent. Our income included a record 305 million of investment income. Strong cash flow of 1.1 billion had -- has allowed us to continue to increase the earnings power of our cash and invested assets which now exceed 29 billion.

Our P&C combined ratio was 90.4 percent, this included 27 million of prior period development. Excluding these losses our combined ratio would have been 89.4 percent. The significant items of adverse development in the North American segment arose from actuarial studies completed on older books of general liability and workers compensation business written prior to 2002. The favorable development in the overseas general segment resulted from better than anticipated experience on our short-tail lines of business.

Our book value grew by 530 million to 10.5 billion and our tangible book value is 7.8 billion. This growth included 170 million of after-tax realized in unrealized investment gains. Our investment portfolio remains conservative with a double A average credit quality and a duration of three years. We estimate that a 50 basis point rise in interest rates would reduce our book value by less than one quarter's investment income.

We have continued the reduction in our reinsurance and financial leverage. Our reinsurance leverage, that is our recoverables over shareholders equity, dropped to 138 percent down from 151 percent at year end and down from 174 percent at the beginning of 2003. Through our management of recoverables, our current retention ratios and our growth in capital we expect to continue to reduce this leverage. Our financial leverage has also decreased. As of June 30th our debt to total capitalization ratio was 15.5 percent and our debt plus trust preferreds to tangible equity was 31 percent. These ratios continue to be below the average of our peer group and we remain very comfortable with our financial leverage.

With respect to our guidance there are three areas I'd like to comment on. First, we believe that our earned premium growth for the year will be in the range of 6 to 8 percent. We had previously estimated growth of between 9 and 11 percent. Second, we now expect investment income to range between 1.18 billion and 1.2 billion. Our previous estimate was 1.14 to 1.16 billion. Third, we are lowering our estimate of the effective tax rate to a range of between 21 and 23 percent, down from 23 to 25 percent to reflect tax benefits received under the American Jobs Creation Act for dividends paid by our foreign operations to the U.S. During the second quarter, dividends produced a tax benefit of 16 million or $0.06 a share. It's important to note that this is a one year benefit and will not be available beyond 2005. All other guidance remains unchanged.

Looking ahead, we expect to release our global loss triangles as of December 31st, 2004 by the end of the third quarter of 2005. Our balance sheet continues to grow as well as strengthen as a result of our reduced leverage. We are well positioned for continued profitability and growth in book value. With that, I'd like to turn the call back over to Helen.

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

Thank you. We will now conduct the question answer portion of the conference. (OPERATOR INSTRUCTIONS) Our first question is coming from Al Copersino of Columbia Management. Please go ahead.

Thanks very much. Evan, you -- you gave some detail on this already in your comments but maybe you have a bit more specificity if possible on the rate of your net written premium versus what are pretty tough pricing environments right now. You all have a pretty good product spread, you have a -- a good geographic spread, maybe you can tell us specifically where you're finding some good opportunities?

Yeah, and I think I did go through this but I'll add a little more color to it. I know that you have some questions regarding -- I assume you have some questions regarding Overseas Gen versus the U.S. and let me hit that. Our wholesale, look, we're maintaining discipline and I don't think anybody should be surprised at the growth rates because we've been very clear all along that we will do what it takes to maintain underwriting discipline and we don't care, we will sacrifice top line growth if that's what it takes, which is okay, that's fine. The opposite would be irresponsible of us. If you take Overseas Gen, in the U.K. business that is the softest market as I said in -- in the world and we have two businesses there, retail and we have wholesale. Our ACE Global Markets which is our international E&S wholesale business that business actually shrank about 9 percent -- 10 percent in the quarter. And that makes sense to us. It was property related predominantly and U.K. professional lines where the market is -- has gone quite soft very quickly.

Our retail business globally was down so ACE International was down about 2 or 3 percent but there was a good growth in the A&H and there was some shrinkage in the property casualty, particularly the U.K. The continent held its own. Asia it was a light quarter for Asia. Their big quarter is more third quarter. And held its own and Latin America did okay.

When I look at the U.S., we really vary by line of business. Our risk management business continued to do quite well, though growth slowed significantly. In casualty risk, our business kind of varied by line whether it was environmental or excess casualty and I could add some more color to that. Worker's Comp. we'e not a big player and we began to increase our writings about two years ago on small account and medium-sized account business and we saw, and continued to see opportunity, to grow that business though it is coming under more competitive pressure. But again, we're relatively small.

And our medical risk business which is predominantly facilities and life science related was very good. Our international unexposed business from both large account and small medium sized account, which we call Advantage, did quite well and particularly that small medium sized account business we think we have an advantage and we're continuing to focus on the growth of that. So kind of a mixed bag.

Well, thanks very much for the detail. I appreciate it.

Welcome.

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

Morning, Evan.

Hi, Ron.

A couple of things. Evan, it seems to me in terms of your comments on the level of competitive behavior on -- in the market that -- I get the sense it so -- you've sort of taken it up a notch from some of your previous remarks and I was wondering is that a correct inference and just how much has changed in your view vis-a-vis the last time we spoke in first quarter directionally in terms of the competitive nature of the markets? And second I was wondering also I noticed with interest that you mentioned specifically that you think you're at prudent loss ratio picks and that's something I don't recall you addressing directly in prepared remarks before and I was wondering if that signals any change in approach to those picks, some greater conservativism that you're applying or what have you?

Let me take them one at a time. Yes, I would say I am taking it up a notch. The competitive environment is more compe -- is becoming more competitive. And that just is a reality. The U.K. surprised me a little bit how fast it's become competitive. The U.S., we're seeing, the incumbents are fighting to maintain a floor but you see varying, by line again, competition that wants to grow willing to do more than they were doing before to write the business. So I do see a change of tone a bit, the market is more competitive.

On prudent loss picks, no, I don't think -- there's no change. I'm not signalling any change, Ron. We have, as you know, made a dramatic change in our mix of business from short-tail to casualty related lines and we're hardly declaring any victory early on any of that business and I just thought it was important to make the point that we err conservatively around here when we think about that.

Okay. Two quick ones for Phil if I could. Phil, there was a big jump in the property casualty investment income from first quarter to second and I was wondering if there were any items of note in there that might have driven that? It didn't seem all accountable -- or attributable to cash flow and there wasn't any real change in yield on the portfolio. And second, I just want to make sure the $0.06 benefit in the quarter you mentioned from the dividend benefit on the tax line, that's separate and apart from this ongoing job creation benefit you expect?

No, that is the benefit.

That is the benefit.

$0.06 is the benefit that happened in this quarter.

Okay.

And that combined with the benefit that we had in the first quarter is leading us to take our guidance down for the year.

Okay. And the second quarter benefit was a dividends relate.

Well, it's all dividends. It's repatriation of dividends from international to our domestic operations.

Okay. And that was $0.06 on the quarter?

Yes.

All right. And on the investment income?

Investment income is just really driven by cash flow and a slight improvement in the yield on investments that we acquired during the period. There were some dividends and partnership income that came in but that was only about 3 million of the change. So it really is attributable to both cash flow and an increase in the yield.

Okay. Thanks very much.

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

Good morning. Just a couple of quick ones.

Morning, Mark.

First of all, on the pricing, so when you're specifying a rate levels on renewals, if business is going away from you it's primarily on price are we to assume that the business that you're not renewing is being renewed elsewhere at rates even lower than what you described?

Yes, in the -- in the main that's true. It's -- it's both rate and terms and conditions.

Okay. So that would characterize the market. I mean if you were looking at average rate levels it would maybe on average be a little bit even lower than what you broadly detailed, is that fair to say?

That is fair to say.

Yes, okay. And then the second question would be just on the sequential movement first quarter to second quarter both on the loss ratio and on acquisition -- acquisition expense ratio, if you can give any clarity on why did the acquisition --

Yes, I -- I don't -- there's a certain seasonality and mix to our business so I'm not as driven paying attention on the acquisition line and loss ratio in particular also to a quarter to quarter. I look more year on year. And if I was going to add a little color around that for you, the acquisition in -- in Overseas Gen went up and that's mostly driven by -- over half of it is driven by a change of mix to A&H which is now 35 percent of the business and also within A&H we're writing more direct marketing business, that's direct response business, that carries a higher acquisition cost but lower and very stable loss ratio. So that drove that. And then we had written more fronted business in the U.K. last year that depressed the acquisition cost and some of that has gone away. So, that's most of what really effected AOG.

The U.S. is very slight change and that's due to our crop hail business where we do pay a contingent commission and -- on that business. And that came in the second quarter of this year. And it varies, depends on on how -- it's based on profitability. Depends on how well the business does and last year did very, very well in the crop hail.

Okay. That's it. Thank you.

You're welcome.

Thank you. Your next question is coming from Ted Shasta of Wellington Management Company. Please go ahead.

Good morning, Evan. How are you?

All right, Ted, how are you?

Good. I have three questions. Have you notices any change in broker behavior given what's happened to that industry? The second question is how are the reinsurers behaving? And then finally I wonder if you could flush out for us a little more on your thoughts on the A&H business which as you say is growing nicely and your expectations are even higher going forward? Thank you.

Well, let me take them one at a time. Broker behavior. Seeing more beauty contests quote unquote where more business is being shopped by clients where they are shopping brokers. Putting it out for bid. So there's more jump ball and more business is trading hands between brokers. To some degree that also causes brokers and we are seeing it in broker behavior to some degree where and by the way, it's not all one way, it's in both directions. On one hand brokers are doing all they can to maintain stability and work with incumbent underwriters to retain business but you got to do it at recognizing market conditions and being a bit more competitive. On the other hand, you see the behavior the opposite and that is where brokers to cover themselves are putting everything out to bid. So I see a little more nervousness among the broker community. You see people moving around and you see accounts that there is opportunity there also, accounts that hadn't seen the light of day in quite some time are coming to market and that does give us some opportunity.

On the reinsurance side, in the main I think the reinsurance market has maintained more stability and been more disciplined than the -- than the primary side has been. Particularly in casualty related business. Though, it varies by class. That's in particular true for large national accounts who go to market to -- for reinsurance. Our sense -- and we write a lot of reinsurance as you know -- in the smaller account arena it is becoming more competitive. But do I see more -- more resilience in terms of maintaining discipline among the reinsurance community overall.

On A&H, well, our focus in particular is Asia and Latin America though we're growing nicely in Europe. It is more direct response focused with third parties as endorsers of our business such as credit cards and banks. Though we are as well doing broad market work using telemarketing and, for instance, over the television in Korea. So we're broadening out more into -- into the direct response arena through both broad market and sponsored and that's where I expect to see continued growth. We have an organization that focuses exclusively on A&H. It isn't an also-ran another line for personal lines guys or someone else in our organization. The people who do A&H for us do nothing but A&H. Does that help you, Ted?

Very helpful. Thank you very much.

You're welcome.

Thank you. The next question is coming from Matt Rothschild of Alliance Capital. Please go ahead.

Good morning.

Good morning, Matt.

Can you discuss the net to gross which was down 2 percent year-over-year? I had thought you guys were looking to keep more business net. And also in the first quarter you had cited $30 million of additional legal expenses accrued for your internal investigations. Can you put a number on that of what you accrued for additional legal investigations in the second quarter, what you would expect to kind of drop off now that the majority of your internal investigations are complete?

4 million is the number.

4?

4 --

Okay.

In the second quarter. And net to gross, yes, it's -- you saw it in the U.S. and it's two things. Number one, in the USA, we had a number of lines that are in runoff that have been in runoff since basically the acquisition of -- of CIGNA and the CIGNA P&C. And they carried a high -- a much higher net to gross. There was a real decrease in that runoff premium coming in which is, from our perspective, is good news. We like that. So if you took the ongoing, you took that out and you looked at the ongoing business in ACE USA, the net to gross was flat year on year.

Number two, in the Westchester, sounds like crop hail is our answer for the day, there is more of a session of the crop business to the government. The government is a partner in the crop hail business. They're a mandatory partner, by the way, you have no choice, and we had to increase our session by -- they amended their rules and you have to cede 5 percent more to the government entity and so we did just that and that reduced the net to gross. That's predominantly it.

Okay. Thanks.

Matt? Yes. One other thing I'd add to the -- in terms of the legal expense. When we accrue these legal expenses we're accruing to ultimate. So we're not expecting a run rate. We trued it up this quarter based on what we saw. But that again is -- is our estimate of the ultimate legal expense.

Thank you. Your next question is coming from Brian Meredith of Banc of America. Please go ahead.

Yes, good morning. Just one question that -- that hasn't been asked. Relating to the Pennsylvania Department of Insurance review that's going on, or at least approval that we're going on, the question is when you did your asbestos review last year one of the comments you made was that where your loss pick was for your asbestos reserves was below where the actual I guess best estimate was. And the question is -- is if I look at the separate subsidiaries that you're trying to get approval for, was that the same case with those subsidiaries or was it different, were they in better shape relative to the actual reserve estimate?

The answer is, yes.

Okay.

Their reserves are at the best estimate of both ACE and the outside actuaries who studied this.

Terrific. That's all I needed. Thank you.

Thank you. Your next question is coming from Paul Newsome of A.G. Edwards. Please go ahead.

Good morning, Paul.

Thank you. Just a quick question on TRIA and I'm wondering if -- what your opinion is on whether or not there will be any issue here at all if TRIA doesn't pass and if you could remind us how you are approaching it? I believe, but I can't recall for certainty that you are putting pop-up exclusions in your policies and I think some of your competitors are not. I want to get your thoughts on whether or not, if TRIA doesn't pass we're going to have some capacity crisis.

We have been putting pop-up exclusions. We don't just do it wholesale but we -- we do it where it makes sense. We measure our aggregations carefully between property and work comp in particular. You can't put any pop-up exclusions on workers comp as you -- as you know. So we do monitor our aggregations in urban centers and we don't have an unlimited appetite. If TRIA were to non-renew we would have to curtail our exposures in certain jurisdictions. We also do purchase -- and -- and that would be particularly in the comp area. We do purchase reinsurance now to protect our net exposure because, as you know, within TRIA -- before TRIA attaches -- the government attaches, you have a very large net retention potentially and so we monitor that. We know what our appetite is and we've articulated that. We buy excess to cover over that.

Do -- do you think that the -- the market will just sort of assume -- begin to assume the -- the terrorist risk if TRIA isn't passed or do you think that most people will follow your example and pull back?

You know, I think most people will follow our example and fall back because it's just not worth it. What are you getting paid to take unlimited exposure and expose your company to risk of ruin that way. That's why it's -- it's just folly to think that the private sector will absorb this. The reinsurance market capacity for TRIA related risk is around 6 to $8 billion. The industry holds a retention right now of roughly 32 to $35 billion. Equivalent to another World Trade Center. We can't look at the capital base of the industry. We can't take a $100 billion loss. Impossible. So you will see companies cut back. It has to happen.

Great. Thank you.

If not, if they don't, I would short that stock. [ LAUGHTER ]

Thank you very much.

Thank you. Your next question is coming from Dan Johnson of Citadel. Please go ahead.

Good morning, Dan.

Thank you very much. Good morning. Two questions if you would, please. In North America the reserve additions that Phil added some color on, wondering if you can go one step further. I'd suspect that that reserve addition is a mix of both adds and subtracts. Would it be fair to assume there is a pretty decent property positive developments from the North American business?

In North American total there have been offsets between property and the other lines that I mentioned and as I said, the short-tail lines in AOG are seeing better experience and so we thought it was the right time to take an action.

And -- and is that new this quarter or in the other quarters is -- has property been a net benefit?

It's varied by quarter as we study it. But -- but you've seen it in past quarters as well.

Great. And then my only other question related to -- in the U.S. broker commission trends in terms of what you're seeing from the distribution community and -- and their effort to change around commission trends and -- and what seems to make sense to you to do on that issue broadly speaking? Thank you.

Our commissions -- commission rate has not been under any real pressure in the U.S. Brian Dowd, are you on?

Yes.

Would you like to handle that question?

Yes, for the most part --

Brian runs North Amer -- runs the U.S. for us.

Right.

For the most part, commissions have been fairly stable if you take out the -- the notion of contingencies. There's been a lot written that -- that underlying commissions will rise to offset that but we haven't seen it yet because of the tremendous amount of broker competition. So our commission rates on both retail and wholesale are relatively stable in all lines of business.

And that's stable excluding the contingent issue?

Yes. contingent comes out. So, if you take that out it's -- it's mostly flat year-over-year.

Great. Thank you very much.

I might add, it's up to the client in our minds if they want to pay more commission.

Thank you. Once again, to ask a question please press star then 1 on your touchtone telephone at this time. Your next question is coming from Nick Pirsos of Sandler O'Neill. Please go ahead.

Morning, Nick.

First question was stemming from last weeks accounting changes what earnings impact if any was there on the second quarter results and as an extension with some of the guidance changes on premiums investment income would there be -- was there any impact from that as well? And then the second question relating to asbestos, Evan, I think you said in your comments you're -- you're on board with the trust fund concept but don't like the current form. What modifications would you like to see in kind of the current form?

Let me take that second question first and then Phil is going to take your first question.

Great, thanks.

There are, in particular ,a few issues in the startup that -- that we do have a problem with. I mean, number one, this legislation is probably as we understand it to be I'm not a historian of these things, but as we understand it to be probably the most complex piece of legislation to come before Congress. And what we're focused on and concerned about is the practicality in startup and that there be a practical, well thought out implementation so that this not be overly complex and slow and can get up and running quickly. Number two, we're concerned with this, and I won't go into the detail of it now, but it's the whole subject of leakage during startup. And that is what cases can stay in the tort system versus during the startup phase and what comes in to that gets swept into the trust fund and we're concerned with -- there are two classes of leakage in particular and we're concerned with shutting that down. The worst of both worlds, right you'd have a trust fund and you'd still have a lot of cases in court and the trial bar tries to game and it -- before this legislation passes and keep more cases out that would run through the court system.

And finally, any cases that do stay in the court system, legitimately, there out to be credit and that ought to be counted towards our total contribution in the fund. So we're concerned about that. And finally, I'm concerned about what they call sunsetting. When this thing at the end of the day if for any reason -- which I think is very remote -- it ran out of money and came back into the tort system, there are certain classes of claims, like what we call direct action claims, that should not be able to be brought against insurers or anybody else at that point in time.

So it's a few things. There is this question of allocation and that question of allocation is among insurers. And that's an insurance industry question. Congress doesn't care how we carve up the 46 billion. That's up to insurers to decide. So that's something we shouldn't gross about, we should just get together as an industry and agree on somebody reasonable and they will put that in the legislation.

Great, thanks.

Phil will answer your other question.

With respect to the restatement, obviously there's no impact of the restatement in the -- in the second quarter other than the income that we're picking up on contracts that were recharacterized as deposits. So in the second quarter we have approximately $3 million of additional income that was, as I said, investment income recorded on the deposits on the remaining contract. You will recall that there were two contracts that remained in force.

Yes.

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

Thank you. My questions have already been answered.

Thank you.

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

Yes, Phil, you mentioned that the development you saw in the quarter was the result of the completion of some studies on older accident years on certain casualty business. Are there any other such studies currently underway?

We do studies every quarter. We work through the entire book through the course of the year so we have studies every quarter and you'll see that activity being reported as we -- as we make judgments about strengthenings or -- or positive experience we record them in the quarter of the study.

Evan, are you surprised, at this stage of the game, that you're still experiencing adverse development however modest?

No. Not -- not particularly, Ron. You understand the casualty business and -- and you know for those soft years, those competitive years, there's a tail that takes a long time for some of that to emerge. So, this level of if, it doesn't surprise me. I don't like it, but it doesn't surprise me.

Okay.

But these weren't special studies. They were part of routine.

Okay. Thanks.

Thank you. Your last question is coming from Robert Roell of American Express. Please go ahead.

Hi, good morning. I just have one question with respect to paid losses. I notice that paid losses -- the growth in paid losses actually slowed down again after accelerating the last couple of quarters and the paid to incurred ratio also came down again. Could you offer any explanation as to -- as to what the trend in paids might be going forward and if there's anything in particular that's slowing the development of the reporting of claims?

Well, I'm not going to comment on the future. I don't see anything unusual. What you do have to keep in mind is we had quite a few CAT losses last year and you had all the paids on those CAT losses that kind of spiked the statistics there for a little bit and then it slows down. And then you have the shift, remember, of short-tail to long-tail that's taking place and earning its way through and that will have an effect on paid loss patterns. So, on one hand you look at in if aggregate and it tells you something but it tells you a lot more when you look at it by line of business. I don't see anything unusual.

How -- how do you look at it as you -- as you try to forecast your cash flow?

How do I look at it in terms of --

What is your expectation for where it might be 12 months out?

Well, it's going to vary by line of business but I'd rather not go into a specific statistic right now and hypothesize some point about exactly where it'd be. You -- you want to add something?

Right, I was just going to say when we do the analysis we build it up from the ground up by line of business using our actuaries to help us estimate the timing of the cash flows. So, there's really no way -- it's very difficult to look at that in the aggregate.

Okay. And then, actually, I lied. I have two questions. And then in terms of investing the cash flow, is there -- is there a plan to change the duration of the -- of the investments?

Not at this time.

Okay.

I wouldn't see any significant change in our investment philosophy at this point.

Okay. Thanks very much.

Thank you. At this time I would like to turn the floor back over to Helen Wilson for any closing remarks.

Thank you. If there are no further questions we'll end this call. We thank you for your time and attention this morning and look forward to speaking with you again at the end of next quarter. Thank you and good day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time. Have a wonderful day.