丘博保險集團 (CB) 2006 Q1 法說會逐字稿

Good day and welcome to the ACE Limited first-quarter 2006 earnings conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS) For opening remarks and introductions, I would like to turn the call over to Ms. Helen Wilson, Director of Investor Relations. Please go ahead.

Thank you. Welcome to the ACE Limited March 31, 2006, first-quarter earnings conference call. (multiple speakers) Our report today will contain forward-looking statements, such as statements relating to our financial outlook and guidance, (inaudible) [strategies] and practices, growth prospects, competition, pricing and market conditions, exposures, losses and reserves, financing plans, [reinsurance], leverage, governmental action, litigation, and settlements. Actual results may differ materially.

Please refer to our most recent SEC filings as well as our earnings press release and financial supplement, which are available on our website for more information on factors that could affect the forward-looking statements.

I would also like to remind you that this conference call and its contents 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 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 would like to introduce our speakers. First we have Evan Greenberg, President and Chief Executive Officer, followed by 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. Now it is my pleasure to turn the call over to Evan.

Good morning. Our earnings release contains some late breaking news, and I will comment on that in a minute. We had an excellent first quarter. We achieved record after-tax operating income and net income after investigation-related charges, driven by both strong underwriting and investment income results.

The effect on book value from rising interest rates was relatively modest, by $90 million, a reflection, I believe, on our strategy to shorten our investment portfolio duration while maintaining quality and yield.

Revenue growth was impacted by two things, foreign exchange and a prior-year premium adjustment on our crop insurance portfolio. Phil will explain more about that. Excluding the effects of these two items, growth was about 4.5% to 5%. I expect we will achieve this range of growth in the second quarter, and growth should improve for the remainder of the year.

We have in the last day accrued a charge of $80 million pretax and $66 million after-tax for a settlement with the states of New York, Illinois, and Connecticut that was announced this morning. It is related to the antitrust and business practices investigation and includes finite related matters as well. It is not a global settlement because it does not include other states, class action plaintiffs, nor the SEC.

This is a significant step towards achieving resolution of these matters that have weighed on both ACE and the industry for the past two years. We look forward to working with the remaining parties and regulators to reach a fair and final conclusion.

I would like to take a few minutes to comment on some of our major strategies and the current market environment. We are a big Company with many moving parts, so there is always a lot going on around here.

First, let's talk about cat management. As I have said on prior calls, we are both reducing and managing our cat exposures in line with our risk appetite, using updated models. This simply means raising prices, shedding exposure, and buying more protection. For our insurance, as opposed to reinsurance, portfolios, in the US and London between October and end of March, we have reduced our US wind aggregates 40% to 50% on the new and renewal business that was actionable during that period. That translates to a reduction of 20% to 25% on our overall US wind portfolio aggregates. This activity will continue, and by July our overall US wind-related portfolio on the insurance business should be down around 40% to 50%.

At the same time, wind-related cat pricing continues to rise month by month, and terms are continuing to tighten. We're taking similar action on our quake insurance exposures; and I might add, we for one are treating New Madrid as a quake zone, while much of the market is ignoring it. West Coast quake rates are up, and aren't up in many cases as much as we think they ought to be; but they're continuing to tighten.

We're taking similar action on our international insurance and global re cat exposures where we deem necessary to remain within our appetite for risk.

On the protection side, we have purchased most of the protection we have so far sought from the traditional reinsurance markets for US-related exposures, though we are currently in negotiations for a new top layer of protection. For US wind in total, we should have 750 to $800 million of cover, ground up, including a retention of about $150 million. For international exposures, we have a $50 million retention and $300 million of cover, with additional cover above that for certain international peak zones.

For our insurance operations, we operate with two towers, one for US, one international. Our reinsurance business is almost all net. We buy very little retro. Again, all of our exposure management activities are utilizing models that were dialed up last fall to address our current view of frequency, severity, surge, et cetera, and are consistent with modeling firm views.

Let me make a few comments on the market. Overall, the competitive environment, with the exception of international retail and international cat reinsurance, is not bad, although not as robust as we contemplated. As I have said before, it may be a matter of velocity, not direction, particularly in many short-tail classes where we see a continued tightening.

To be more specific, in the US and London wholesale market, large account property rates, both cat and non-cat, are continuing to rise, and terms and conditions are tightening. It is a hard market in this class, and this end of the market continues to change by the month.

On the other hand, within the US, small and middle sized non-cat property insurance business, both standard market and E&S, is softening as agency companies in particular compete aggressively for this business. In an effort to maintain discipline in this area, we have been forced to shed volume. But I believe in time, this part of the market will change as the reality of tighter and tighter reinsurance costs takes hold.

On the other hand, middle market property cat is continuing to tighten, particularly wind-exposed. Again it's a hard market for wind business. Energy and marine-related lines continue to harden, particularly offshore energy; but onshore energy has not moved as much as we hoped to see, though again it is moving and continuing to move.

Most US casualty classes are pretty stable with rates flat or down slightly in the 2% to 3% range.

Outside the U.S., international retail continues to soften for both property and casualty, particularly the UK, Europe, and Asia. I don't see any real signs of change.

However, in local currency, all regions of the world, with the exception of the UK, experienced growth in the quarter, in particular, Asia, Latin America, and continental Europe. In these three regions in constant currency, growth was double-digit, driven in large part by our A&H growth.

Around the world, US and international growth is impacted by a lack of new business in many classes. We and others are holding renewals and are reducing rates to do so modestly where justified. When it is available, competition for new business, particularly on large accounts, in many instances is ferocious and well beyond rate levels we will support. The rate levels I have quoted you were for the business we write only, not what we passed on.

On the reinsurance side of our business, pretty similar story. US cat-related hardening by the month, casualty stable, risk property tightening, both rate and terms. International cat-related lines tightening but not enough.

We are experiencing a flight to quality in the reinsurance market, and we have seen the benefit of our strong financial ratings. We're being shown more business and have had improved signings on accounts we like.

I would like to take a few minutes to comment on a couple of the opportunities we are focusing on that will impact our business in the short and longer term. Our US retail presence continues to build. We opened nine additional sales-related offices last year. Our middle market specialty business, while small and absolute terms, is growing at a good rate in percentage terms; and I suspect this will continue.

Our Asian life business, while nascent, is beginning to show signs of progress. As you know, we launched companies in China, Vietnam, and Taiwan last year and already have a company in Thailand. We opened in our second city in China last month; and by this time next year, I expect we will be in seven to 10 locations and potentially four provinces. We now have a total of 2,500 life agents in Asia.

We are exploring other Asian countries where we plan to open in the next year or so. While I don't expect this business to have any real earnings visibility for the next five to seven years, we are sowing the seeds for a future long-term earnings stream. The long-term trend in Asia for the life business is favorable, with a growing middle class, high savings rates, and a lack of social safety nets.

Our life reinsurance business is doing quite well. As we have discussed before, it is a specialty niche business where we have a real expertise. We're now expanding into the term life reinsurance business in a modest way. We view that currently as an attractive opportunity where the reward justifies the risk.

Our Asian P&C business is doing well, though the softening commercial market is impacting our growth. We're expanding into the small commercial package market in a number of Southeast Asian countries and China; and while small now, I expect this business will contribute to our results in future years.

Finally, our overseas A&H business continues to perform extremely well, particularly in Asia and Latin America, where our growth rates are north of 30%. A&H now represents over 35% of our ACE international premium -- which, by the way, is contributing to the low combined ratio and increasing expense ratio in the AOG segment. This business represents a great source of strength, and I expect it to continue growing at its current pace.

I know you are interested in the Pennsylvania sale of the three runoff companies. We have concluded the process with the Department of Insurance. They have everything they need to make a decision. I believe we have done all we can to satisfy their concerns. It has been 14 months, a long process, and I anticipate their decision very shortly.

With that, let me turn the call over to Phil Bancroft, then we will come back and take your questions.

Good morning. This quarter, we have had after-tax operating earnings of $1.63 per share before the $66 million after-tax investigation-related settlement charge, and $1.43 after the charge. As Evan mentioned, our net written premium growth for the first-quarter 2005 was 1.7%.

Our growth was affected by two items. First, adjusted for foreign exchange, our growth would have been approximately 4%. Second, as you probably know, we are the second-largest writer of crop insurance in the United States. Each year in the first quarter, the previous crop year is settled based on actual experience. The increase to premiums resulting from this settlement was higher in 2005 than in 2006. If normalized, our growth in written would have been another point higher to almost 5%.

You will also note that our presettlement P&C expense ratio has increased for the quarter. Two items drove this increase. First, the crop adjustment I discussed also affected the expense ratio. The 2005 crop year was quite profitable, and the settlement includes a profit commission expense. This affected the ratio by almost half a point for total P&C, and almost a full point for the North American segment.

Second, in ACE international, our A&H business has grown significantly. As Evan mentioned, it now represents over 35% of our premiums for the unit. While this business is quite profitable, its expense ratio is higher than P&C. The change in mix has added almost 0.5 point to our total P&C ratio and almost 1 point to ACE Overseas General's ratio.

The quarter also included a record $369 million of investment income, up almost 30% from the first quarter of last year. We continue to increase our earnings power with our almost $34 billion of cash and invested assets. Our operating cash flow for the quarter remains strong at $1 billion.

Our book value grew by $411 million or 3% for the quarter in spite of a rising interest rate environment. Our short duration of 3.1 years and our well-diversified portfolio left us well positioned for the significant increase in global bond yields that occurred throughout the quarter. This strategy helped to dampen the impact on book value from rising bond yields and at the same time supported our strong growth in investment income. The very flat yield curve allowed us to shorten our duration without sacrificing yield in the longer maturities.

Our after-tax realized and unrealized loss for the quarter was approximately $88 million during a period in which global term interest rates increased 50 basis points. The quality of the investment portfolio remained high with an average credit rating of AA.

Also during the quarter, we changed our accounting for stock options and recorded an expense of approximately $4 million.

I will also note that during the second quarter, we expect to issue $300 million of debt. We will use the proceeds to repay the $300 million 8.3% debt coming due on August 15 of this year. We plan to refinance now because of the current favorable interest rate and credit spread environment.

Finally, on the subject of guidance, as you know, the settlement-related charge was not contemplated in our original guidance. Other than adjusting for the settlement, we're not updating our guidance at this time. There are many elements that go into our annual estimate, and as Evan mentioned the market is dynamic. We will update you as the year progresses, if we feel any changes are necessary. With that, I will turn the call back to Helen.

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

(OPERATOR INSTRUCTIONS) Mark Lane, William Blair & Co.

Just wanted to focus on growth a little bit. You mentioned some of the different moving pieces. Can you give us a better sense of the areas in which you are seeing pricing improvement? The large commercial property in the US and US property cat, how big of a business is that for you?

Well, the large account property business is a good-sized business when you look at it both from our US perch where we are write it; we write excess large account property in Bermuda; and we write large account property out of our wholesale business in ACE global markets. And that business is doing quite well. That is not just cat-related; it is cat and non-cat-related.

Casualty business is stable. You know, we are experiencing growth in many specialty casualty classes. It is not huge growth, but it is positive growth in most casualty classes that we write.

Our A&H businesses are doing extremely well. As I told you. And the balance of our short-tail lines are doing pretty well, in marine and inland marine, et cetera.

But is large account US property and US property cat, are we talking about 5% to 7% of written premium, 15% to 17%? I mean, can you -- ?

You know, Mark, I don't have a -- I'm sorry, I don't have a percentage in my head for what that represents as our total premium. You know what property represents as our total. As you know in cat, our premiums in cat are growing while our exposures are -- and I gave you the percentages -- are shrinking substantially.

Okay, so growth similar in the second quarter to the first; and then maybe better after that. So is that -- ?

Remember, growth in the second quarter I gave you; and that is with adjusting for foreign exchange.

Right. But in terms of the past, are we thinking about that the market is pretty stable and property pricing is going to continue to move up? Or are we going to see growth after you get comfortable with the reductions in your overall wind and cat and earthquake exposure as you stated?

No, I think property is continuing to tighten, and particularly in the large account area. On the other side of the coin, as I told you, middle market property, in the smaller account, where it is non-wind-related, that is softening. I expect that will likely change as the year progresses and large account continues to tighten.

But are you holding back a little bit right now as you are managing your cat exposure down? You expect to get more aggressive later in the year? I am just trying to understand the dynamics.

No, I don't expect to get more aggressive. I think our game plan is pretty steady, and steady as she goes. One thing I can tell you that I also think has an effect, and we have seen it. We came out of the box in January aggressive about rate movement. We really tried to push the market very hard, and we got bloodied a little bit in January as a result of that.

We adjusted, and we are writing business where we think that the price justifies the risk in return.

Okay. Then just Phil, could you comment on reserves? I know there was a little bit of favorable development, but was there -- what was movement by year? I know it's favorable on a net basis; but could you talk about some of the -- ?

Yes, I will give you the pieces. For prior-year cat, that they were included in the prior-year development, there was $49 million after-tax. That was a negative development. For other short-tail lines, that we had positive development of $61 million, non-cat; for a net after-tax of about $12 million. Yes, that's right, net after-tax of about $12 million.

Okay, but that is all of the reserve movement you had from prior years?

Yes.

Okay, all right. Thank you.

[Stephen Peterson] with Citadel Investment Group.

Building on what Mark was asking about, in general and at maybe a top-level layer, do you anticipate that your liability duration will shorten or extend over time as your business mix changes?

You're talking about the investment portfolio?

No, I'm talking about your line. I'm trying to get to business mix. I'm trying to figure out kind of long-term in the next 18 months how much more property versus casualty you will be writing; and how the general business mix of the organization will be changing, based on the opportunities that you're seeing in the (multiple speakers).

I think you'll see the general business mix will be approximately the same as you see it today.

Okay, and then I was wondering if you --

(multiple speakers) within a couple of percentage points, that I cannot -- that is jittery, I cannot predict that with precision.

Got you. My next question is, could you talk a little bit about capitalization and what you are thinking about in terms of your capital base right now? Maybe in light of a slightly changed view from three to four months ago, of the market.

My view is that our capital is adequate at this point. We don't have any actions planned. We think it is in line with where we need it to be to support our current business plan.

Okay.

Our ROE is good. We think we will produce a good ROE for the year. We did say when we raised capital that it would be accretive. And as the year progresses, we believe that it will. We still believe that.

Okay, I appreciate it. Thank you.

Ron Frank with Citigroup.

A few things related. One, just following up on Stephen's question, perhaps to put it another way. When you raised the money last year, the additional equity capital, you anticipated some strengthening of the environment that would create the opportunities to deploy it. In the early months of the year, it seems as if overall, although it is not monolithic, that those opportunities have fallen somewhat short of initial expectations.

So I guess what is on my mind relating to Stephen's question is, has part of that billion as a result been rendered excess potentially?

With respect to premiums, two questions. One is, the US and Bermuda reinsurance operations showed some decent double-digit growth; and I was wondering if you could drill down there a little bit.

Second, you had some pretty dramatic reductions in your wind exposure aggregates as you mentioned. Did that impact the premium as well? If so, could you give us some insight there?

Okay. Yes, the year has started out, Ron -- it's correct -- slower than expected. It is a slower burn. But the market is continuing to tighten, not everywhere; and stable. Obviously international P&C is disappointing. But it is continuing to move. You know, this is not just a short-term game, so we will wait and see.

You also understand that rating agency requirements for capital increased; and we raised the capital for the two reasons, right? One was adequacy, and the other was for growth. So, the money isn't burning a hole in our pocket, and I am comfortable with where we are.

Your second question, can you repeat the second one again?

Yes, two on premium growth, Evan. One was if you could give us some color on what looked like some pretty good growth out of the US and Bermuda reinsurance operations?

Second, if you can quantify at all the impact of those wind aggregate reductions on the premium as well.

Yes, okay. US reinsurance, mostly casualty-related, not property-related. At least it's definitely not risk or cat-related property in the US. It was casualty. As I said, we are seeing improved signings. We have had a great improvement in showings on casualty, particularly given our rating. We think there has been a flight to quality there.

In Bermuda, it is property-related and cat-related, but pricing has moved so much for us, it wasn't exposure driven. We did not increase our exposures. In fact, we have been shrinking exposures while we are increasing premiums in the cat-related area.

Okay, and finally, can you give us a --?

(multiple speakers) premium, I don't have an exact number for it. But what I can tell you is that our reduction in aggregates has obviously been weighing on our premium growth rate.

But you know, the irony -- while we shrink aggregates, the rate increases we're achieving are equal to, in most cases, or greater than the reduction we are taking in aggregate. So you come back to zero and up a bit.

Right. So it is taking another point, a couple points away from growth; but there is an improvement in risk per unit of exposure behind?

Exactly right. You're taking some volatility out, and you are reducing exposure, and so the quality of the revenue improves.

Okay, okay. Thanks a lot.

Paul Newsome with A.G. Edwards.

Congratulations on the earnings. I want to ask about the settlement. Specifically, are there any restrictions or characteristics of the actual settlement that had to go to your business structure? I'm thinking of things like Zurich having to disclose contingent commissions and having a separate sheet of paper that they have got to sign brokers, and things of that nature. Is there anything you could tell us about that?

Yes, basically this. We adjusted our business practices in the fall -- God, it's a long time now -- in the fall of '04 and the winter of '05. We adjusted both internally our practices and, as you probably know, I'm sure you know, we produced a white paper on how we thought the industry's practices ought to adjust.

The changes and discussions we have had with the AGs imposed no additional restrictions on us. We had already come in line ourselves voluntarily with anything that they were asking us to do.

Great, thank you.

Charles Gates with Credit Suisse.

I only had one question. Can you provide any insight as to the possible timing of settlements with the Securities and Exchange Commission?

Boy, I tell you, my crystal ball is just not that good. It is not crystal. The SEC is on their own, on a different track, and on their own timeline, and I cannot predict.

As far as finite reinsurance, weren't they ones who had the problem with Renaissance Re?

You know, Charlie, I cannot comment on another company. I am not -- I don't know the particulars on Ren Re.

Thank you.

Matt Heimermann with JPMorgan.

Two quick questions. First, paid losses, if I looked at the disclosure correctly, looked pretty stable. I was just wondering whether or not we have really seen any impact from catastrophe loss payments at this point.

Then secondly, I was just wondering if you could give us a sense of what you are -- given that most of your programs are now set, if you could give us a sense of total reinsurance spend this year versus last year. Just order of magnitude.

And as a corollary to that, just how you are thinking about retentions, whether or not that will have a significant impact on retentions.

Yes, paid losses, let's see. The cats gross losses, Phil, you have the --

$428 million cats paid during the quarter; we billed 260 to reinsurers and collected 130.

Excellent.

On the reinsurance spend, cat pricing is up, what we pay, around 30% to 50%. The balance of our reinsurance placements, other than cat, pricing is flat pretty much. Retentions, I already mentioned the retentions to you in terms of cat, which is where I think you're real --.

No, I'm sorry, I kind of flipped the question to be a little bit more geared towards just natural gross retention. Excuse me.

Natural gross retentions, they will bounce around a little bit quarter by quarter, but -- due to the mix and timing of business; but you have got the range of it.

Okay, thanks much.

Small with Bear Stearns.

On the last conference call, Evan, you mentioned that international pricing would need to become firmer in order for you to reach your goals. I guess is that no longer the case? Or do you expect the international pricing to firm from here?

I think I said in the commentary that international pricing is not firming in P&C, and that I don't see it changing right now. There I don't see signs of changing. I would like to, but I'm not going to -- I am going to be a realist. So I do not see that.

But since the last call, have you seen -- ? I guess it seems like you must have seen more growth opportunities than in the US.

Well, and our A&H business is doing well, and it is not just growth that drives an earnings guidance, which is where you are headed. There are a lot of moving parts, as you know. Other factors.

Okay. Just lastly, some of the other companies this earnings season have commented that D&O pricing, especially for large account, has been particularly weak. Could you maybe give us any commentary there?

Particularly weak? I don't think particularly weak. We have not seen much growth in that area. We are holding our renewal business. I think, the comment I made about new versus renewal -- you got new business out there and it is pretty ferocious, D&O included.

But holding the renewals. You know, where you need to, you give some modest price reduction, or it is stable. We have seen our large account D&O business pretty stable. But we're not growing much.

Great, thank you very much.

Jay Cohen with Merrill Lynch.

Two I guess unrelated questions. The first is, you talked about opening up more retail branches or retail presence in the US. I was just wondering how that tends to play out. After you open up a new location, how does the revenue flow in over the next several years? That is question number one.

Secondly, asbestos. Can you give us any update on what you're seeing from a claims standpoint? Some of the trends?

Yes, US retail, I am not sure exactly what you mean. But let me see; if I put a picture on and it doesn't answer your question, then keep drilling at me.

These offices that we opened are really sales offices rather than full-service underwriting offices. They are kind of satellites. It's a bit of a hub and a spoke, and there are spokes around the some of the regional hubs that we have as we reach out to more of the producer marketplace and into territory, therefore, where we are underrepresented.

Look, it is still a matter of a lot of the way this business works, the closer you are to the customer and to the producers, the more you are a part of the action. That is what it is.

In most cases, though not all, but in many of these offices the mix of business is more towards the commercial or the middle market end of the business, rather than just simply the large account end of the business.

So, to make a difference in each of these offices -- and they become profitable very quickly -- growth, though, and in absolute revenue terms, it takes time. Because it is a flow of business that you have got to build up. The average premiums are lower.

It is more specialty; and you know we are more specialty oriented. It is more towards the specialty lines. Most of these offices have gotten off to a very good start.

On the asbestos front, the trends continue to look favorable. New reportings continue to trend well. The regulatory or the legal landscape in the various states, we see that trend continuing in both some of the judgments that have been made, particularly in the federal courts, on prepacks, related to prepacks and screenings and all of that; as well as some of the state legislation that has taken place relative to medical criteria, et cetera. We think that is coming through on the reporteds, number one.

And number two, you know, the paid trends on claims on the settlements continue to look good to us. You know, we have heard about this potential spike in mesotheliomas, as kind of noninjured, are put aside. And will all the money move towards just much higher verdicts on mesotheliomas? We don't see that.

That is great. On that first question, I guess, one of the conclusions you could draw is that the benefit you received from opening these sales offices has not been fully realized yet. It should play out over years.

That's right, it takes time. This is a long-term business. I know while we all talk quarter-to-quarter and on results, I have to tell you, the way we run the business around here is looking years out, not just at the current period.

Thanks, Evan.

As you know, a lot of the results that you see today are for actions we took in prior years that now position us in the marketplace to take advantage of the environment as we see it. We are trying to plant a lot of seeds and position ourselves to take advantage of the environment that will be in the future.

Thanks.

Steve Labbe with Langen McAlenney.

Most of my questions have been answered; but I have one left. Evan, I was wondering if you could help me understand why it is taking so long for sort of -- I think you alluded to the middle market property and certain other pockets, where rates just are not going up despite models telling these companies that their exposures are higher, and higher reinsurance costs, and so on and so forth. Why is it taking so long?

You know, I will give you a rational man's answer. What I think is a rational answer to what is a chaotic, in many cases irrational environment, because that is what you're really asking me.

You know, what takes time? Many companies, I think, frankly -- and I am not trying to criticize others -- but I think they don't necessarily anticipate ahead; they react as events occur. They wait to react. So number one, you get incurreds that come through on all the storms last year, but the pain is not really felt to a large degree till the paids come through.

The rating agencies. Everybody knows the rating agencies are adjusting capital models. But do you adjust in anticipation of that? Or do you wait for the rating agency actions to actually come through?

Reinsurance costs. Hope springs eternal that reinsurance costs and retentions, you know, somehow your company will be different, and will be viewed differently. You know what? No. Those costs continue to tighten, and the cost of doing that business continues to go up.

Then you say to yourself, well, do you believe that your cat-related premiums are going to pay the full cost of all your increased reinsurance costs for property cat and risk covers? And the answer ultimately is no. How long does it take for management to react and to press their underwriters to react?

You know, there is my unvarnished answer to you. It takes time.

So then it would suggest that all of these things everyone knows; it is just a matter of who decides to apply them before they actually occur to them.

That is exactly right. It just takes time. That is why -- you can never -- and I read all the pundits who have some special knowledge of being able to predict when and where. No one can predict with any certainty. The market is chaotic, and you cannot predict how the market is going to in fact -- the timing nor exact theme of it.

Okay. My last question is just back when the Cygna INA operations were purchased, immediately one of the first things that was done is you all sold the renewal rights to CIS. Yet, here it feels as if you're building out a bit of a middle market presence in the United States.

Can you maybe explain the difference between what you wanted out of and what you are going into now?

That is a good question. You remembered that CIS business. That was general market, small property, small package business. We are not going in nor are we in the general market, small commercial package business. That ain't us. So where you see us expanding, that is more into specialty and monoline smaller market business.

Can you just say maybe what are some of the lines of business, as an example?

Sure. Environmental, D&O, excess casualty, small primary in the E&S areas, inland marine, et cetera et cetera.

Comp. Comp, but on a monoline. There when we do it on a monoline, we are usually up the risk curve where you can get paid a little better.

Okay, great. Thanks for the help.

Adam Klauber with Cochran Caronia Waller.

Could you give us idea of what your zonal catastrophe limit would be for southeast wind? Has that changed materially since last year?

Well, I told you how it has changed materially already in my commentary. That on that which was -- I cannot give you a number, no. On that which was actionable, we are down 40% to 50%. Overall portfolio down 20% to 25% on wind; and that will, by July, I expect it will be in that 40% to 50% range on the total portfolio.

Okay. Phil, you gave the gross and net hurricane paids for this year. Could you give us that for last year also?

I will give you the cumulative. For the '05 storms it's 750 gross, 500 net. That is on a net ultimate of 1.3 and a net gross ultimate of 2.8.

Okay. finally, you showed some favorable reserve developments during the quarter, which is a departure from what we have seen for the last, I think, four or five quarters. Will the trend be any more favorable, or at least a departure from what we have seen over the last year or so?

We don't predict. You can't predict prior-period development.

It is just a result of a number of studies that are done as we look at the expiring shorter-tail lines. But we have no choice but to react to the result.

Okay, thank you very much.

J.F. Tremblay with HSBC.

I have two questions. First of all, you mentioned, you characterized the international P&C market as disappointing. How would you describe those competitors that are driving the market down?

I'm not going to comment on competitors.

(indiscernible) the US or geographies?

You know, I'm not going to comment on any specific competitors, but it varies by market. In the UK, it is local players and continental players, for the most part, who are I think misbehaving in the UK market.

On the continent, it is continental players predominantly, though there are one or two US players there, particularly in the property area, that I think are misbehaving a bit.

In Asia-Pacific, you get some of the Australians. You get Lloyd's. You get the major reinsurers, who I think in Asia-Pacific are not taking actions that they ought to be taking; and I think it is for the sake of market share.

By the way, I think the major reinsurers have a lot to do with the competitive environment in the UK and the continent as well. I think in a drive to maintain market share, they're not driving pricing.

That's very helpful. Then my second question relates to your A&H business. You have highlighted the strong growth in some of your markets with 30% rates of growth. Should that rapid growth raise some concerns about your pricing strategy?

No, it is personal accident-related business and supplemental health, like hospital cas. The combined ratios run in the low 80s for that business. There is a barrier; no one can just jump into that business, particularly where we are growing because it is very marketing driven. It's your marketing expertise, particularly in direct marketing, that drives that.

You have highlighted that that growth is explaining part of the uptick in the expense ratio. So do you think we're reaching the high end of where the expense ratio can go?

I don't know. It depends how fast we can grow that business.

Okay, thank you.

Ken Zuckerberg with Carlan Advisers.

I just wanted to ask about the reinsurance placements this quarter, and whether or not you could comment as to just composition by category. Just being existing players, new players, and maybe alternative programs like ILWs and other items.

Can you be --? I'm sorry, I'm a little thick. Help me a little bit.

You told us about a new cat reinsurance program, if my head is clear today and hopefully it is. I think you said 750 to $850 million of cover over your retention. What I am really --

That includes our retention.

Okay, including the retention? Okay. So the point being, with that chunk of protection, where there new players, some of the new class, that participated on the program?

A few.

Secondly, by way of percentage, was it sort of half existing players, some new players, and then some alternatives like industry loss warranties?

No ILWs. It was all traditional, so far. Understand that that 750 to 800 includes a new top layer that I don't want to talk about, but that we are out to market to purchase. The overwhelming majority of participants was existing players, not new. Yes, a few of the new players are on; we were cautious in our selection; and there are no ILWs included.

Great. That is very helpful. If I could just by way of follow-up, I actually asked [Joe Klimari] this question last fall after the recaps.

I could never answer better than Joe Klimari.

Hopefully you will appreciate the question. I had said to Joe that I viewed the market as being a little bit like Weekend at Bernie's, where there were a lot of seemingly wounded soldiers being propped up here.

I guess as we look towards 2006, without naming competitors of course, do you see the have-nots sort of exiting? Or do you see them sort of sticking on and writing a little business here, as we see the year unfold? You can be as general as you would like.

By the way, when I review mentally that tape of Weekend at Bernie's, I don't see ACE there. I see us sitting in the seats (multiple speakers).

Exactly.

--film. Thank you.

It is a little later in the alphabet.

You know, right now, if you just had a steady-state as she goes, I see most of the damaged ones limping along. But as paid claims come through there could be a couple of surprises there. As you continue to see cat development, there could be some surprises.

But you know, I'm sure there are guys out there making bets right now, because the high rates on line are attractive to them. Yet, you're staring down the barrel of the gun at what could be a very active wind season; and that could add to your movie.

Great, thanks a lot.

Tom Cholnoky with Goldman Sachs.

Evan, it seems as though the market these days seems to -- that being the equity markets -- seems to be obviously highly focused on top-line growth. I'm just wondering whether this time around that, as you think about your earnings power, it is not really what you're necessarily doing on the top line but more so through business mix; and that relationship between what you're charging in terms of rates and what is happening with exposure.

So in other words, as you look out -- and without giving us necessarily guidance -- do you feel more comfortable that what will ultimately drive your earnings power in the near term is more from a margin perspective rather than necessarily top line? And then if top line, obviously, emerges as the market unfolds the way you see, that that becomes icing on the cake?

You know, it is a pretty good picture you paint. It is degrees. There's no absolutes there. So in terms of degrees, yes. On the one hand, it is the quality of the business that you are writing and the mix; and I agree with that. That is a question of margin.

On the other hand, you know, look, you also need some growth. It is a combination of both. I think growth, you have to be more selective right now. That is all there is to it. Where you like the quality, you have got to hold your renewals and pay attention to your customers. That is what it's about.

Okay, great. Thank you.

[Dan Johnson] with Citadel.

Follow-up on the primary insurance, reinsurance protection. The 750 to 800, can you tell us how that compares to the numbers you had this time last year?

I want to say to you it was 550. Brian Dowd, are you on?

Yes, I am. You hit the number just right, Evan. When we [set] this --

He is in Hawaii, by the way, so you can imagine; he is like at 3:30 in the morning.

No problem, Evan. When we finish this new purchase we will have bought about 20% more.

Okay. Help me with -- I'm sure I am missing something here obvious, that your net to gross hurricane exposure was -- what was it? 2 8 minus 1 3, so $1.5 billion of ceded losses. Can you help me sort of compare that to this discussion of -- well, 20% less than $700 million?

We buy an awful lot of cat cover in our risk programs as well. So you don't only get recoveries in the event of catastrophes from your catastrophe reinsurance program. We buy risk covers for every product we sell in first party line.

So tremendous amount of coverage from there, as well as marine and other products. It is not just property that you have losses from, so there is lots of other coverages. So it could be a little bit misleading when you only talk about the property [towers].

Yes, yes, and that is obviously --

(multiple speakers) facultative and a lot of sources.

The cat cover within risk programs, this is where obviously a lot of people got burned last year in the reinsurance area. The presumption was the availability of that would be substantially less going into this year's wind season. What have you been able to do on that side of your protection program?

In some places, it is -- we have been able to maintain a good level of cat-related protection within the risk. In some areas it has tightened and been more restrictive; and we have reflected that in our total purchase .

Meaning that you have -- so you have upped the cat program to help offset some of the no longer available cat protection within the risk programs?

Where necessary, yes. Sure, where necessary.

The only thing I would add is in the main we have almost the same amount of occurrence covered in our risk programs. Our retentions are slightly higher than they were a year ago. But the actual dollars of occurrence limit within the majority of our programs is about the same.

Okay. Then one simple numbers question, the rough property, say casualty, mix within Tempest -- and I am sorry if it is in your supplement. I just haven't seen it.

I don't have that in my head, what it is right at the moment. Do you have it, Phil?

I don't, but --. We do have it split between the US and Bermuda premium.

The split between US and Bermuda is a fairly good proxy. You have that in your supplement.

Yes, I got you, with Bermuda being property and the US being casualty.

Predominantly. The US is overwhelmingly casualty.

Okay, great. Thank you very much.

Ron Frank with Citigroup.

I had just really a quick follow-up to Dan's question. The 150 retention on what I guess you would call the corporate cat cover, was that a significant change if any from last year?

Yes, last year -- well, significant? I mean last year was around 70 to $80 million. Is that right, Brian?

On the core property programs, that is right. You've always got --

We relay that back to the 150 that I mentioned.

So if we were to characterize what you have done overall with the corporate cover and with the risk treaties, it sounds like what you're saying is that you have managed generally to maintain or even improve upon your limits; but that you have taken generally higher retentions on average.

Of course. Yes. Then you see what we have done in aggregate shedding, and so you know, yes.

Right. Okay, thanks.

By the way, what we gave you as a cat guidance for the year, where I believe we said about $400 million of net cat losses, all of this was contemplated in that. This was the game plan.

Mark Lane with William Blair & Co.

First and last.

Start and finish. Play the lottery today. The development, I just want to get more specific on that, Phil. Within your supplement, excluding Financial Services, you had favorable development of $44 million pretax.

That's right.

Okay, could you just rectify that with the numbers that you had given me, which maybe was not exhaustive?

I was giving you everything including Financial Services. I think we had about 6 in Financial Services. So we had negative development after-tax of 49; and positive development -- that was only on catastrophes; 61 million of positive development after-tax on property and other short-tail lines; for a net after-tax of 12.

So the $12 million after-tax compares to $44 million pretax?

That's right; and it really obviously is driven by what jurisdiction a loss is in, and you get a little bit of an anomaly. But that is the tax.

Okay, and the $49 million was for the '05 cats?

It was for all cats prior period.

Okay, all cat. So there was no reserve movement that offset each other by year then? So reserves were not -- did not develop adversely in '01, and then something in '04?

This is all very short-tail lines.

Okay, thank you.

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

Thank you, everyone. That does conclude today's conference. You may now disconnect.