丘博保險集團 (CB) 2008 Q3 法說會逐字稿

Good day everyone and welcome to the ACE Limited third quarter, 2008, earnings conference call. (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. Ma'am.

Thank you. And welcome to the ACE Limited September 30, 2008, third quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to general economic and insurance industry conditions,our financial outlook and guidance, business strategy and practices, competition, growth prospects, investments and use of capital, integration and performance of recent acquisitions, our redomestication to Switzerland and its effects, our stock price in the capital markets, pricing and exposures, losses and reserves, all of which are subject to risks and uncertainties. Actual results may differ materially.

Please refer to our most recent SEC filings as well as our ACE press release and financial supplement which are available on our website, for more information. on factors that could affect these matters. 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'll hear from Evan Greenberg, Chairman 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. Now it's my pleasure to turn the call over to Evan.

Good morning. I want to make a few comments about the financial markets and our industry, and then follow with ACE's results. To say this was a difficult quarter for the global financial markets is an obvious understatement. What we witnessed since the beginning of September, is simply seismic. Destruction of companies and wealth, all in a blink. In roughly a six week period the role of government and regulation in the market has changed. The structure and order of the financial services industry, banking, investment banking, brokerage and insurance are changing before our eyes. Across the financial services landscape, true credit related losses unreasonably exaggerated by fair value accounting have contributed to a cycle of fear and tight liquidity that has fed on itself, resulting in severe and indiscriminate price declines for all classes of financial assets and near zero liquidity in the lending markets. The ultimate impact of all this is still in front of us and not 100% clear.

Economic, political, geopolitical, regulatory, all consequences yet to unfold but undoubtedly will over years. I am encouraged by the extraordinary actions taken by central banks and governments around the world to provide capital and inject liquidity and confidence into the banking system. There are early signs of stability in the debt markets; however, credit and equity markets remain under severe stress. The continued impact of deleveraging and the specter of severe recession are the principle factors impacting pricing. In the insurance industry so far this year, we have witnessed a significant and rapid destruction of capital. We began the year with an overcapitalized industry feeding a soft market. Since then natural catastrophes and financial market losses have destroyed a great deal of this excess capital. Additionally, down grades and government ownership are impairing the ability of a number of companies to operate in the same manner as they have in the past, and this adds to industry capital pressures. Moreover, the cost of debt and equity capital has soared for all industries globally, including insurance, and this will be true for some time to come.

While all this is going on insurance company margins are under greater pressure as underwriting experience deteriorates due to increased cats, soft market pricing and declining returns on investment portfolios. In sum, the end of the soft market in insurance has arrived. During the quarter, the balance sheets and income statements of all financial service companies, including insurance, have been stressed, some far more than others. Through these extreme conditions, ACE, in my judgment has performed quite well. I believe our results demonstrate relative balance sheet stability and earnings strength. In fact, if there ever was a test of our operating policies, of how we endeavor to run our Company conservatively and manage it for permanence, it has been this period. This environment has and will create quite a number of casualties in the corporate world, witness Lehman, Bear, Merrill, WaMu, Wachovia, AIG as well as others in our industry. This period will also create significant opportunities, many of huge proportions, for those with the wherewithal and franchise to take advantage.

We have already witnessed some of that in the banking world and we will in insurance as well. ACE will be one of the companies that strives to take advantage of these opportunities. The exact size, shape and timing are unclear as events are unfolding rapidly. I expect we will emerge from this period bigger and stronger. Again, our results for the quarter in nine months were excellent, all considered. ACE recorded after tax operating income in the quarter of $504 million or $1.51 per share bringing year to date operating income essentially flat with prior year. It was down about 3%. Our P&C combined ratio for the quarter was 97.9. Underwriting results were impacted by 12.5 points of cat losses almost exclusively from hurricanes Gustav and Ike. These were within our expectation of loss when we priced and wrote the business.

Results in the period also benefited from positive prior period development in the amount of $277 million pre-tax. About 55% of the release was related to casualty related lines, and the balance was short tail. For casualty, we completed a number of actuarial studies in the quarter and the majority of the release was for accident years '04 and prior. The balance of the release was for short tail lines. Loss reserves year to date increased by $1.5 billion. This is another point of our balance sheet strength. Our balance sheet and capital position are in good shape and our operating cash flow quite strong at $1 billion for the quarter and $3 billion year to date. Net income and book value were impacted significantly in the quarter by realized and unrealized of $1.3 billion. The vast majority of this was due to pricing and not true impairments. As a consequence book value declined by 6% in the quarter. Our book value in the last 12 months is essentially flat. And our annualized return on equity year to date is 16.5%. Pretty good use of capital in our judgment.

Concerning our variable annuity reinsurance business, as we have explained before, accounting convention requires us to account for these liabilities like a derivative, using fair value accounting even though they are in fact long-term in nature, consistent with a buy and hold business. This is a cat business and we are in cat-like financial market conditions. Our portfolio had a net loss of $78 million in the quarter, which includes a realized mark of 161. Phil will provide more details about this. During the quarter our net premiums increased 17% with strong contributions from crop insurance, our international A&H and the impact of consolidation of combined insurance which, by the way, is on track with its savings and growth initiatives.

Turning to market conditions. As I said earlier I believe the soft market is now over, and this fact will work its way to the trading level of our business over the next few months. Rates are now in the early stages of firming. In many parts of the world, rate decreases have slowed or stopped. And in some classes rates are beginning to rise, particularly in lines that have performed poorly, such as energy. Again, it's early days. As I said before, given the amount of capital that has been destroyed, as well as the capital on balance sheets that cannot be effectively deployed, due to downgrades and government ownership, I believe rates will rise in the future. How far and how fast I cannot predict. There is simply not enough visibility. At ACE; however, we have mandated as a rule flat pricing no reductions. Under more normal circumstances you would expect us to provide '09 earnings guidance by mid December; however, we are in a period of great uncertainty.

Due to the global economic slowdown, continued financial market stress and dynamics within our industry. our business mix may very well change. Until we get more visibility, we will likely delay issuing guidance. That means end of the year or very early '09. It is worth repeating. I believe that based on what we know today we will see a reordering of players in the insurance industry. Some will be in a position to take advantage of these challenging times while others will shrink or disappear. I have confidence that ACE will be one of the winners. Before I turn the call over to Phil, I would like to comment on a statement I made yesterday on behalf of the American Insurance Association, addressing news that the Treasury Department is considering whether insurers should be included under the capital purchase program, which is part of the $700 billion emergency economic stabilization package approved by Congress.

My statement said the majority of insurers represented by the AIA do not support the inclusion of PMC insurers in the CPP program-- that's the equity program-- and if made available, they would not elect to participate. And that statement includes ACE. In fact we are adamantly opposed to taxpayer capital being used for the insurance industry and that goes for both general and life insurance. There is simply no need or cause. We believe the CPP funds should be used as Treasury intended them, to prevent systemic risk to the financial system as a result of a counter party failure or as a means to inject liquidity into the credit system. Two criteria the insurance industry fails. To protect policyholder interest there is a well established system in place. If CPP funds were used for insurers, the capital would represent a cheap and distorting subsidy from the government. rather than a means of crisis correction. In short, taxpayers should be a last resort rather than a cheap source of capital. With that I'll turn the call over to Phil and then we'll come back and take your questions.

Thanks, Evan. Good morning. For the quarter we had positive operating cash flow of approximately $1 billion and our balance sheet and capital position remain strong. In fact, Standard and Poor's recently reaffirmed all of ACE's counter party credit and financial strength ratings including our A plus ratings for our core operating companies. The S&P, A M Best, Moody's and Fitch outlooks on all ACE companies remain stable. Net investment income grew 6% in the quarter and 9% for the first nine months. On an after tax basis realized and unrealized losses from our investment portfolio were $1.1 billion with approximately $850 million in unrealized losses resulting from the mark to market pricing impact caused by the dramatic widening of credit spreads and drop in equity prices in the quarter. After tax realized losses from our investment portfolio were approximately $280 million comprising losses on sales of securities and losses on securities deemed impaired.

Approximately $120 million of the impaired amount relates to our holdings in Lehman Brothers debt. Overall, our invested assets decreased $2.1 billion in the period. Approximately $1.5 billion of this decrease was due to pre-tax realized and unrealized losses. An additional $1.2 billion was used to settle repurchase agreements used to finance the acquisition of combined and to pay for purchased securities which remained unsettled at the end of last quarter. These reductions were partially offset by our $1 billion of operating cash flow. Our portfolio continues to be predominantly invested in investment grade fixed income securities and is broadly diversified across geographies, sectors and issuers. The average credit rating is AA., and its duration is approximately four years. Our holdings of financial institutions that have recently experienced distress related to the credit market difficulties are not significant to our capital position. We do not invest in CDOs or CLOs or complex credit structures and we do not use leverage in the portfolio. We also do not provide credit default protection.

With respect to the unrealized losses in our fixed income investment portfolio we believe our strong liquidity and our continuing positive cash flow support our view that we will hold our highly rated fixed income investments until they recover their value as they approach maturity. We have longstanding global credit limits for our portfolio. Exposures are aggregated, monitored and actively managed by our global credit committee. We also have well established strict contractual investment rules requiring managers to maintain highly diversified exposure to individual issuers. We use state of the art technology to monitor, manage or compliance with portfolio guidelines on a daily basis. You will find additional information in the supplement about our investment portfolio, including a breakdown by sector, credit quality and geography. This disclosure includes our top 25 holdings.

Our realized losses include $161 million relating to the increase in the fair value liability of the GMIBs in our variable annuity reinsurance business. The loss was reduced from our pre-release estimate by approximately $60 million following the subsequent completion of our regular quarterly reserve study. Our operating income also improved by approximately $18 million or $0.05 per share. The level of operating income and the mark to market losses are contemplated in our models and within our range of expectations when we originally priced the business. In fact our models show that as of 9/30 this is approximately a one in 50 year event. While this business is considered a derivative for technical accounting purposes, we feel our operating income, which includes the results of insurance accounting treatment is a more meaningful way to look at this business. It is worth contrasting our variable annuity reinsurance to the life companies that originate this business. First, we have no deferred acquisition costs. Second, our contracts are issued to life insurers covering the portfolios of business they wrote, and our contracts contain annual limits and deductibles that limit our exposure. Third, the premiums we charge companies generally do not fall when equity markets decline and finally, we reinsure only guaranteed minimum death benefits and guaranteed minimum income benefits. No other guarantees. We have been asked to reinsure other benefits but didn't consider it prudent to do so. We have controlled our aggregate exposures and our portfolio has been declining. We stopped writing new or renewal business in 2007. There are no liquidity problems and the business produces positive cash flow. We have included the cash flow for this business for the last several quarters in the supplement. On substantially all of our GMIB exposures, our client's policyholders are not eligible to trigger claim payments until 2013 or later. As you may recall, our debt to total capital leverage was inflated at June 30th due to $700 million of repurchase agreements used for the combined acquisition in the second quarter. These repurchase agreements were repaid in the third quarter, and our debt to total capital leverage at September 30th was 17.6%. We have also provided additional disclosure in our supplement on our debt maturity profile and bank credit facilities. You will see that we have minimal debt refinancing needs over the next five years. Our LOC and revolving credit facilities were executed in 2007 for a five year period. The LOC facilities are principally used for collateral requirements related to our reinsurance business in Bermuda.

As of September 30th, we have entered into the securities lending agreements, totaling approximately $2 billion. The proceeds from these agreements are invested in prime, short-term money market funds. We do not issue commercial paper or any other short-term securities to finance our operations. Our cat losses of $311 million net of tax were in line with our previously reported estimates. We have included our estimates by storm and segment in the supplement. The combined acquisition is performing as expected. We are on track with our expense reduction plan and with our operating income estimates. We estimate that the acquisition of combined will be $0.24 per share accretive for 2008. We are updating our 2008 earnings guidance. We now expect our earnings per common share will be in the range of $7.55 to $7.75. Cat losses included in our estimated earnings are $100 million pre-tax for the fourth quarter. I'll turn the call back over to Helen.

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

(OPERATOR INSTRUCTIONS). First question from Jay Gelb of Barclays Capital.

Thanks very much. First on the earnings guidance, I know you mentioned the catastrophe expectations. Are there any expectations in there for reserve releases?

No. Absolutely not.

Okay. And then second, and I guess more broadly, with regard to AIG, can you give us a sense of how much you or how much ACE can benefit from the dislocation there in terms of attracting business or buying operations or bringing over teams of people? And then on the pricing side, Evan, you said no reductions on pricing in P&C.. Does that apply to new and renewal business?

First, the no pricing reductions applies to new and renewal business. The new business has to meet our pricing standard. So if it was priced below our standard, then we're going to raise the rate on it. On renewal business yes, it applies to renewal business. That's the rule. Any exceptions to that rule require quite high level sign off within every division. For instance in North America it requires each division president sign off to be able to quote other than flat or up.

On AIG, look. There is opportunity from AIG. I'll give you a couple of data points in terms of business that is coming to market, and it is seeking an alternative and in fact securing an alternative. As far as acquisitions go, I'm really not going to speak about that. AIG has announced they are going to sell assets. And we have a strategy, a very clear strategy, and we will make acquisitions where they further our strategy, and where they enhance and make our company stronger. If that includes businesses in AIG, then that will happen. As long as it's accretive and so therefore it's at the right price to shareholders. We're not going to break discipline. We are quite mindful of the high cost to capital today.

On the side of business, if I give you just a sense of business that is coming in, and a lot of it is due to the trouble or the weakness that is occurring with other insurers in terms of either rating downgrades of some others or those owned by the government today. Our submission activity, and that will just give you a window into it. Our submission activity in August, September was up about 12% over prior year. In early October, our submission count from late September, early October was up over 31% over prior year. And for all of October as of now, it's up over 50% over prior year. So it's increasing just rapidly. Our submission count for large account business is up 80%. For middle market it's up about 60% and for the small commercial it's up about 36%. We have seen so far in October as many submissions as we saw all of fourth quarter last year so I hope that gives you some window.

That's great. In terms of the conversion on that, the written?

The conversion ratio, I don't mind saying when it comes to the one large player who is under stress, they are an outlier right now in the pricing environment today. They are aggressively cutting pricing in an irresponsible way to maintain business. And it's worrisome. The balance of the market we are seeing really rates kind of going flat, in some classes up, we have seen where rates are going down and a dramatic slow down in the rate in decrease in pricing the last four weeks have been almost a sea change, the beginning of a sea change in the market. But there is that one outlier and we're just not going to break discipline to write the business. .

(OPERATOR INSTRUCTIONS) We'll go now to Josh Shanker of Citi

Good morning, you mentioned the word, Evan, energy, that energy rates might be on the rise. We haven't heard that from anyone else yet. I wondered if you would go into a little detail about just reacting to the storm losses or something greater afoot here?

I'm going to ask John Keogh to comment for a moment on offshore energy and then Brian Dowd to talk for a moment on onshore energy.

Sure. Offshore, Josh as you know, Ike has given that part of the industry significant loss in the Gulf of Mexico. That loss will be multiples of the premium for the industry on the heels of a big loss a couple years ago. So we are already seeing, it is early days, we are already seeing rates for the Gulf of Mexico go offshore up significantly over expiring.

Other than the Gulf, we are also seeing offshore energy rates rising right now. This is early days. Rising double digits though significantly less than the Gulf. Brian you want to talk a little on onshore energy?

Onshore energy property, frankly the number of losses in '08 have been historic, frankly. We start trying to push pricing in early April on onshore energy, and frankly with limited success. Starting in the third quarter we have started to get some traction and we are starting to see prices move up in the single digit area to start. We are also starting to see differential pricing. We're seeing some carriers get pricing increases and one large carrier frankly getting prices that aren't the same as the rest of the market.

Thank you for that. The other question I don't mean to force the conference call to continue to be a little about AIG, but I can promise you, you are not the only conference call. In terms of markets where there is not a lot of competitors where you are there and AIG is there, in somewhat emerging markets. I'm wondering if you can go into detail on how the product sold and whether or not the counter party risk is prevalent in the buyers of insurance in these more emerging market places.

Let me answer it this way. The United States and the UK and to a lesser extent Australia, are where there is the greatest concern about counter party for the most part. Right now, less so on the continent. It is to some degree in Latin America, less so in the balance of Asia. Large accounts though around the world have a greater concern. You see more CFO involvement around the world than you do in middle market or smaller accounts though again like the U.S. and the UK, it's kind of, it's front of mind for most.

The business is sold mostly through brokers, though when you get to some of the smaller markets, it is agency driven. And so, the recognition and the understanding of what is occurring is, it's kind of like throwing a stone in the water and the ripples move out -- the ripples are continuing to move out. The comments on how I would have commented on it two weeks ago or four weeks ago is different than the comment I give you today. It's dynamic.

And in terms of business that's sold through brokerages, is it the customer asking for more quotes or are you seeing the brokers being proactive in terms of doing a deeper dive they have typically done for more sources of protection for their customer.

You know it's thick and thin, it depends on how diligent the broker is in doing their job. In many where a broker is diligent, they are presenting their clients with the information, they are giving them their own professional advice. But of course it's always the clients's choice. I think in most cases whether it is the broker or the client they are prudently exploring all opportunities.

Thank you very much. Good luck to you in this coming term.

We'll take our next question from [Tom Cholnoky] of Goldman Sachs.

Good morning, Evan. I wanted to pursue this comment that Phil made regarding your invested assets. Clearly we can all see the impact that the weak financial markets have had on company's balance sheets. I was intrigued by the comment that you and other companies have been making that frankly, this is all credit spread related. We have the full intent to hold, which kind of implies that what we are really facing here is a temporary impact to capital. If you and other managements really feel that way, that this is all going to come back, where is this financial pressure that everybody's talking about? How will this actually impact behavior in the market over the long-term? If you and others believe this is all money good investments.

Well, two comments I would make about that. Number one, Phil was not referring to equity markets. He was referring to debt markets, number one. Number two, he was referring to the amortized the ultimate amortized cost of these securities.

They will amortize themselves back to the original price that we paid for them. That doesn't mean if you traded them in the meantime, because of spreads, that you wouldn't take a realized loss. You would. And so what he didn't comment on is that whether he thinks credit spreads are going to come back to where they were. And frankly, let's assume equity markets recover and let's assume that debt markets recover to some degree. We don't think the cost of capital is going to return to where it was. And that recovery is going to take some time. So there is just that practical reality.

Okay. But in the end, though, you would argue that some of the, what you are really saying is a lot of these unrealized losses will ultimately reverse themselves?

Over the next three to four years, right. As depending on the duration of the investment back.

On the fixed income as it amortizes itself back

Or as spreads might narrow, right?

As it accretes back, or as spreads narrow, correct.

Secondly, I'm just wondering, Evan, if you could just talk a little bit about the demand side of the equation. Obviously you're going into a global slowdown in terms of growth. How much of an impact will that have, do you think, on actual premium writings? In other words, even though your rates might be going up if exposure growth is declining, will that somewhat slow the impact on the top line?

Yeah, I think that's fair. That's why I'm saying it's chaotic right now. It's dynamic. If you want to put it all in a neat box, I think that's at your peril. I don't think any of us have that kind of a neat picture of it right now.

Tom, I want to be careful of one thing you said. What I said is the market is firming and that, to me, means rate decreases have slowed. The market is going-- I see in the first instance the market going flat. How much rates will rise past that, how long it will take, which classes exactly, I don't know. On the other side of the coin, we see all the market dislocation. We just talked about one player, that everyone is obsessed with, and that will benefit ACE, I think broadly. There will be other market dislocation that will benefit ACE. On the other side of the coin, recession is slow down. Severe recession which is the picture we have. I'm sure it's the picture you have, will impact exposure and business activity. And so therefore, that will, on the other side of the coin, impact the growth of our business.

One quick final one. Could I assume, would it be fair to assume, that you have kind of pushed back your concerns about the impact of inflation on loss?

Yes. At the moment we have, yeah. I do believe-- I will tell you this. I hope everyone is very mindful that all the government stimulus, all the liquidity is putting a tremendous amount of capital cash into the market. When we come out of this we are going to come out of this likely in a higher inflation period, with an increased cost to capital.

Agreed. Thank you.

We will take our next question from [Ron Bobman of Capital Returns]

Good morning. All the concern over crop insurance losses seems like it was two years ago. I had a question about reinsurers --

A lifetime ago.

Yeah. Yeah. Thankfully, the investment bunker is built strongly for ACE. I had a question about reinsurers and choosing or sort of not choosing to support AIG as the AIG reinsurance programs come up for renewal. Will what happens there have a meaningful impact on sort of AIG's continuing ability to act in the manner and way you have described?

You know, I don't want to speculate on how reinsurers are going to respond to AIG. Reinsurers are there to provide capacity when it is to their advantage, when it's good for their balance sheet and shareholders and they'll make those judgments. The only thing I'll say is that reinsurers do, it's part of their job, they look at every cedent, who are they reinsuring and they look at the quality of their underwriting and they do that for all of us. They do that for the entire marketplace. I'm sure AIG or ACE, none of us, are any exception to that rule.

Okay. Thanks a lot. Best of luck.

We'll go now to Matthew Heimermann of JP Morgan.

Good morning everybody. A couple of questions. This is maybe following up on Tom's a little bit. But in terms of the stabilization you expect in the market, when you think about the risk to that stabilization and potentially increases, are there more fundamental risks, i.e., investment markets increased more quickly than you can expect? Or is it more resolve on behalf of some of the competitors?

I don't think it's necessarily just resolve. I think it's your business behavior is really impacted by your view of the realities that you face. The environment you face. The realities right now-- which none of us can guess with any certainty I think it is fairly reasonable to assume are not going to reverse themselves in the near term and that is the cost of capital has gone up dramatically. That's not going away in the immediate future. If it did, then that's-- then we'd have to reassess. The amount of capital that has been destroyed within the industry, or that is dislocated, that is a reality. that we assume is going to be with us for the foreseeable future. And if that changed, then you would be-- cause to reassess. Severe recession. Obviously if all the sudden we are in a growth environment instantly that would be a change. We make our plans and I make some of these pronouncements this way to kind of give you some clarity on what we expect based on the realities as we see them and as we expect them to be. Now obviously if some of these become more transient, then we'll readjust. I think there are smaller odds of that. And so I'm not playing the small odds, I'm playing the big odds.

All right. That's fair enough. Then I guess ACE is a company that at least I viewed as pretty well capitalized, especially in relative terms. I'm curious if you could kind of comment about how much capacity for growth you feel like you have, and in particular whether or not you're going to change your reinsurance use if the market really does improve from here.

I don't anticipate much of a change within our reinsurance use. Fundamentally the same. We measure our appetite. We measure our reinsurance, really, based on our appetite for risk and that's based on the strength of our balance sheet to the exposure and how much leverage we want to take relative to any one risk or concentration of risk. And so I don't foresee any change of any magnitude that way. And as far as capital for growth or opportunity, from what I can see right now, we're reasonably capitalized. And obviously, if opportunity comes along and it requires more capital, the only way we would do that is if we thought it was good for shareholders. And then we would make a capital management decision.

That's fair.

What we are not going to do is allow constraint of capital to constrain our growth. If it is accretive and makes sense for shareholders.

That makes sense. If I could sneak one more in, I would be curious whether or not to the extent you think demand for reinsurance goes up, do you believe there is enough supply of reinsurance in the market to meet that demand?

It's going to vary by line of business. And I think the first one everyone has their mind on, and I think it was-- I'm giving them free advertising-- I think it was Dowling who said cat well it is a smaller part of the reinsurance market does dominate a lot of mind share in North America among investors and it does. There is an example of a line where companies, because of more balance sheet fragility, may try to buy more cat protection. I agree with that statement.

There is the notion that private equity hedge funds, et cetera, because of other issues, are going to pull capital back. You'll see less private capital participating in this. I agree with that. So there you could see supply/demand become a little more strained, which generally drives pricing and that's possible. Now whether you are seeing it in other lines or not, so far I don't see that. Don't anticipate that.

Appreciate it, Evan. Thank you.

You're Welcome.

Next question from Susan Spivak Bernstein of Wachovia.

Good morning. Most of my questions have been answered. Just following up on your last comment, Evan, could you talk about how do you plan on participating in the up turn in the reinsurance market by selling protection come January or increasing organic growth on your reinsurance company?

Say that again. Will we expand Tempest? Write more business? Is that the question in reinsurance?

Yes. That's my question.

Thanks. Susan.

Sorry.

No, no. It's my brain. The, yeah, sure. Tempest is there to write business. If we like the pricing, we like the terms, Tempest will write the business and it will grow. It is a multi-line insurer operating out of the U.S., out of London, out of Bermuda principally. If we see opportunity and it looks good, we will write it. We have been shrinking the business because we didn't like risk reward. We're perfectly happy to turn around and expand the business if we do.

Will you be making that capital decision for January renewals or will you keep powder dry for the remainder of the year anticipating a slower upturn?

You know what, we will shoot the birds when they go by. So if we like the trade at that time, then we will make that trade.

Okay. Thanks, Evan

You are welcome.

(OPERATOR INSTRUCTIONS) We'll go now to [Scott Frost of HSBC].

Yeah, I just want to go over a little bit on your securities lending portfolio. You may have touched on this but I might have missed it. I know it's small. But for the payables could you just go over maybe how often this stuff comes up for renewal, how much it is open and on the collateral you hold against it what's sort of the breakdown between I guess treasuries and NBS, high rate corporates and other?

Well the collateral is placed in money market funds and it's all short-term, very safe investments. So we take no risk on the asset side. And the contracts are of varying length but all short-term.

So is it fair to say most of the stuff rolls overnight?

No. 30 to 60 days.

Okay, great, thank you.

We'll take our next question from [Ian Gutterman of Adage Capital]

Hi, Evan Some more questions on pricing obviously. First your directive to your underwriters that pricing needs to be flat or up. I guess I'm thinking human nature is such that is an underwriter going to think hey if I held rate flat or I got it up 2%, I made Evan happy when I really should have been pushing for 10 or 20%? What exactly are your instructions so that case doesn't happen?

You know I don't think it's a matter of making Evan happy. I'm looking at Brian Dowd and John Keogh and boy if you don't make them happy, you can forget about me. Dead is dead. I'm going to let them comment on that. Brian do you want to talk about that?

First in North America we started the mandate no more price cuts in early September. Our view was frankly that pricing was starting to get challenged in virtually all classes of business that we started to mandate flat pricing and frankly we get great statistics on every submission that every underwriter gets that we can monitor by individual by class how they are doing to get those statistics. Anytime you are in a downward market the first thing you've got to do is you get it flat. Pricing did start to go from single digit, higher single digit decreases in September to single lower digit decreases in the beginning of October to flat at the end of October.

We were definitely seeing that trend start. You know it is interesting. Underwriters, they do like to trade. They do like to trade up whenever they can. The creature is designed to sell product at a better price. We monitor it in every line of business by every underwriter. There is reward for such behavior.

I would also add that's a general statement we're making about flat rates. There are certain product lines and certain territories around the world where frankly that is not good enough. Whether we talk about energy or aviation or certain areas of the D&O business right now, our teams around the world know what we need, which is more than flat. We are managing it very carefully by product, by territory. Frankly, management heres getting out there and being part of it on a regular basis.

Great. That makes sense. I just wanted to make sure. And then I guess my broader question is we talked about a lot of the issues why pricing needs to go up and obviously capital being very costly these days around the globe whether it be insurance or elsewhere. How are you thinking about what the right hurdle rate is for new business? I mean, is the old you know 15% good enough when if, given the growth opportunities, it might be so good that you come down the road and want to raise some equity to go further? Maybe the cost of equity is more than 15%. Do you have to set the bar and say 20% or maybe even higher, to not so much talk about your renewal book but to actually grow the book the renewal rate needs to be high given how costly capital might be to fund the growth?

Without putting data points on it, I agree with that thinking, and that's how we think. Look, you can't go out to shareholders to raise capital if you don't believe it's going to be accretive and produce a reasonable return and as we said, cost of capital went up so hurdle rates on returns go up.

Great. Last question, where --

Ian I've lost you. Can you hear me.

I can hear you.

Okay, now I can hear you.

Okay, great. My last question is, will rates go up first? And where should they go up? Casualty or property? Basically what needs rate the most?

You know, frankly, we see property needs rate and so does casualty need rate. I know there's the view that property-- the general wisdom is property is going to go up before casualty and property cat will go up first. But I have to say for ACE, early days, we are seeing in some markets, like in the UK, we are seeing property harden before casualty. In the U.S. we are seeing actually casualty tightening in the primary casualty areas.

So whether it is a primary D&O or it's primary environmental or it's primary risk management casualty, those sorts of lines, and I go on, we are seeing actually rate movement in those before we are seeing really property movement. So, you know, is that a trend? I don't know that that's a trend. But that's what we are seeing in the first few weeks of this. Where is rate needed? Rate is needed boy I think in the property and in the casualty areas. It's both.

Next question from Brian Meredith of UBS.

Yeah, good morning. Couple questions. First it looked like the loss pick went up by almost 400 basis points in North America and even Overseas in the quarter factoring Combined, it looks like loss picks went up. Anything unusual happen that may have caused that to happen?

You know, there's two things. And no, it's not unusual. First of all, I look at the year on year of quarter 3 to quarter 3. I think when you look at that comparison you see the loss ratio ex cat and prior period development so accident year ex cat up about a point. And that's really trend in pricing. In North America you have a few things that have done sort of the year on year and the quarter on quarter. And what you'll see in the quarter on quarter crop insurance has an impact on our loss ratio. There were more energy and property losses in the quarter. And that were outside the loss ratio peg. So we eat those and that put the loss ratio up a little. And then the year on year increases really just the strengthening of loss ratio because of rate and trend. In the International it is really the same story. It is trend in pricing primarily driving and that is what you see in the year on year. Then on the quarter on quarter there were some aviation losses and some large property losses.

Right and then Evan, in the past, you have talked about 15% being kind of a good return on equity, kind of the target. But if your cost to capital has gone up here, shouldn't that number be higher now?

Maybe. I want to give you a thoughtful answer and I don't have a thoughtful number in my head for you right now.

Okay.

Let's just both agree on this. That the return on capital is a risk adjusted return on capital. And you've got to start with that.

Okay.

And you have got to obviously consider it's got to be accretive to capital. So that means that you have got your cost to capital.

Okay. And then the last question, Evan, can you talk a little bit about opportunities possibly to get business or move business in the international A&H area? I mean, I know a lot of that business is tied in with either banks or affinity groups. Is that business tough to move? Or is there opportunity, you think, in this environment to potentially move some of that?

Remember the A&H business internationally comes in two flavors. On the one hand there is a direct response and that's where you are thinking of banks and sponsors. On the other side we have a substantial business in the corporate world and that is writing accident business programs that are part of employee benefits that corporations purchase. That business is written through brokerage distribution and that business moves rather readily, like P&C does, so there is opportunity there. And on the financial institution side, where you are doing it for direct response, yes, there is opportunity. We are seeing opportunity in that area.

How easy it is to move or not, it's moving for new programs generally, and that is that all their new campaigns will be written by another carrier and it depends on the contract they have with their incumbent carrier. Sometimes you can't move for a year. Sometimes you can move right away. So it varies. But there is opportunity there.

On the other side of the coin, I don't mind telling you that recession impacts direct response business in my mind, it slows it down, it can increase lapses, it can make it more difficult because of recession. Many people in the financial institution side you are marketing to credit cards or mortgage holders that sort of thing or those who lease automobiles and so your business on the other side the coin can slow down or suffer as a result of recession also. So opportunity and risk.

We'll take our next question from Paul Newsome of Sandler O'Neill and Partners.

Good morning. Most of the territory well covered. Was hoping you could maybe give a few comments on how Combined is working out so far this quarter.

Yeah. It's working fine. As I said just in a quick statement, the efficiency strategy we have between ourselves that expresses itself in cost reduction is right on target. Growth initiatives, be they new operations, expansion is on target. We just launched Mexico and it's-- please don't ask me every quarter of how Mexico is doing. It's small and it takes time to build. I will periodically update about that. But remember policies are written 100 bucks at a time.

Then really the growth initiative in the developed territories, which is the remodeling, revamping modernizing of the agency distribution is moving along well. It is moving along-- the early day tests of that are doing so well that we've accelerated the roll-out schedule of the new agency model in the United States and overseas. We are going to implement it in New Zealand and Australia rather quickly. And we are now looking at the UK. An accelerated time frame from implementing in the UK. In the U.S. we were going to really roll-out the model through '09 and maybe even into early '10, whereas now we are accelerating that. By mid '09 it will have been implemented in most all regions of the United States. It is doing well in the regions that we have tested. Productivity is up significantly. Whether that will hold-- those productivity increase numbers will hold at the level they are at, in all as we roll it out across the country remains to be seen. Even if it comes down a little bit, boy it is exceeding what we initially anticipated.

Did I miss how much it was accretive this quarter?

It is about $0.09. What we say originally estimated is about the same as we are saying now for the full year it will be $0.24.

Great. Thank you very much.

You are welcome.

Our next question is from [David Small of JP Morgan].

Thanks. Two quick questions. Evan what would be your willingness to expand your line sizes that you offer to your customers now? And secondly how do you think about the D&O business now. When you've described your book to us in the past you have talked about a lot being excess and a lot being A side. Would this be an opportunity for you to try to write more primary business there?

ACE is writing now more primary business there. I would not be surprised to see us become one of the two or three largest D&O writers over the next few years. We are presenting an alternative to the marketplace now and it is well received. As far as expanding our line size, expanding our net line size at the moment I don't really see much, if we did it at all to be modest, and it be very targeted. Expanding the line that we offer because of reinsurance partnering on programs, well we've done that recently in some of the casualty lines in the United States in particular, and we will continue to do that as we see an opportunity, and it doesn't create a negative arbitrage for our company.

That's great. Thank you.

You are welcome.

(OPERATOR INSTRUCTIONS) We'll take our next question from Vinay Misquith of Credit Suisse

Hi, good morning. In terms of the market opportunity from AIG, could you help us understand how it is in the U.S. operations versus worldwide? That is do you see more opportunities in the U.S. versus worldwide business?

You know, I don't know. We'll let the market speak about that. I can only tell you what I see now. And which I have spoken to already and I would really rather not dwell on it. So I think what I have already said, let's let that stand. I would rather not speculate on the future.

Fair enough. On the Combined specialty business. I asked a similar question the last time, how do you see the persistentsy of the business right now since the economy has gotten even worse in the last quarter?

We haven't seen an impact on persistentcy. And remember something. On one hand, there is the notion that this is a discretionary buy, they are canceling discretionary buys because their budgets are tighter. We sell pretty much to the middle, middle income and lower middle income are our buyers. And in many cases this is the most important insurance they have or among the most important insurance they have. People also psychically seek protection when there are times of unknown and stress. They want security. And so that is the underpinning to me of why the numbers are also showing the same thing-- we don't see an increase in lapse.

That's great. Thank you.

You're welcome.

we'll take our next question from Steven Labbe of Langen McAlenney.

Hi, good morning. Evan, as it related to your comments on the CPP, a quick clarification, please. Were you referring specifically to the property casualty industry? Or were your comments meant to be inclusive of the life insurance industry as well?

They were meant to be inclusive of the life insurance industry as well. The insurance industry.

Okay.

The only exception to my comment that I could note would be the financial guarantee insurers where that could be systemic risk, counterparty That I could imagine represent systemic counter party credit risk and that would fit within the standards of CPP.

Okay, thanks. And a quick follow-up if you will please? A hypothetical. If a key competitor of yours were to somehow ultimately have access to the attractive funding via the CPP, would you reconsider your position of refusal?

I'll tell you something. The amount of pause you just heard me take is probably the extent of the pause I would take before I said no. I think like most of you. I believe in the private market. I believe in the free enterprise system. It is extraordinary to see government ownership of companies today, and what has taken place in such a rapidly short period of time. I understand as all of us and we struggle with that need to preserve the fundamental stability. But if you get past that and this is about capital that is simply doing it to get cheap capital and not about stability and avoid systemic risk, I reject that. We'll row our own boat.

Thank you very much.

You are welcome.

Our final question from Matthew Heimermann of JP Morgan.

Just a follow-up on your professional book in general. Could you give us a sense of how much of premiums your total professional book is?

I don't have a number in my head. And you know the guys are going to reach around to try to add a number up. And I would rather not speculate on that. We'll get back to you.

Okay. Thanks.

We haven't disclosed that.

I know, that's why I'm asking.

I know that, pal.

I'll wait for it to follow. Thank you.

And that was our final question of the question and answer session. Ms. WIlson I would like to turn the conference back to you for any additional or closing remarks.

Thank you 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.

This concludes today's conference. We thank you for joining us today and hope that you have a great day.