丘博保險集團 (CB) 2005 Q3 法說會逐字稿

Welcome to the ACE Limited third quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would 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, September 30, 2005, third 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, hurricane, and other cat losses, reinsurance, leverage, the effect of the share offering, regulatory approval, 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 effect the forward-looking statements.

I'd also like to remind you that this conference call and it's content and any taped, broadcast, or publication by ACE Limited are the sole copyrighted property of ACE Limited, 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 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 development. Now, I'd like to introduce our speakers. First, we have Evan Greenberg, President and Chief Executive Officer; followed by Phil Bancroft, Chief Financial Officer. Then we'll take your questions. Also with us, to assist with your questions are several members of our management team. Now, it's my pleasure to turn the call over to Evan.

Thank you, Helen, and good morning everybody. It was a difficult quarter for the insurance industry to say the least and ACE was no exception and our results reflect this fact. The headlines were obviously the series of large, natural catastrophes, particularly Hurricanes Katrina and RIta and as a reminder we also had typhoons in Asia, floods in Europe, and an unprecedented series of Atlantic storms striking the Continental United States. The third quarter hurricanes alone will likely cost the industry in the range of 45 to 60 billion of capital. This represents about 15% of total U.S. industry capital. For ACE, our loss estimates represent about 7% of our June 30, equity, which is within our tolerance level for the size of events experienced this quarter. Our loss estimates were calculated conservatively and we believe methodically.

A substantial portion of our gross loss for Katrina and Rita, which was approximately $1.3 billion was covered by reinsurance. I believe we've managed our counter-party exposures prudently. Our reinsurers are high quality and are well diversified with no concentration of risk. The underlying health of the Company is excellent. As you can see, the earnings supplement we have provided you, if you include a normal or average level of cats for the quarter our earnings were very strong. Phil will provide more color around that in his commentary. Revenue growth in the quarter, excluding the cats, was essentially flat, up about 1.5%. The P&C underwriting environment in the quarter continued a general trend of softening worldwide. Pricing declined, particularly in short-tail classes, and in casualty related lines, pricing was down as well, though more modestly, but this varied by class and territory.

As you know, earlier this month we raised 1.5 billion in new equity capital. The offering of common shares was well received by investors and the net proceeds will be used to take advantage of what we believe will be future growth opportunities in both the insurance and reinsurance markets. This was a strategic move to take advantage of what will be an opportunity to take on risk for an appropriate risk adjusted return. We believe this quarter's cat losses on top of the last year's hurricanes will be a market changing event, and we explained this to investors during our capital raising. Why do we believe this? First, the reduction of hard capital. Again, 45 to 65 billion or more in the quarter as a result of the hurricanes, and add to that 5 to 10 billion anyway for Wilma, potentially you've got 70 to 80 billion in total industry losses.

The second factor, an increase in the perception of risk on the part of buyers and sellers of insurance and reinsurance and the rating agencies. Katrina related losses and the frequency of large storms have exceeded most companies' and rating agencies risk models. Businesses of all kinds have a heightened awareness of risk and will seek to limit their exposure. Katrina was not a one in a 100 or 250 year event, but rather a sobering indication that the frequency and severity of major catastrophes are on the increase. Does anyone really believe Katrina was the big one? And that we won't see another one for 100 to 250 years. What about wind storms and floods in Europe? Or earthquakes? Pakistan reminds of us that peril. What about last years tsunami and this years typhoons in Asia? What about the annual aggregate of events. We had four major hurricanes in the U.S. last year of significance to the industry and four or five so far this year again.

While clearly useful and rigorously employed, let's remember cat modeling is a relatively crude science. Perhaps as much art as science. Again, we know that the number of powerful hurricanes is on the increase. It appears we're in a period of increased Atlantic storm activity linked to a decadal phenomenon and rising sea temperatures likely exaggerated by global warming. More and more people around the world are purposely working and living in catastrophe prone areas like never before in human history. The concentration of insured values in cat prone areas has exploded in recent decades. This is a problem as insurers cannot assume infinite risk with finite balance sheets. The economic consequences of catastrophes occurring in these areas are a major concern.

For insurers, demand for reinsurance protection will increase as they seek to limit their exposure by either buying more protection or scaling back on their concentrations in cat related areas. Ironically, at the same time reinsurers will reduce the amount of risk they are willing to take while increasing the price they charge. These factors when combined will lead to a tightening in the insurance market. Prices will rise, terms and conditions will tighten, and at the same time demand for coverage will increase. Further, this demand will not be easily satisfied by many insurers, because they are either damaged, undercapitalized, or reluctant to assume the same level of risk. I might add that we are no exception and are reassessing our exposures to capital appetite as the models are adjusted to reflect current realities.

Today, several weeks later, we believe just as firmly that this change in market environment we envision will occur, and we are already beginning to see early evidence of this. We believe appropriate pricing will return to many short-tail lines such as property, property cat, marine, and energy, and not simply in cat prone areas. In the medium term we see a beneficial effect on certain casualty lines as well particularly in areas that require capacity. Consequences of major events such as these aren't generally limited to one area of the business. Since capital is fungible it will be deployed where companies -- by companies with the best return for the perceived risk can be achieved. Unlike the hardening after 9/11 this one will be a more reinsurer led tightening, in our view while pricing will harden first in the major insurance markets of the U.S., Bermuda, and London remember that insurance markets are linked globally. Much of the same capital supports markets all over the world and therefore ultimately the effect of these events will be felt worldwide.

The degree of tightening will vary by market and line of business. The effects will likely be felt first in the wholesale and large account retail and cat prone areas, but will spread further over time. ACE is well positioned to capitalize on this environment. We have the capability in both breadth of product and geographic reach. We have the underwriters and management team in place around the world who can execute on this opportunity. We are one of the very few global commercial P&C organizations with a strong balance sheet and financial scale. ACE also has a strong underwriting culture. As we have said many times before, we are an underwriting company first and foremost. We move swiftly and deliberately to take risk when the opportunity makes sense and we'll walk away from risk when it doesn't.

Our size of loss from events like 9/11, the four hurricanes last year, and Katrina, Rita, and Dennis this year demonstrate our ability to not only take risk but understand and manage it. Doing otherwise is simply gambling. We believe our customers and brokers find comfort and value in our discipline. And when you look at how the industry fared this year after Katrina, there will likely be a further flight to balance sheet quality and we should benefit from this. Bottom line, we believe the share offering will be accretive to investors using realistic assumptions for growth and combined ratios, but we are not prepared to provide '06 guidance at this time. We do that generally later after our Board has reviewed our budgets.

Before I turn the call over to Phil I'd like to comment on two other matters. First, the pending sale of our three Brandywine runoff reinsurance entities. We were hopeful it would be consummated in the fourth quarter but ultimately timing is in the hands of the Pennsylvania Department and we cannot speak for them. They've recently made requests for additional information and we are providing this expeditiously. Again, we believe the transaction has been structured in the best interest of all parties and that we have satisfied the needs of all constituencies. I remain confident we will complete the transaction.

Second, concerning the investigations. You are all aware that last month we announced that we resolved the lawsuit brought by the Attorney General of the state of Connecticut related to certain underwriting practices associated with an $80 million portfolio of Connecticut workers compensation claims which the Company is administering. ACE paid $40,000 and obtained a release of Connecticut's claims and a withdrawal of the lawsuit. We have nothing new to report on the industry-wide investigations. We have been and will remain diligent about keeping you up to date on these matters as appropriate. Now Phil will provide additional financial 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 results and I'll also update our guidance. This quarter our loss, excluding realized gains and losses, was 187 million or $0.70 per share. Net realized gains were 75 million, or $0.27 per share. Our loss includes losses related to the third quarter catastrophes which totaled approximately 742 million after tax, net of reinsurance including reinstatement and other premiums. In connection with our equity issuance on October 3, we updated our guidance for the year and gave an operating loss per share range of $0.50 to $0.70. We're reporting at the high end of this range principally because we've increased our estimates for Katrina by 7 million and Rita came in above the midpoint of our range by 6 million. Increases in estimates for Dennis and the other cat losses make up the difference.

Aside from the hurricane losses our underlying performance was very strong. If we remove the effect of Katrina and Rita, or 689 million after-tax losses, and left the 53 million of other third cat losses, our income before realized gains would have been approximately 502 million, or $1.69 per share. This includes one-time gains in the quarter of approximately 44 million, or $0.16 per share relating to the settlement of a long outstanding litigation matter and the release of an accrual which reduced admin expenses in the North American segment. In addition we had a current accident year reserve release of approximately 30 million pretax on short-tail lines.

Our income included a record 320 million of investment income, strong cash flow of 1.2 billion increased our cash in invested assets to over 30 billion. Our P&C combined ratio was 116.5%. This includes 27 million of adverse prior period development. The development resulted from the completion of various actuarial reviews of many lines across our portfolio as part of our regular reserving process and reserve actions on specific claims. No systemic issues were identified.

Year to date our book value has grown by $1.11 to $33.62. This growth included 152 million of after-tax realized and unrealized losses. Our investment portfolio remains conservative with a AA average credit quality and a duration of approximately 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. Subsequent to September 30, as Evan mentioned, we raised additional equity of 1.5 billion which clearly strengthens our balance sheet. For example, this has further reduced our reinsurance and financial leverage ratios. Our reinsurance leverage, that is our recoverables over shareholders' equity, dropped to 134% down from 151% at year end even with the addition of approximately 1.3 billion of recoverables relating to the cat losses. We expect to continue to reduce this leverage in the future.

Our financial leverage has also decreased. After our equity issuance our debt to total capitalization ratio was 14.2% and our debt plus trust preferreds to tangible equity was 27%. 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 2005 full-year guidance, there are three areas I'd like to comment on. Financial services operating income before cat losses is expected to be down 10 to 15%. Previous guidance was down 25 to 30%. This is driven by approximately 34 million of after-tax income from the one-time settlement of the long outstanding litigation matter which I mentioned earlier. We now expect investment income to range between 1.240 billion and 1.250 billion. Last, we believe the effective tax rate will range between 22 to 24%, up from 21 to 23%. All other guidance remains unchanged. Even with the significant losses, our balance sheet continues to strengthen. We are well positioned for the future growth opportunity. With that, I will turn the call back over to Helen.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Charles Gates of Credit Suisse First Boston.

On page 11 of your statistical supplement you show the financial services segment showing net premiums written of $212 million, up from $68 million in the prior year period. I'm on the page that delves into your catastrophe loss estimate. Is that basically a financial reinsurance program?

Charlie, this is Evan. What it is, in FSI, our Bermuda-based solutions business, they, for quite a long time, have been in the structured cat retro business, and so what you have -- and what they call triplicat. You write a couple of year contract for party and covers very severe events and multiples of them. They're entitled to additional premiums after a major event, and so those additional premiums are what is reflected in that premium growth, and when you see losses in there related to them, that's their cat losses, and we contemplate all that in our modeling.

Would you characterize that as financial reinsurance?

Would I characterize it as--.

It's really catastrophe reinsurance.

It's really cat re. It's not straight financial re, it's real risk transfer business.

The only other question I had at this time, in your initial remarks, you made reference to one of the areas where you saw firming as large account retail. Would you give an example of what large account retail is?

Sure. Wal-Mart property. I mean, a major -- a major Fortune 2000 account, or Fortune 5000 account.

So you think that area is pretty strong versus other corporate America?

I think large account property business, which has exposure typically across many geographic areas, is complex and requires a lot of capacity, absolutely, and I already see prices moving up in that area as opposed to say July 1, when prices were moving down.

Thank you.

Thank you. Your next question is from Mark Lane of William Blair & Company.

Good morning, Mark.

Good morning, Evan, good morning, Phil. Just a few questions. First of all, just on the loss ratio, excluding cats, the message last quarter was that the loss ratio had moved up from the first to second quarter because the product mix changes and maybe some pressure on pricing a little bit or margins. And this quarter it came -- actually came down quite meaningfully excluding cats. Is there any specific reason for that? Was it a light quarter from a loss perspective?

I don't think we have -- we are looking at it the same way. When I look at the loss ratio excluding cats and excluding prior period development, it's essentially for P&C flat, dead flat with prior year.

I'm talking about this first and second quarter. I mean, it's down over -- down almost 250 basis points sequentially.

That would just be the -- which is typical. That would be seasonality within the business.

You've really got to compare year on year, quarter on quarter.

Yes, it's more apples to apples, Mark, not a quarter to quarter sequential.

Okay. Second question is, on asbestos, originally when you announced the agreement to sell the small runoff subsidiaries you had also discussed looking -- pursuing alternatives for the rest of your exposure. How is that going, and do the changes in the market -- is that an obstacle in doing something with the rest of that business, or is that too much of a distraction given the focus on the market today?

No, first of all, we're target fixated on getting done what we set our sights on getting done that's right in front of us, the sale. I had said that anything else we did would take time, and , we're working on that. But it's not something that is on the horizon. I wouldn't see it on the immediate horizon, but it is something that we will continue to pursue and work on. And -- but right now the people working on that were focused on getting the first part done.

And last quick question, is this issue of flight to quality, with the capacity down, as you described it, and less risk taking out there, how significant can that be, and do you think that also applies to longer tail insurance lines, like excess liability and D&O, et cetera, et cetera?

It's early days in that, and I know, and I didn't say a lot in my up-front on it because I think -- there's been a lot of talk over the years about flight to quality, and yet we've never seen a dramatic move in that direction, it's always been more disappointing, as we all know. But I see signs that tell me it will -- it potentially will be more substantial this time around. We're seeing some early signs on the retail side, the direct insurance side, as you said of. They look at the ratings of some companies, that have lower ratings and say, well, why would I want to place D&O or excess liability with them when I see these kinds of exposures of capital to a single event? So you're starting to hear that.

We're starting to see on the reinsurance side where cedents are beginning to say, no, I'm not doing business with those guys, or these guys. Collateral requirements are going to, that has already been a trend, and that trend is going to accelerate in requiring collateral, which will further limit the ability of companies to take on -- who have less of a balance sheet to take on risk, and finally, I'll tell you, when they come to someone who has a better rating and they say, you're a flight towards quality, to write certain kinds of business for them, for instance, cat, you're in a position to demand and leverage other lines of business.

Just real quickly, the follow-up, do you think that applies to -- and this would be speculation, but if any new capital is formed, or new companies come out of this location, as in the past, do you think that buyers will view that capital a little bit more skeptically given what's happened to some of the other companies, the newer companies during this round of cats?

Well, yes, I do, and that's why I said to you, who's going to write with -- whether it's new capital or old capital, you're going to look at the quality of the balance sheet at the Company and how they manage risk, and you're going to demand collateral. You're going to demand that they perfect their obligation to pay and that's going to limit. And then the rating agencies are going to be all over this now. They already are. And I think that's just in front of us on what is your risk management capabilities for assessing your concentrations to risk and how much capital do you have to have to the exposures you take on? Leverage will be reduced.

Okay. Thank you.

You're welcome.

Thank you. Your next question is from Paul Newsome of A. G. Edwards.

With your potential expansion into a hard market, are you considering beefing up your operations and number of people, et cetera, particularly in the reinsurance business and are there infrastructure changes that you would consider?

Nothing of significance. I think we have built ourselves. We're ready to take advantage. I think we're there. Unlike after 9/11 where we were simultaneously taking advantage of opportunity, we believed a proper underwriting trading environment, we were building ourselves out as an organization. We have focused on that for the last four or five years. We're there. I think we're in place. We're not only ready, we're moving.

Just unrelatedly, if you could touch on a little bit more your fortunately small adjustments to your Katrina losses, we're looking at a lot of companies that have gotten it very wrong, and what are the dynamics underneath the changes and how comfortable should we be with those estimates?

How comfortable should you be? I'm relatively comfortable with them. They are estimates, but we're pretty far along since Katrina. I find that our track record is good. Our process, it's a very granular, ground-up business by business, so there are -- we have businesses in London, businesses in the U.S., and businesses in Bermuda, predominantly, that contribute to the loss. A $6 million swing is just not significant. It's immaterial on the size of loss. It didn't come from any sort of one area or that. It's a million from this unit and two million from this unit. I feel pretty good about the number. I don't think and I don't expect any deterioration of that.

Great. Thank you very much.

You're welcome.

Thank you. Your next question is from Ron Frank of Citigroup.

A few things if I could, Evan, in no particular order. First, in a mega cat scenario, such as we had in the third quarter, so-called finite contracts have been known to end up being not so finite. I was wondering with respect to the financial services businesses in particular you have any concern over potential adverse development, or maybe put a better way, is it correct to be more wary of adverse development there perhaps than in some other segments?

Let me take that one first because otherwise -- it was a big question. No, I don't -- it's not -- it's not sort of a finite or funding. It really is more of a structured real risk transfer, and I don't see adverse development in that at all.

Okay.

Particularly if you were relating to -- from these events, do we see that? No, no, not at all.

All right. Second, I would be interested if you could elaborate on your response to a previous question, because I also noticed the combined ratio dropped versus first half, X catastrophes and I was curious as to what would drive that seasonality you mentioned? What would ordinarily cause third quarter X cat losses to be more favorable than first half in a given year?

Let me ask you a question. Did you guys adjust for that 30 million, $40 million that we just took down from the current short -- current period short-tail business?

What I did, Evan, was I just added up the prior period developments of the segments, and it came out up in total to about a point on the combined, which it had been in previous quarters.

Yes, you also mentioned--.

But we also mentioned to you, Phil did, that we had 30 or 40 million bucks of short-tail business year to date, running really well, and we put up a peg loss ratio when we adjusted the peg, and you'd say, well, how could short-tail run, well, you add all the cats, but it's X the cats so--.

I'm sorry, that wasn't prior year.

No, that was current year. Then we also mentioned to that you that there was a $12 million one-time adjustment for a -- and it really was a contingent liability that we just didn't need, and that was in the expense line, so that comes into the combined ratio.

Okay. Thanks. And finally, there was significant growth in the reinsurance operation, and from the information you gave, it didn't seem to be inflated by the reinstatements, and it seemed to be a pretty sharp shift to north of 20. I know it's not a big quarter for the operation.

Let me give it to you. There's a combination of things that went on. It's three things. One, there were reinstatement premiums that we collected from the catastrophes. So that adds growth. Number two, on a treaty year basis we wrote more business in January in the first quarter. Shouldn't say in January -- as the year went down our treaty year writings really went flat, or declined, but earlier in the year we wrote -- the pricing and the terms look good and we wrote more business that then comes through on a -- because it's treaty year, you don't book it yet, you wait until you get the border rose, so it comes through in the third quarter that increased the writings then. And finally, we didn't write -- and I believe I've said this before, we didn't write much Florida cat during the second quarter because we thought pricing was not adequate, and others were writing. But there was an increased appetite for Florida cat that continued at the market after its filled its boots couldn't satisfy. So in the late June and the July period we wrote more Florida cat at what we thought were substantially higher prices, and that came through in there as well.

Okay. All right, that's helpful. Thanks.

You're welcome.

Thank you. Your next question is from David Small of Bear Stearns.

Good morning. Maybe could you just give us some color in terms of how much of the 1.5 billion that you raised in new equity can you deploy versus how much do you think you need to keep on the balance sheet to maintain your rating given what we're hearing about higher risk-based capital requirements on the rating agencies?

Wow. I don't have an exact percentage or number I can give you, David. But I can tell you that, we're comfortable that this will be enough to meet rating agency requirements and take advantage of the growth opportunity as we see it within our appetite for taking on risk. And it won't all get deployed right away, the capital. It will take time. It will get deployed over the year. We write our business throughout the year, and there will be opportunity all year, take time. And -- but I think that the capital will be adequate, it will not constrain us in terms of growth opportunity.

Then maybe if I could just ask another question, you talked about the changing perception for risk for the industry. I guess how are you changing your underwriting standards at ACE given this change in risk perception?

Well, we're changing our standards. Look, I -- if you start out with that you don't believe Katrina was a 1 in 100 or a 1 in 250, and you say to yourself well, what is Katrina, Katrina is probably closer to a 1 in 20-year event. So that right there tells you how you start thinking about perception of risk. And what do you do, then? Well, you adjust the models, first of all, and you adjust and take into consideration not only what an individual event could do to you but what an aggregate frequency of events in a given year could do to you, and you have to consider that. And you know that in adjusting those models and doing that right there, that raises the capital requirement to write the business.

Secondly, if you're prudent and you recognize there's basis risk, you're going to double up. You're going to raise the ROEs as well to take risk. So all of that drives pricing. You will cut exposure, accordingly, because now all of a sudden your perception of what a loss could do to you in terms of exposure to capital has changed, and so you will cut exposures, and we will. And you will buy more protection at the same time. So it's a combination of all of that.

Great. Thank you very much.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is from Tom Cholnoky of Goldman Sachs.

Good morning, Evan, I just want to follow-up on your last comment just with respect to reinsurance. Obviously over the last couple of years you have been retaining more risk, and now perhaps you're going to have to go back into the market, or maybe will you not choose, but I'm just curious what your thoughts are about your own reinsurance purchases as you go forward and what you may expect to happen with those costs.

Well, you know what, the costs are going to go up. What ends up happening, we were major buyers of reinsurance, as you can see, even though we retain more risk, you see that Katrina and Rita generated about 1.3 billion of loss, and a substantial portion of that is recoverable from reinsurers. But, Tom, in short, retentions will go up, you will retain more, lower down, and you will buy more going higher up. So you will buy more cat, either through traditional reinsurance, or bonds or some other vehicle like that, and because your perception, you want to be prudent on that basis risk, and with pricing going up, likely retain more down below. So costs will rise, you'll retain more, and you'll buy more protection.

So will that--?

And we already figured that and baked that in.

Okay. So do you think that's going to also impact your own reinsurance business? I mean, are you going to be -- do you think you're going to find yourselves in a lot higher layers with your own primary clients on that part of the business?

No, I don't.

You're unique, then.

No, I don't think it's unique. I think, when you say "a lot higher," we don't play down in there, we haven't been playing lately down too much in the first layers, in the early layers. In fact, we've been playing much higher up. I think you start to drop down more.

I guess my question is, if you're going to retain more risk to save on the cost of reinsurance will the buyers of reinsurance from your own firm, do you think they're going to be doing the same thing of retaining more risk down below?

The people who buy from us?

Correct.

The people who buy from us, it will vary by cedent, obviously, because we play with a lot of -- we do business with a lot of small companies as well who won't have that ability. The big nationals, or multinationals, will have that ability. The predominance of our cat business is not with the big multinationals or the big nationals. We're actually -- we do much more of our business with the regionals and small companies.

Sorry, one other last follow-up question on reinsurance. I guess there was a company yesterday that mentioned that they had actually already cut down their number of reinsurers on their approval list. What do you see going forward? Do you sense that your approval list is going to shrink as well?

Well, we have standards right now. In our reinsurance security. And you meet the standards, and we'll do business with you. Fewer companies are meeting those standards. You're seeing rating downgrades, and that just puts companies into other categories and they fall out of our standards. So yes, the universe shrinks, and you start requiring tougher terms, you're going to write with somebody who is marginal to you, you're going to get collateral, or you ain't going to do the business.

Okay. Great. Thank you.

Thank you. Your final question is from Nick Pirsos of Sandler O'Neill.

Good morning. Just as you assess the pricing opportunities in '06 would you expect any change in mix between your primary and reinsurance business overall?

Nick, that's the crystal ball. I can't tell you with any certainty. I don't know. I certainly expect that short-tail lines as a percentage of our total writings will increase. It had been ebbing down. I think that will move up. The mix of insurance to reinsurance may stay fairly constant, but it wouldn't surprise me, on the other hand, it depends how this all plays out, it wouldn't surprise me if reinsurance became a modestly larger percentage, but now, I don't think significantly.

Just one other question. In med-mal, as you continue to increase that platform, how do you see terms and conditions this time around being -- having evolved from when some of the troubles hit the industry a few years back?

Well, it's all far more claims made than occurrence formed to begin with. We are -- we're not a huge player in that business, because we have a very clear defined appetite. We're in the facilities business. We're not in the individual docs business per se. We are very selective of the geographies where we'll write the business. The market has remained disciplined, disciplined, though there has been some signs of softening of late, and we're just not going to chase growth in that area. But what I think has changed for the market overall is that, there's just such a recognition of the volatility and difficulty in that line of business.

Great. Thank you.

You're welcome.

Thank you. Your next question is from Bill Yankus of Fox-Pitt Kelton.

Evan, could you talk about environmental liability as it relates to Katrina and if there's anything on the horizon there for the industry?

Yes, I can do that. We are aware of the exposure, and we're following related activities, as far as some of these class actions that are getting filed. There's nothing we see on the horizon that impacts our estimate. Not at all. And the same goes for mold, I might add, where we have an absolute exclusion there. I do think there will be -- and there are -- liability claims related to -- with that said, related to environmental exposures. But I don't see, as I said, an impact to ACE beyond what we have already contemplated in our reserve.

But you don't think that will be major portion or a significant portion of the losses that we see ultimately from Katrina?

I don't know. For the industry overall, I can't say. A major -- it may have some significant dollars associated with it but I don't know if it will be a major portion of the loss.

Thank you.

You're welcome.

Thank you. Your next question is from Jay Gelb of Lehman Brothers.

Thanks, and good morning. Phil, I just wanted to follow up on the guidance for 2005. On the 8-K that ACE issued on October 3, there's an updated full year guidance in there for 2005 and I just want to confirm that nothing is changing off of that updated guidance except the investment income.

That's correct. That's correct. One thing we didn't talk about was our combined ratio and we're going to obviously have to wait to see what happens with Wilma before we can give you more guidance on that.

Okay. Do you have any early read on would the impact from Wilma may be?

No, we don't. It's just -- we knew we'd get this question, but it's just too early. It would be irresponsible of to us say anything at this time, because we just don't know.

Okay. And then when do you think you will be in a position to offer 2006 guidance?

We're planning to issue guidance in December after we've had a chance to discuss our plan for next year with our Board.

All right. So that will be before you release the fourth quarter earnings?

Right, we won't release fourth quarter obviously until early next year.

Okay. Good. And then do you have a plan to do another ground up asbestos study any time soon?

Well, we do one each year internally, and we're in the process of doing that now. The external review of that is done every two years.

And the last one was done at year end '04?

That's right.

So this would be end of '06. Finally, from a high-level perspective, the impact of the catastrophes clearly is being pushed onto the private market. Evan, can you give us any sense of what you think the prospects may be for some type of federal catastrophe disaster fund or the ability for insurance companies to pre-emptively reserve for natural catastrophe losses?

Well, that would be a -- that second part is -- for me, that's what we endorse. We'd like to see the tax laws changed, the accounting changed, so that you could reserve for catastrophes. Right now capital is proxy for that reserve, and I think that drives the wrong kind of behavior in the industry done that way, because you consider it to be profit in some years, and then we turn around, and it's a loss of capital in later years. I think that's a bad way. The prospects of getting that done, man, very tough. Nothing on the horizon. The prospects of getting a natural -- a national catastrophe program done, let's get TRIA renewed first and you see how difficult it is. Frankly, how short-sighted and myopic Congress is in approving that. Though I do think we'll get that renewed but they're taking it to the last minute. So you can't be overly sanguine about a national catastrophe program.

Makes sense. Thanks for the answers, guys.

Thank you. Your next question is a follow-up question from Ron Frank of Citigroup.

It's been answered. Thanks.

We gave you too much time.

No, I'll back off, Evan. It's been answered. Thank you.

Thank you. This does conclude the question and answer portion of the conference. I would now like to hand the floor back to Ms. Helen Wilson.

Thank you, everyone, for joining us today, and good day.

Thank you. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.