丘博保險集團 (CB) 2006 Q2 法說會逐字稿

Good day and welcome to ACE Limited's second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] And now, for opening remarks and introductions, I would like to turn the call over to Helen Wilson, Director of Investor Relations. Please go ahead ma'am.

Thank you and welcome to the ACE Limited June 30, 2006, second quarter earnings conference call. Our report today will contain forward-looking statements. Such statements relating to our financial outlook and guidance, business strategy and practices, growth prospects, competition, pricing and market conditions, renewals, exposures, losses, and reserves, reinsurance, and leverage. 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 forward-looking statements.

I'd also like to remind you this conference call and its content and any tape, broadcast or publication by ACE Limited are the sole copyrighted property of ACE Limited and may not be copied, taped, rebroadcast or published, in whole or in part, without the 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 our speakers. First, we'll hear from Evan Greenberg, President and Chief Executive Officer; followed by Phil Bancroft, our Chief Financial Officer. Then we'll take your questions. Also with us to assist with your questions are several members of our management team. And now, it's my pleasure to turn the call over to Evan.

Good morning. Overall, we had another excellent quarter and I'm particularly pleased with the quality of earnings. This is our second consecutive quarter of record after-tax earnings. Operating income was 579 million, resulting from a 28% growth in both P&C underwriting and investment income. Our P&C combined ratio in the quarter was 88.8% and is overwhelming a result of current accident year experience, which was favorable across the Company.

We had virtually no Cats and this benefited the combined by also 1 point. For ongoing operations, year-to-date, our net loss reserves have increased by about $1 billion. Book value is up 6% since December 31. That's after a mark-to-market impact from rising interest rates, 329 million. And our ROE year-to-date is 18%. I believe we are deploying our capital efficiently while continuing to strengthen our balance sheet.

Regarding revenue growth, our net written P&C premiums in the quarter were up about 6% and adjusting for foreign exchange, over 7%. As I've said before, this speaks to our diversification, our broad product portfolio and geographic reach. Globally, the markets generally remain favorable but are mixed. We took advantage of opportunities for growth in some areas while curtailing growth or shrinking in others. We continue to balance growth with our overarching priority to maintain underwriting discipline. I'll return to this subject shortly.

Earned premium growth lagged written and there were a few items that depressed growth in earned for the quarter. It will, however, pick up in the second half and Phil will elaborate more on the quarter and the year. In the first week of July, we successfully concluded the sale of the three reinsurance runoff entities. And I might add, substantially on the same financial terms as originally proposed. While all the facts regarding the sale are out there in the public domain, some of you may have questions about the terms. Phil and Bob Cusumano, our General Counsel, are prepared to address your questions, one on one. Simply, call Helen to arrange a conversation.

Let me now take a few minutes to discuss market conditions and how ACE is achieving growth while maintaining underwriting discipline. It's all about quality growth. I'll start with our U.S. retail and wholesale business first. I'll provide the rate environment and then where we are growing. In the property area, the effect of the 2005 Cats is spreading. Not only are wind related rates and capacity tight but the same can be said of California quake. Where since June, California quake rates are up anywhere from 50 to 100's of a percent while capacity has been greatly restricted.

Non-Cat rates for retail large account property requiring capacity have been firm all year and are holding. In certain geographic areas, particularly in the Midwest since May, we're beginning to see a stabilizing and firming of what we call middle market retail property, with rates on business we're writing flat to up 20%. Until now, rates in this area were falling. Overall, our property rates were up over 40% for the quarter.

For other lines of U.S. retail, I'd observe the following. For the moment, particularly with large accounts, it's an incumbents market. And our renewal retention rate remain quite high. I think this is true for many other carriers as well. In this part of the cycle, rates on new business can have a tendency to be lower than for renewals, as underwriters reach for growth. We are vigilant about this and are watching the pricing between our renewals and new business.

With that said, for the balance of our U.S. portfolio for the quarter, specialty casualty, namely umbrella and excess, environmental, D&O, E&O and medical malpractice lines, casualty pricing is down overall about 3 points. Large account risk management casualty business, pricing is stable, it's up about 1 point. Guaranteed cost workers' comp is generally more competitive but disciplined with the exception of a few companies who are aggressively buying share. For our book, pricing is off an average of 2% to 4%.

Our U.S. commercial marine book, rates are flat. For U.S. insurance businesses, and globally for that matter, terms and conditions are generally holding. For ACE Bermuda, our Company that writes high attachment excess casualty, professional lines and property, conditions are very similar to large account U.S. retail. Very high retention rates, in fact, historic highs. Pricing for the three lines is similar to the U.S., except excess casualty pricing was up about 8% in the quarter.

With all that said about U.S. and Bermuda pricing, let me explain where we are growing and where we are flat or shrinking. Again, it's all about quality of growth. Large account casualty risk management business is a significant business for us and it is flat. We are maintaining renewals and new businesses hard to come by, given what competitors will do to win big, premium accounts. Our expanded branch network and local underwriting presence continues to pay dividends and we're growing in the large account and middle market specialty casualty businesses. They are all up about 8% to 9%.

Our marine business is up 3% and our retail, retail property business is up 27%. Our guaranteed cost comp business, a relatively small book, is growing double digit overall, expanding in some states and shrinking in others. On the U.S. wholesale side, our growth by line is similar to our retail business, with the exception of property, which is flat. While we are up substantially in property due to rate increases in wholesale property, this is offset by exposure reductions and cost of Cat-related reinsurance.

We're also shrinking our non-Cat wholesale property, as some agency companies broaden their risk appetite beyond standard classes to E&S in search of growth at rates we cannot support. Finally, ACE Bermuda was up over 20% for the quarter.

Let me now turn to international and briefly describe, again, market conditions and growth. I'll explain growth in currency, eliminating the distortion from foreign exchange. On the continent for the quarter, P&C rates are down about 5% overall. Latin America, rates are flat. In Asia Pacific, the market is softening, rates are down about 10% overall. With professional lines and casualty down more than property and marine. Australia is softening more rapidly than any other territory in Asia.

UK retail remains competitive for both large account and middle market. Competition is very aggressive for the business that comes to market. In the UK, like the U.S., the large account business renewal retention rates are fairly high. Again, more of an incumbents market. UK retail P&C rates, overall, are down about 9%. For London wholesale business, the property market is firm for U.S.-exposed risks and worldwide offshore energy risks. Non-U.S. property risks written through London wholesale are more competitive. With that said, property rates overall are up about 14% and energy is up about 38%. Professional lines in the wholesale area are flat and marine is stable with rates up about 7%.

Now again, with that as background, let me explain where we are growing, flat or shrinking internationally. International retail was up 6% before foreign exchange. With P&C up 2% and A&H business up 16%. By region of the world, that is for P&C and A&H combined, our UK business is down 3%, the continent is up over 20%, Japan is up 7%, Latin America is up over 20% and Asia Pacific is up almost 10%.

Now, turning to the reinsurance side of our business. Tempest Re grew 14%, predominantly our property-related businesses and U.S. casualty. On the rates side, U.S. property risk is firm, with rates up 25% to 50%. Non-U.S. is stable, up 5 to down 5. U.S. Cat is hard, up 100%. And non-U.S. is stable and beginning to show signs of some firming, though not enough yet to meet our target in many areas. Rates are up overall 7% to 10%.

For the U.S. and international casualty, rates are stable but beginning to soften, flat to down 5%. In the reinsurance area, terms and conditions are holding but we saw signs of some softening at July 1. Now, with all of that said, I've given you a quick snapshot of our U.S. international and reinsurance businesses.

As you can hear on balance given our diversification, we see continued opportunity for growth. Again, with some areas up, some down and some flat, as we strive to grow intelligently and responsibly. As I said earlier, markets are still favorable but mixed. That means we have to be more discriminating and pick our shots. In commercial P&C, we have a lot of spots to choose from.

One final subject. We're in the wind season and I know you want an update on Cat exposure. We are on-plan. We have reduced and continue to reduce our aggregates in line with our objectives which I have described on previous calls. We have purchased most of the reinsurance protection we sought. We are getting paid well for the exposures we are writing. I believe we are in relatively good shape as we enter this wind season. Let me now turn the call over to Phil.

Thank you, Evan. Good morning. We had a good quarter from an earnings standpoint with operating earnings per share of $1.74. In addition, our balance sheet is strong and continues to get stronger, measured on growth in book value, the size and quality of our invested asset portfolio and a reduced recoverable and debt leverage. Second quarter operating cash flow was again very strong at $882 million. And our cash and invested assets are now almost $35 billion, up approximately $2.3 billion from operations for the year.

Our cash flow was affected by net Cat loss payments of 280 million and 170 million of payments made at the expiry of a runoff structured insurance transaction. I'll note that these items are also driving the increase in our paid loss to incurred ratio in the quarter. Our book value grew 2.5% or 309 million in the quarter despite the continued rise in interest rates.

Globally, rates rose 35 to 40 basis points, which resulted in an after-tax realized and unrealized loss of 237 million in the quarter. Our short duration, well diversified and highly rated portfolio kept us well positioned for a rising interest rate environment. During the quarter, our reinsurance leverage, that is our recoverables over shareholder's equity, decreased to 123%. On a pro forma basis, removing the high quality short duration recoverables related to Cat losses and the recoverables of the Brandywine subsidiaries runoff subsidiaries we sold on July, 3, our adjusted leverage would decrease to 110%. This is down from almost 220% at the beginning of 2003.

Our financial leverage increased slightly for the quarter but it's only temporary because we issued 300 million of 30 year senior debt in May in anticipation of 300 million of debt maturing in August. The repayment will bring our debt to total capitalization ratio to 14%. I'll also mention that our P&C earned premium growth was 1.4% and was affected by two items. First, adjusted for foreign exchange, the growth in earned would have been 2.3%. And second, as you probably know, we are a large writer of crop insurance in the U.S.

This year, we adjusted our earned premium recognition pattern, which better matches the exposure period for this business. This had the effect of moving earned premium to the second half of the year. Our growth in earned premiums without both of these items would have been almost 3%.

During the quarter, we had very little net prior period development. We increased reserves for prior year Cat losses by 30 million after-tax. We also had reserve releases in other short tail lines. The net result was positive prior period development of 9 million after-tax. Our effective tax rate for the quarter was 19%, principally because certain of the short tail releases occurred in low tax jurisdictions, while most of the adverse reserve development was attributable to higher tax jurisdictions.

Now turning to our guidance for the full year, we have some changes. We now believe that P&C net earned premium growth will be between 2% and 3%. We project that our combined ratio will be between 88% and 90%. However, we expect to be at the higher end of this range, including the first quarter AG settlement of 80 million. We have included 380 million of Cat losses in our estimate for the remaining six months. Investment income is now expected to be between 1.5 billion and 1.55 billion. We expect our tax rate to range between 20% and 22%. And we now expect that financial services income will grow between 0% and 5%. With that, I'll turn the call back over to Helen.

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

[OPERATOR INSTRUCTIONS] Our first question from Matt Heimermann, J.P. Morgan.

Good morning. A couple quick questions. On the guidance, that is net of any impact from the sale of the runoff entities, correct?

There are two things affecting it. We had 525 million of cash go out with the sale. And we also expect that we're going to repay that debt, as I mentioned, that's 300 million. And both of those items are built into the calculation of our guidance.

Okay, excellent. And then, it looked like retentions are declining a little bit, is that just a function of the cost of your reinsurance this year?

Matt, good morning, this is Evan. It's a couple of items in the quarter. One, yes, there was reinsurance cost increase mostly related to Cat protection. There was also -- we bought more reinsurance -- so one was the price of reinsurance, so the cost of reinsurance. The other was we actually bought more reinsurance. Particularly, related to our energy business in London where we gross line that business more than we have in the past. And that changed net to gross.

And then finally, in the quarter in the U.S., we wrote a number of fronted programs that had gross premiums with them but little to no net. And that skews the net to gross. Some of this I expect to be transient.

Okay. But if we think about year-over-year, we should think about a little bit of pressure on the absolute retention?

I think that's right. I think that's fair.

All right, thank you.

And our next question comes from Mark Lane, William Blair & Company.

A few questions. Number one, regarding the guidance, the combined ratio guidance, if you back out the regulatory settlement and the expected Cat losses, the midpoint of that range is like 85.5%. And I think in the first half you had 87.5%, which would imply, if I'm doing the math right, a pretty significant reduction in the second half. And I don't understand exactly how you get there given an 87.5% combined ratio in the second quarter. That's my question.

I hear your question. I haven't worked out -- and I understand what you're saying. Look, the regulatory settlement is baked into it, we have gone through this line by line. There is a Cat number baked into there of the $380 million that we expect, but I think when we come out to the math, we don't come out quite to that 85%.

The guidance is $400 million in Cat losses for the year, right?

That's right.

Which is about 3.5 points, which is 85.5 ex-Cat's.

I'm sorry. Yes, but if you don't have any Cat's -- that's right, you'll say, "yes, but you didn't have any Cat's for the first half of the year." A lot of the product business we write is pegged simply for the year. Okay? It's a pegged loss ratio. In our non-Cat reinsurance business where we just write property that could have attritional losses or Cat losses or large losses, those all make up its pegged loss ratio. We don't adjust its loss ratio quarter by quarter because it's property business. We look at the experience at the end of the year and adjust it. And I think that may be where the difference you're running into between an 87 and an 85.

So, there could be some type of true-up on property?

Hello, that's how it works.

Second question is regarding the asbestos runoff reserves or A&E overall and other non-A&E reserves. When you made the announcement to sell these smaller subsidiaries, you discussed looking at opportunities to extricate yourselves from the balance of those reserves or other runoff reserves. Can you give us an update on the progress there?

There is nothing to report at this time. And when and if there is something to speak about, it will be sure to report it to you on a timely basis.

And just one quick follow up on the net underwriting retention. When you set the guidance in mid-December, the 6% to 8% guidance, did the net underwriting retentions that ultimately came through your reinsurance program, were those completely consistent with your expectations at that time, or were they lower?

The retention -- the cost of reinsurance and the amount of reinsurance protection was basically built into that, yes.

Okay.

We haven't had -- there haven't really been surprises in that.

Thank you.

Our next question comes from Paul Newsome of A.G. Edwards.

Good morning, Paul. Paul%

Mr. Newsome your line is open. Our next question comes from Stephen Petersen, Citadel.

I was wondering if you might be able to revisit some of your earlier comments on the U.S. wholesale market? And I believe you said you were roughly flat, even in the Cat-prone areas? And maybe I misunderstood your comments.

No, I think what -- you didn't misunderstand -- I said wholesale property. I said retail property was up about 27% in the U.S. Wholesale property was flat. Rate increase, we got -- we had substantial revenue increase due to rate increases. But then that was offset by exposure reductions, cost of reinsurance.

Okay.

Then I also said that non-Cat E&S property, which is what we write in the wholesale area, non-Cat, that that area is shrinking because you see agency companies broadening their appetite of what they call standard lines business. And they're writing what would typically be E&S business and they're doing it at terms that we can't support.

Okay. Terrific. And I was wondering if you could provide a little bit more commentary on the reinsurance program vis-a-vis an update in terms of any additional limits purchased or any other changes that were made from your comments on the Cat program from the first quarter?

There were no other changes that are material from what I reported in previous quarters. Except that we did complete with Swiss Re the placement of a Cat bond, it's actually a Swiss Re Cat bond, but it protects ACE business and it's backed up by a traditional Swiss Re reinsurance contract with ACE for $100 million. And he had said we were out purchasing and we did complete $100 million of purchase.

And that's sort of a --

It sits as a top layer.

Okay, terrific. Thank you.

Now, we have a question from Charlie Gates of Credit Suisse.

Good morning. I'm looking at your December 15 announcement where you said that you expected net earned premium growth of 6% to 8% and now, of course, you've reduced that substantially to 2% to 3%. What would be the most important factors that contribute to that revised guidance?

I think it's two things, Charlie. One, we're just not going to write business for the sake of writing business. We're going to write business where we can get a decent underwriting return and the environment overall is not as tight as we projected it might be. And so, we're just going to maintain discipline and not grow as fast, number one.

Number two, with that said, I have said in the past and continue to see the effects of this to a substantial degree. That it's a matter of velocity and not simply direction. And the market particularly in short tail lines has continued to tighten or to stabilize in many areas. And so, there we do see better opportunity now than we did. And as you can see, our net written premium growth, we're growing faster than we did.

So, there is a lag in the timing of that and that's what we've tried to signal to you as well in the earned premium guidance, because earned premium was 0 growth in the first half of the year. And to get 2 to 3 for the full year, well, you're going to have to have more than 2 to 3 for the second half of the year. So, I think that kind of explains it to you.

My follow-up question, your comment about the excess and surplus lines market in the states contracting, that was a casualty comment, wasn't it?

No, that was a property comment. Casualty is good.

So you're saying that the excess and surplus lines market in the United States for casualty coverages, such as say commercial auto, has not contracted?

For the casualty excess and surplus lines businesses that ACE is engaged in, the casualty market from an underwriting point of view is stable and we continue to do well in that business. And we have continued to experience growth in that area.

Would that contain things like --?

That was roughly in line with -- and consistent with what we have on the retail side.

My final question, sir. Would that include coverages like say contractor's liability insurance --?

I'm sorry, can you repeat that?

Would that include coverages like contractor's liability in California?

Yes, yes. Yes, we're not -- by the way, you referenced commercial auto. And in the E&S market, we're not a real commercial auto writer.

And the contractor's liability in California, you think that continues to be good, very attractive?

Yes, pockets of it. We don't have a broad appetite for everything. But for the areas that we write it in, particularly in the residential areas, on project specific, we do find that market to continue to be robust, yes.

Thank you.

You're welcome.

We'll take our next question from David Small of Bear Stearns.

Could you just maybe comment on the life reinsurance business? You made a recent acquisition there. Maybe just talk to us about the potential for further acquisitions and what the growth strategy is there?

Yes. The life reacquisition was simply a shell. We bought it to get the licenses. I have said on previous calls, we have a specialty life reinsurance business. It's a niche focus. It's not very people-intensive and it's mostly in the areas of variable annuity guarantees where we have been a reinsurer of those for five or six years, and quite successfully.

We have broadened our product portfolio and have entered the term life market in the United States. On an opportunistic basis, I might add. Because that market has tightened to a point, given a lack of capacity, from quality paper where the returns given the risk are attractive to us. And as long as that is maintained, we will build a portfolio in that area. If that market turns and it's not reasonable, you will see us cease writing business in that area.

So, it is opportunistic. We're moving into it, it's a step-by-step and it's an incremental move. This is not a big push into the U.S. life re business.

And then maybe I could just ask you about your capital position. When you first raised capital a few months ago, it was -- your expectations for growth were obviously higher. Now that you're a few months out, how much of that 1.5 billion do you think was for ratings agencies and how much of that are you going to be able to deploy in the market?

I don't consider us overcapitalized. We raise capital both for growth, as you said, and for balance sheet strength. And while growth is not as we originally anticipated, the ROE is excellent, and we're giving a good return on that capital and I think we're using it efficiently. And at the same time, what we did is strengthen the balance sheet, we have stable ratings, and I think all of that improves the franchise quality, which provides greater flexibility for opportunity in the future, good or bad and we are in a volatile business. So, that's kind of how we square that circle on capital.

Okay, thank you.

And now we have a question from Ron Frank of Citigroup.

Good morning. Two things, one for each of you. Evan, following up on Charlie's question, I was wondering if you could drill down -- you gave us a lot of market information, I couldn't write fast enough. But if you could drill down a bit on looking at the earned premium guidance now versus six months ago, just broadly speaking, which markets in particular failed to tighten as much as you expected? If you can drill down that far. And Phil, the guidance seems to imply a significant increase in tax rate second half versus first half. And I was wondering if you could give me some quick color there?

In a word, short tail and many short tail lines tightened but didn't tighten as rapidly. So velocity is about short tail lines tightening but not as quickly. And the balance of it is casualty. Casualty has not tightened and in some areas has been softening.

Evan, are you still of the view that it will, or do you think it just didn't happen?

I think at this point in time, it depends a bit on the Cat season we have. I think if you see a benign Cat season, a relatively benign Cat season, you aren't going to see it. I think if you see an active Cat season, I believe you'll see a -- it will have some ameliorating effect on casualty.

Ron on the taxes --.

I'm expecting just kind of an average season.

Okay.

On the taxes, Ron, our original guidance was that it would be between 22% and 24%. We had the 19 in this period but it was really one off. It was a result of, as I said, it was a result of the losses in the taxable jurisdictions and the releases in nontaxables. So, I don't expect that to happen again. But on balance for the year, it will be lower than our original guidance, we've lowered to 20% to 22%.

Okay, fair enough. Thanks.

Our next question comes from Ian Gutterman, Adage Capital.

I had a question for Phil on investment income. Can you remind me, Phil, I think you said in the past if you have a FAS 115 in the quarter you would essentially make that up in higher investment income over the next 12 months, is that still correct?

What we say is a 50 basis point increase in rates, would give us -- we would lose about one quarter's investment income.

Okay. And then, what's the impact as far as -- obviously, that means higher rates, you get increased investment income going forward. When do you sort of get to neutral on that? I thought in the past you said in a year?

Yes, we said for 50 basis points, it's between 12 and 18 months.

Okay, so then -- what I was thinking is, I think you said a little bit over 300 million pretax at this quarter. Does that imply about 150 million increased investment income just from increase in interest rates in the second half? And that's partially being offset by the Brandywine assets going out?

As I mentioned, there's 825 million going out in the second half, between Brandywine and the repayment of the debt. We've said that we expect the portfolio rate to grow at 5.1%, we saw that in the press release. And that assumes an overall rate, a market rate, a reinvestment rate of about 575. So, when you roll the cash flow that we expect and net of those two outflows and the portfolio of movements into the higher new money rates, that's where we're coming out.

And then just related to that as far as new money, how much of your portfolio in a given year actually gets a new money rate? Obviously, the 4 billion of new cash flow would. But on top of that, you obviously have maturities that get reinvested. How much gets reinvested?

We said -- our duration is about three years, 3.2 years.

But is it really 1/3, or some of that obviously is to pay claims, Right? So I was just wondering how much actually does get reinvested, you know what I mean?

You mean, how many years it would take to reinvest the entire portfolio?

No, not really. What I'm saying is out of the 30 some billion of invested assets, if you have a three year duration, about 10 billion of that matures but not all of that is necessarily getting reinvested. I assume some of it is going out the door to pay claims or other expenses, whatever, interest expenses et cetera?

I wouldn't look at it that way because we have such significant net positive cash flow.

Okay. So, then I could basically say roughly 10 billion is getting reinvested in new money, plus the 4 being of cash flow, so close to 15 billion. We will be seeing that 5 points on the 5?

You work out your own worksheet on that. We gave you the numbers, that's all we're going to give here.

Thanks so much.

Now, we have a question from Tom Cholnoky, Goldman Sachs.

Good morning. As you can probably tell, the market seems to be infatuated with top line growth. And I'm just curious, in your calculations, let's say you wanted to post the kind of growth -- or you ended up posting the kind of growth the market wanted to see. What would you think you would have in ROE give-up if you were to do that?

Well, I really haven't figured that precisely because I see it a different way. I haven't added it together that way. But I could tell you, every incremental dollar, if we're doing our job efficiently would be destroying ROE. And I just can't bring myself to a strategy that says, "let me have a little lower ROE and write some stuff that has no business being on the books of the Company", because it destroys ROE. So, I can't do it.

And do you think the way the market is right now that there's still enough opportunity out there at a lower growth rate to generate the kind of returns you think are acceptable at this point in the cycle?

Well, absolutely. That's why we have that number. And look, we grew -- when we talk about top line, I look at that 6% growth in the quarter and 7 without foreign exchange and I think that's pretty robust written premium growth. And I'd more be asking, and that's why I tried to square it in the commentary; Are you guys really maintaining underwriting discipline? And that's why I talked about new versus renewal pricing. So, I look at it the other way. And to me, I think we can maintain underwriting and continue to find pockets of -- you've just got to be more discriminating in the pockets you look at and take your shot.

And then one follow-up, if I can. Can you -- I don't know if you've talked in the past with the relationship with Star and the kind of opportunities you see ultimately emerging there?

Well, Star is an independent,I'll underline the word "independent", agency managing general agency operation. We do want -- they do four or five lines of business. ACE does one of them. And that is their U.S. energy business. They're also, as you know, in the marine business. They're in the public entity business and certain specialty casualty businesses, and aviation business. We are not engaged with them in doing business in any of those other areas. Just the U.S. energy business. And at the moment, I don't see expanding that.

And can you give us some sense of how much incremental premium you might generate out of that?

It's -- U.S. energy, you're looking at big, complex risk. And so it's really gross line quite a bit. A lot more gross premium then net premium written. And I really don't want to talk about a specific -- and it's not our way to talk about a specific area, a specific deal that we do in any detail. So, I'd rather not. But I will tell you that it has a lot more gross than net.

Okay, great. Thanks.

[OPERATOR INSTRUCTIONS] We'll go next to Jay Gelb of Lehman Brothers.

I wanted to step back, Evan, and get your sense on the business mix for ACE overall. Looking at page five, it's about 30% property, a little more than 50% casualty, and 11% accident for the first half of the year. In this type of market environment, where do you see that business mix going over time?

Well, it's going to fluctuate a bit depending upon the pricing environment. Right now, as you could see, it's upticked a little bit into the short tail lines because of the price increases, predominantly that we're receiving in the property area. Not that exposure has grown but you're seeing revenue growth there. that you're not seeing in casualty. My sense is, the mix -- A&H will continue to modestly increase as a percentage over the short-term. Over the short-term, you might see property as a percentage of the total increase modestly. But you're thematically where we're going to be, unless there are some other dramatic changes in the market, which there can be, it's a very dynamic business, as you know. In the -- but if you look at what we can see today, that's about what I'd expect.

Can you drill down a little more on the personal asset market? That's been a pretty good growth area for ACE over time. And I'm just trying to get a better sense of what the drivers are there and what market conditions are like.

It's -- we have very good -- we have pretty good growth in the developed markets. It's an overseas business for us. U.S. is very mature and we're not in the business in a major way in the U.S. So, it's an international play. The developed markets continue to grow and grow well, modest double digit. But the real play is in the developing world and in more emerging markets. And Latin America and Asia in particular for ACE, they're growing at rates of north of 30%.

It's more about marketing than it is about simply underwriting. Underwriting is important but marketing is really the key. We have a real capability, not just -- in this area and in the support areas of marketing for A&H. We have very good call center capability and we have built and managed call centers all over the world to do this business. We have very good direct mail capabilities. So, we have very good overall internal direct marketing capability. It's about marketing with third parties because we use the brand and the customer list of third parties, such as financial institutions or associations or others who have an affinity.

And so, it's about the sales and the marketing to those institutions. We're also developing a very good direct to consumer capability and we're doing that in a number of countries. For instance, in Korea, we're on the Home Shopping Network and have built a substantial book selling supplemental accident and health type products directly to the consumer via that channel. So again, it's more about marketing, it's more about developed countries. And it's about building a culture that doesn't treat this as an also-ran product but really focuses on it. And I think we have that momentum.

Okay. And then a separate issue. Can you give us your view on whether the backdating of stock options on D&O will be a material claims issue?

It's early to tell. My gut is it's not going to be a big event for ACE. We didn't have and don't have a lot of high-tech exposure. We weren't a big primary writer of D&O and so we won't have the same defense costs, exposures. This is really going to be a case by case, where the facts have to speak. There are many defenses and conditions within the policies that on the face of it, you'd say there is no coverage for many of these. But the facts have to evolve and it hasn't ripened and they haven't evolved yet. And how many of them will involve accounting restatements and how many will not? What are the real damages to shareholders, if any? What are the damages to the corporation? All those answers have to -- and was it willful, was it not? So, the facts have to speak on this. But I don't expect, from everything I know so far, that this is a significant event for ACE.

Okay. And then a final issue, you said you really can't update on us on whether ACE will explore at this time other opportunities to jettison the rest of the asbestos exposure. But can you give us kind of a road map in terms of what may lead that to happen? What type of conditions would need to be in place to move forward on something like that?

I'd just correct one word you used there, Jay. Because it doesn't characterize the way we think about it. We're not going to jettison anything. We will manage the exposures and we will eliminate them and reduce them wherever possible.

I don't want to give a road map at this point. It is in a -- what you should know and I think what's important for you to know is, as analysts or investors, is like everything else in our Company, this is on our balance sheet, we manage our balance sheet, we're going to manage this exposure and we are doing that. And that will include exploring all options for reducing or eliminating that exposure. And we're actively -- we're not asleep at the switch and we're actively exploring that.

Thanks for the answers.

When and if, I underline both, when and if we have something to say, we'll be back.

Thanks very much.

We have a question from Josh Smith, TIAA-CREF.

I just had a quick question on the big dig. I think the Insurance Times way back when had listed some of the people on the construction wrap contract and you were there on a few of the layers in the GL, the builder's risk, etc. Have you looked at all that the possibility that this could become an issue given what's going on with people looking into faulty construction?

Yes. And while we don't traditionally comment on individual claims, and I won't get into any detail here, this is not an event for ACE.

Okay, thank you.

And now we have a question from Bill Wilt, Morgan Stanley

On the guidance, just your thinking and color on the -- including the regulatory charge, which seems to be a one-time item, embedding that in the combined ratio guidance?

We did do that.

We've had a long-standing policy that the only thing we remove from our operating earnings is realized gains and losses. We feel that everything else belongs in operations and that's just been our policy.

We gave you the math. So, it's transparent. So, you can put it in, take it out. We put it in.

Good deal. Moving on, question two. Credit ratings. Are you content with the rating at its current level, actively seeking a higher rating? Your thoughts looking 12, 18, 24 months out on where you'd like to be.

Bill, we're not actively seeking a higher rating, no. Our ratings are -- we have a good rating. A+ is a very helpful and sound rating in this environment we're in. And when we look at a flight quality, which we have experienced in a number of areas of our business, we've seen it particularly in reinsurance, the A+ has been attractive and we have gotten better signings and better showings in many cases. The same thing can be said on the insurance side. So, I have to say we view the A+ as attractive. It's viewed as stable by the rating agencies and that color is gratifying to us as well. I would think if we just -- to us, we don't look at it as sort of; we're going to go out and seek a higher rating. We'll just do our job. We'll keep strengthening the balance sheet, building book value, producing quality earnings. And that will over time, I would guess, reflect potentially a higher rating. But who knows when and there you go.

Good color, thank you.

And at this time I would like to turn the conference back to Helen Wilson for any closing or final remarks.

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

That does conclude today's conference. We thank you for your participation and you may disconnect at this time