丘博保險集團 (CB) 2009 Q1 法說會逐字稿

Good day and welcome to ACE Limited first quarter 2009 earnings conference call. Today's call is being recorded.

For opening remarks and introductions I would like to turn the call over to Helen Wilson, Investor Relations. Please go ahead, ma'am.

Thank you. Welcome to the ACE Limited March 31st, 2009, first quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to our financial outlook and guidance, business strategy and practices, competition, growth prospects, investments and use of capital, general economic and insurance industry conditions, 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 earnings 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 call and will not be updated to reflect subsequent material developments. Now I would like to introduce our speakers. First we have Evan Greenberg, Chairman and Chief Executive Officer, then Phil Bancroft, Chief Financial Officer, and Tim Boroughs, our Chief Investment 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. ACE had a very good first quarter, a strong start to 2009. Overall our company is in good shape, and our performance was steady. We are, of course, operating in a deep global recession and the financial markets remain difficult. That means a challenging environment for all businesses, including insurers. There was some improvement in both debt and equity market conditions in the latter part of the quarter, and time will tell if this improvement, particularly in equity markets, is transient. That depends on the future state of the US and global economy, which in my judgment is in turn dependent to large degree on the health of bank balance sheets and financial markets, particularly in the US and Europe. ACE's financial results in the quarter on both an operating and net income basis were quite good, with all divisions of the company making a positive contribution to results.

After tax, operating income in the quarter was $669 million, or $1.99 per share, while net income in the period was $567 million. Book value grew in the quarter, up about 2%. We continued to be impacted, though to a much lesser degree by credit spreads and equity prices. Our P&C combined ratio for the quarter was 87.5, simply an excellent result. We benefited modestly from prior period development, short tail related, and this includes a prior year crop insurance adjustment that was positive, but much less so than 2008's first quarter. While there were a number of natural catastrophes in the first quarter around the globe, our cat losses were within expectations at approximately $36 million after tax. Net investment income was up modestly over prior year, but below fourth quarter. Investment income was impacted by both a more defensive investment posture, adopted in the fourth quarter, and foreign exchange. Phil and Tim Boroughs, our Chief Investment Officer, will speak more about that.

Let me simply say we are adjusting the tactics around our investment strategy again, having gained a bit more visibility, and we'll be putting to work in the second quarter much of the cash built up by our portfolio managers. Our balance sheet is in good shape, and in my judgment, our capital position is strong. Our return on equity was about 18.4%. I want to make a few comments about growth, pricing and the market environment. Total company net written premiums were up 9%. And adjusting for the negative impact of foreign exchange, were up approximately 15%, a pretty good performance given global recession and pricing conditions. Keep in mind we continued to benefit from the combined insurance acquisition which again improved our growth rate this quarter. Our P&C businesses, both insurance and reinsurance, grew in the period. This was the first time our global P&C reinsurance business has grown since 2006, with net premiums up 4% over prior year. In fact, on a treaty year basis, our reinsurance premiums were up 23% year to date through April, and this will show up in future quarter growth rates.

For reinsurance, growth was due to a combination of firming prices, particularly in the North American and Bermuda markets, as well as companies purchasing additional reinsurance due to capital management requirements. In the US, we saw rates for most lines, and particularly risk property, move up about 5% to 10%. In Bermuda we also saw prices improve with cat related lines up 7.5% to 15% for US business, and flat to up 7.5% for international business. Cat reinsurance pricing is continuing to firm, and in the second quarter so far, we're seeing prices up 20% to 30%. One clear trend across the world that benefited our global Re business is counterparty security. It is clearly more important to clients, and as a result, ACE is definitely benefiting with stronger signings and increased line size.

Turning to the insurance side, P&C pricing during the quarter was generally in line or better than what we contemplated in our 2009 plans. As I said last quarter, and it still holds true, rates overall are firming, and faster in reinsurance than insurance. In many classes of insurance, rates are flat to up, and where prices are declining, they're doing so at a slower rate. The balance of first quarter insurance pricing was essentially unchanged from what we reported for January 1st. Although in April we have seen some further tightening in selected classes, such as energy, cat exposed property, and certain areas of professional lines. In general, the larger the risk, the firmer the pricing. Primary or first excess layers are generally firmer than excess layers. It is clear in lines and layers where it is about more than simply capacity, where clients are seeking the service, expertise, balance sheet and presence of a company like ours, prices are firmer.

We are definitely experiencing in our retail business a positive benefit from flight to both capability and safety. And that is showing up in growth rates in certain lines, particularly casualty related. At the moment, there are countervailing forces at work in the marketplace. Some bode towards continued firming, others keep prices from firming more rapidly, and, in fact, fuel competition. On the demand side, client exposures are down due to recession, and that means less pressure on capital to exposure. Further, because of economic conditions buyers have less ability to pay for increases, and are seeking cheaper alternatives, or any alternatives but a price increase. Many are willing to place their business with lower rated cheaper capacity. So demand is down.

On the supply side, one large damaged company and smaller newer companies simply in search of market share are willing to cut price. However, the fundamental truths that portend continued firming remain. I include in that current industry underwriting and investment results, weaker though adequate balance sheets and a firming reinsurance market. In sum, I do believe rates will continue to firm as time goes along. How fast, what lines, and where, I cannot predict with certainty. But we are patient, and as they do, we will gain share, and that equals growth. In the meantime, again, recession is impacting exposures, and clients' insurance budgets, and this along with foreign exchange will continue to place pressure on premium growth rates.

Let me provide a bit more color around P&C growth in pricing. Our P&C net written premiums grew 1% on a reported basis, while on a constant dollar basis they grew 7%. On a constant dollar, our global retail P&C business, that's ACE USA and ACE International, grew 5%, while our London and US wholesale business, excluding crop insurance, shrank by 15%. Wholesale remains more competitive than retail. Let me dig a little deeper into the divisions. In North America, net written premiums increased 2.5%. Retail was up about 3%, with long tail lines growing and short tail shrinking. New business was up 20% while renewals were down about 4%. Much of that exposure related due to recession, though also due to our pricing discipline. Our renewal retention rate was about 88%.

We're able to secure our prices more often on casualty business again than short tail lines, and that's the flight to capability and safety element. Our specialty casualty lines, including excess casualty, construction wraps and environmental grew about 7%. Our risk management business was up 4%. Our professional lines, including financial institutions, grew 24%. And our medical professional was up 12%. Overall rates in US retail were up about 3% in the quarter. For US wholesale premiums were up 29%, but excluding crop, premiums were down 16%. Rates were up 3.5% overall with casualty and property up 4% and 6.5% respectively. Competition continued unabated in E&S casualty, and we've deliberately shrunk our property portfolio, freeing up aggregate for a firmer rate environment later in the year.

For international P&C, retail premiums in constant dollars were up 5%. New was up about 7.5%, and renewal retention was 77%. Rates overall in international P&C were up modestly, about 1% in the quarter, and all lines and regions were in a pretty tight range with pricing varying from up 3% to sort of down 1%, and an awful lot was flat. Except for Continental Europe, market tone is improving and pricing firming. One or two large damaged players continue to be the exception. For international wholesale, premiums and constant dollars were down 14%, as we strove to retain price in a continuing competitive London subscription market environment. Our rates were up 9% driven by property, energy, marine, and professional lines.

Before turning it over to Phil, I'd like to repeat a few comments I made last quarter about our political risk and trade credit business as we continue to get a number of questions about our exposure given global economic conditions. Trade credit continues to run in line with our expectations. There is nothing that we have seen to date that is outside of our expectations of loss for the business. Also true of the political risk business. We have what we consider to be reasonable levels of exposure in many of the countries that are in the news, and that you might be concerned about. We approach this business conservatively and have stuck to the fundamentals. We have no claims of any size reported or pending at this moment. We have a situation watch list, and we're constantly reviewing our portfolio exposure.

Again, as I mentioned on the last call, our exposures have been declining in hot spot countries. We hold reserves for this business, and reinsurance for the portfolio, and results are tracking with or better than our expectations. Of course we expect a certain level of loss activity. After all, we are in the risk business. But we're not concerned with our exposure. Frankly, I just don't see a problem on the horizon in political risk. I hope that helps. We're planning to record a web presentation on this subject to educate you further, and it will be available in the next 30 to 45 days.

In closing, I am quite confident about ACE's prospects in both the near and long term, given our capabilities, our balance sheet, our people, and our single-minded focus on staying true to underwriting integrity. We are gaining in the marketplace, acquiring talent and growing our presence, particularly in specialty classes. It's a long race, and we're patient in strategy and impatient in execution. With that I will turn the call over to Phil, and then we'll take your questions.

Thanks, Evan. Good morning. The market volatility continued throughout the first quarter. In spite of this, our balance sheet and capital position remained very strong. Our cash and invested assets grew by $500 million. Our reinsurance leverage dropped to about 93%, and our tangible book value increased 2% on a per share basis. Net realized and unrealized losses from our investment portfolio were $305 million after tax. Included are $192 million of losses for securities deemed other than temporarily impaired. $27 million of these were due to actual credit losses. The balance was all pricing related.

For the unrealized losses in our fixed income investment portfolio, we believe our strong liquidity and continuing positive cash flow support our view that we'll hold our highly rated investments until they recover their value as they approach maturity. Our global equity holdings representing about 2% of the portfolio are actively managed and are highly diversified. Since quarter end, the portfolio has recovered in value by $450 million to $500 million. New guidance was issued by the FASB this month related to both mark to market accounting and OTTI. We plan to adopt this guidance in the second quarter, although we don't expect a significant impact on our book value, principally because we don't believe the valuation aspects of the guidance will apply to the types of high-quality assets in our portfolio. I will ask Tim Boroughs, our Chief Investment Officer, to talk about the movement in our investment income for the quarter in just a moment.

Our net loss reserves increased about $100 million during the quarter after adjusting for foreign exchange. Our cash flow of about $560 million was below our recent run rate but within our expectations. It was lower primarily because of payments relating to cat losses and a few other individual large loss payments and higher tax payments. We provided disclosure in our supplement on our debt maturity profile and bank credit facilities. You'll 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 relating to our reinsurance business in Bermuda.

As of March 31st, we've entered into securities lending agreements totaling approximately $1.4 billion. The proceeds from these agreements are invested in prime short-term money market funds. We do not use commercial paper or any other short-term securities to finance our operations. With that I will turn the call over to Tim.

Thanks, Phil. Net investment income is up 3% from last year's first quarter and approximately 4% lower than last quarter. Foreign exchange, lower yields on short-term securities and a tactical shift in our asset allocation all contributed to the quarter's decline in investment income. Although our portfolio is conservative and has served us well throughout the recent turmoil, we took additional measures to support our balance sheet strength. One consequence of these measures has been a deliberate increase in our cash and shorter term investments, which has put downward pressure on our book yield. But now that many sectors of the credit markets have begun to stabilize we are redeploying that cash into high-grade fixed income securities. Over time, this tactical shift should lead to an improvement in both book yield and investment income. And with that I will turn the call back over to Helen.

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

Thank you, Ms. Wilson. The question-and-answer session will be conducted electronically. (Operator Instructions) Our first question comes from Jay Gelb with Barclays Capital.

Thanks and good morning. Evan, you pointed out some countervailing factors with regard to premium growth. Can you give us a sense when you think we could see some sequential improvement in that growth rate?

Jay, I don't have a great crystal ball. I think The problem, you have three factors. Clearly you have foreign exchange rates. Now, on a year on year comparison if rates stay where they are, and the dollar doesn't weaken, which you take your guess on that, then the impact of that really lasts through the third quarter. Fourth quarter, as you'll recall, the dollar -- there had been a huge flight to quality in the dollar -- safety in the dollar last year, and so it soared in the fourth quarter. So that's one thing.

Recession, and the impact of recession, you tell me. My own judgment, the balance of this year will be negative growth, and sometime in 2010, or late 2009, you'll see a bottoming and a slow recovery. So that has an impact. And then the balance has to do with pricing within the insurance markets. Those are the things I think about, and I can't guess with any certainty when you'll see that sequential change.

That's fair. And then if you could just give us a little bit more color on the pace of reserve releases. They slowed quite a bit on a linked quarter basis. Is that something we should think about as a run rate going forward? And maybe you can talk about why they were slower in the first quarter than some of the previous quarters.

Well, we don't manage our reserves that way. We look at our reserves all the time for adequacy, and we do different studies of different parts of our book at different times of the year. Most of our reserve studies are -- the predominant number of them is done really during the second and third quarter. Some done during the fourth, and the first is generally our lighter quarter for those studies. And whatever you see is just a consequence of those studies, and if they show that we're either holding too little or that reserves have reached a point of where they appear redundant, and we're comfortable with the results that they're saying, then we take an action. So the only thing you are seeing is a result of our own reserve management in that way.

Was there something in the back half of the year that caused the reserves releases to be more significant than had been previously?

The back half of last year?

Correct.

Well I think you saw in second quarter, you saw in third quarter, where we really -- that was -- I think that was the largest amounts, and that was due to really all the casualty studies that we do in those quarters.

Okay. Thank you.

And more of the casualty is studied as the year goes along.

Our next question comes from Mark Lane with William Blair & Company.

William Blair & Company. Good morning.

Yes. Good morning, William and Blair & Company. Good morning, Mark.

Yes. Only one and. Okay, so two questions. First question, Phil or Evan, regarding accident year loss ratios, it seems like in all three major segments that your loss ratio excluding cat losses and prior period development is actually down from the full year 2008. What are some of the factors?

We'll answer that question. First of all, it's not all three. It's two. It's in North America and it's in Global Re, but AOG, no. In North America, last year we had a lot in the first quarter. We had a lot of energy and large property losses. Just a series of them. So last year was unusually high in North America.

Secondly, we did have a reserve adjustment in claim adjustment expense in the first quarter this year, where we just had too much claim adjustment expense, we felt, and that was a benefit in current accident year, so that caused the swing in North America, one period to the next, if you are following me. And in Global Re, it's simply a change of mix of business, less casualty, more property this year, and property oriented in short tail lines, and that runs a lower loss ratio, as that mix came through on the earned.

I'm also looking at the first quarter versus all of 2008, given that in the fourth quarter last year, you said that you adjusted loss ratios up for earlier in the year. So I'm not sure the first quarter of last year is a good comparison.

Well, I think it is. I think that's how you do it. Other than that you are running into all kinds of seasonality and mix and other issues. So I don't do -- I don't look at it the way you do that way. I don't look on a sequential. When it comes to loss ratio, it's much truer when you're looking at a year on year comparison.

Second question is, regarding the life reinsurance business. So can you talk about the factors that kept the benefit, the losses down relative to last year, the policy benefit levels under $100 million, given the stock market was down over 10% in the first quarter?

Two things happened. One, the interest rates were up, and that had an important impact, and then as we looked at the underlying policy holder funds, they performed better than we had anticipated. In addition to that, we had a gain of about $25 million on our hedge program. So that altogether contributed to the results.

Okay. Thank you.

You are welcome.

Our next question comes from Matthew Heimermann with JPMorgan.

Hi. Good morning, everybody. I guess first question, just with respect to the potential strategic shift in the investment portfolio as the year rolls on, what type of yield pick-up are we talking about once that is fully implemented?

Tim, you on?

Yes.

You want to take a shot at that?

So Matt, the cost of holding cash is probably the highest it's been in our lifetime, right, zero. So if you go back as recently as the fall, our short term investments were about 7% -- 6%, 7% of the portfolio. They were 10% March 31st. So even if you just take several points of that out, on a $40 billion portfolio, you're talking about $1 billion to $1.5 billion going from what essentially is zero into maybe a blended rate of 5%, where you have high-grade corporates 6.5% to 7%, and agency mortgages at 4%. So we're thinking in those terms.

Okay, that's helpful. Evan, can you just -- I probably could back into this, based on some of the numbers you gave earlier, but just with respect to the crop business, can you talk -- obviously there was -- commodity prices are down versus last year. Can you talk about what that book is going to look like for you in terms of size?

You asked a question I didn't think you were going to ask.

You can answer the one you thought I was going to ask, too.

In terms of size, Brian, you want to take a stab at that?

Sure. I think you are going to see some differences. First of all, the first quarter crop this year will be larger than 2000 -- was larger than 2008, because actually winter wheat prices were higher in 2009 than they were in 2008. So the first quarter was actually larger year-over-year comparison. The second and third quarters you will probably see between a 10% and 15% decrease in premium because the commodity prices for both corn and soybean, the base prices year-over-year will be down about 20%, 25%. So we expect to pick up a little bit of share, but the price will ameliorate that, so I would guess would you see second and third quarter premium down.

And then just in round numbers, am I right that the crop in total last year, was that about 7% of the portfolio, the nonlife portfolio?

In percentage, we'd have to go work out premium. We could tell you dollars, roughly. Are you talking gross or net?

You can give me whichever you want. I can work through the rest.

Just the gross is so much larger than net. Let us come back to you in a few minutes.

Okay, that's fair enough.

We'll come back and just announce Matt here's the number.

All right, fair enough.

Roughly.

Our next question comes from Thomas Mitchell with Miller Tabak.

Hi. In this somewhat interesting and turbulent environment, I'm wondering what you're thinking might be, or your thinking process might be about the opportunities to grow your business by aggressively going after people, and particular specialty underwriting capabilities, as opposed to possibly the opportunities that exist to buy large books of business in the marketplace with there being so many distressed owners of property and casualty businesses needing to raise capital.

Well, I'll answer your question the way it was asked, I think. Look we're constantly expanding our capabilities in all our businesses, where we see opportunity. In the specialty classes and even some of the more traditional classes we have brought on quite a number of people globally. North America is where we brought the greatest number, but we have brought them on globally, and particularly in specialty casualty related classes, in particular, and we haven't slowed down in investing in our company that way. We're more discriminating because of the environment, but we've continued to do that. So we're not on the back foot in that regard. As far as books of business, it's one thing to think about buying a total company. It's another thing to think about buying a book of business, and while we'll look at everything that comes across, we're not lazy people. We haven't at this point noticed any books of business that have been for sale that have been of interest to our company.

Thank you.

You are welcome.

Our next call comes from Paul Newsome with Sandler O'Neill & Partners.

Good morning, Paul.

Good morning. Thanks for the call. I was wondering if you had any thoughts on the speculation that ACE and perhaps some of the other Bermudians are increasingly hesitant if not refusing to write in excess for some of the more troubled companies, particularly the company that may not be named, just call it Voldemortic for short.

Look, we just -- we're -- We try to be unemotional and just flat about this. And I don't think it's a Bermudian - I think frankly you want to put a wider lens on that. It's all insurers and all major insurers have all taken -- are all taking rational approaches to protect their balance sheets and protect their exposure. We're not going to write behind any insurer where we worry about operational risk or we worry about balance sheet risk. And then so therefore, it could prejudice and add exposure to our layer if we're writing excess, and hardly are we going to end up writing somebody's casualty or their property and finding at the same time we were financial guarantee behind the primary layers. That will not happen. And we're also not going to write behind any insurer where we don't have confidence in their ability to manage the business and handle the claims properly, Because again that can prejudice our layer. So, that's just -- to us, that's just rational, fundamental good risk management. So take it as that.

Has that been a major or minor factor in some of the lines that you've shrunken of late?

No, but it contributes. I mean, just if you have -- it's hard to parse the pieces, but that's not a major factor, but it's a factor. Along with all of the other conservative behavior that we're trying to exhibit in terms of underwriting and risk management discipline. You are constantly asked every day to do things that you know will impact either the balance sheet or the performance of your underwriting. And that's just another one of those factors.

Thank you very much.

You're welcome. Crop was 6% of our net earned premium for P&C, and it was 11% of North America's net earned premium, Matthew Heimermann.

Our next question comes from Vinay Misquith with Credit Suisse.

Hi, Vinay.

Hi, good morning. What do you think will be the impact of the swine flu outbreak on your business?

Well, I don't know. Does the world just have a couple hundred cases or does it end up with millions of cases? You tell me the scenario. And I'm not trying to be cute about it, but right now, if it's what it is, there is no impact whatsoever. So let's answer it slightly differently. Let's say that since SARS and the bird flu, we have in our enterprise risk management activities dimensioned and tried to manage our exposures across all lines of business on a global basis, and we continue to do that since those events. And so we try to keep a sense of in an extreme event, what our aggregate exposures could look like in absolute terms and relative to percentage of capital, etc., just like you'd manage any cat. So we imagine a 19 -- a repeat of 1918 where at that time 50 million people were killed.

We also look at events like the 1950s that were very severe flu pandemics, but not as severe as 1918. And from everything we can tell on that, we're comfortable with our exposures. Now, this is just evolving, just beginning, and who knows where it's going. I can tell you we're also -- we do have a plan in place for disaster recovery in all of our facilities around the world of how we would manage in a business interruption setting, where you did have a global pandemic of significant proportions. And those are in place, and people are on alert to implement those protocols. So that's about the best answer I can give you.

Sure, that's great. And I presume that would happen mostly in the life insurance segment, correct?

Probably more in our accident and health. I'm comfortable with our -- life would be small. I'm comfortable with property. We know our exposures, and frankly, ACE has taken a very conservative position of how much we would offer in terms of business interruption from properties that are denied access. We have been very diligent about that, and how much appetite we have for it. We know in workers' comp, and we've foregone writings. Brian and his team have in areas where, for instance, hospitals, where they want you to give event aggregate covers we won't do that. So we've really been conservative to limit our exposures.

That's great. The second question is on your purchase of reinsurance. We saw that came down this quarter. What's your expectation of that in the future?

I think you've got to be careful of that. We didn't -- that's jittery, and it goes to mix of business, so depending on what kind of crop adjustment, for instance, you have in a period that can play with your net to gross, different lines of business. If we've written more risk management or more loss portfolio transfers, that plays with your mix of business -- that plays with your net to gross in a quarter. You also have AOG, the mix between AOG and North America, and there the net to gross is different in the total P&C impacts, so you've got to be careful. There hasn't been any serious change in our reinsurance purchasing philosophy, and we haven't had a change really of any consequence in our net retentions.

All right, that's great, thank you.

You got it.

Our next question comes from Brian Meredith with UBS.

Yes. Good morning. Couple questions. First, just a quick numbers question. What was the impact of the combined insurance on the Overseas General premium growth this quarter? This will be the last quarter that we'll have that strong year-over-year comparison, right?

Yes. We'll get that for you. Go ahead.

The next question, given that you have moved a little bit more towards some of the property reinsurance lines, Evan, what do your PMLs look like going into wind season? You typically provide them in your 10-K. How much do you think they are going to be up going into this wind season?

They're well within our -- we have very clear guidelines about all that, and we won't violate any of that. We watch it very closely. And the only reason you would see Global Re increase its writings is because of what we allocated to them. They just had head room. And at the same time there are some areas, if you heard me that we kind of shrank in the quarter also, because we think we'll save some appetite for pricing firming.

Great. And one quick one for Tim. It looks like, and maybe this was just market value, but it looked like you increased your allocation to high yields, corporates in the quarter, is that true? And if so what's the strategy there?

We did not. It was probably market value change.

Just market value change up a couple hundred million dollars. Great, thank you.

You are welcome.

Our next question comes from Ian Gutterman with Adage Capital.

Hi, guys. First item (inaudible). First can you clarify, the P&C net premiums sales up 7% constant currency, retail up 5%, wholesale down 15%, so what was up more than 7% to get to an overall 7%?. What did I miss?

Say that again.

You said in your prepared comments you said that P&C net premium was up 7% constant currency, with retail up 5% and wholesale ex crop down 15%. So nothing was up more than 7%, and the total was 7%. So something was up -- so there's a piece you didn't give us that was up way more than 7%.

Hey, Ian, you've got to add crop.

How much was crop up is I guess what I'm asking?

22%.

Okay. Got it. My other question, can you give us an update on the acquisition you did in the high net worth personal lines? I would think there would be a lot of opportunity there, given I assume AIG isn't a very friendly retail name that that might be a very easy pitch for an agent to put that business in play.

Ian, I'm going to let Brian comment a little, but the only thing I'll say to you, it's going along well, but you named them. As long as you want -- somebody wants to offer Costco prices for a Tiffany product, that's going to give you a little headwind in what you write. Brian, you want to add to that?

I would add that certainly the acquisition has gone along probably a little bit better than planned, but remember we started out with just 15 states. So it is a state by state rollout where we have to file and get all the approvals done, and we're up to about, I think, 18 states now that have our full products and all that stuff. It is a several year project to get throughout the whole country. So it's on track but our plans are modest, and it's on target.

Fair enough.

Ian, we'll take the wraps off and highlight it a little more and give an update in a couple of quarters as we have a little more maturity going on. It's picking up steam.

Okay, that's fair. I was just speculating that their brand might be damaged more in a retail line than a commercial line. That's what I was thinking about. And the other one, can you give us an update on the Combined side, just the new sales initiatives that you've been working on and so forth, just how those are going?

Yes. I'm glad you asked that question. First of all, our initiatives are in two parts, revenue and expense. Expenses, efficiencies are on track and in fact ahead of what we envisioned. We're doing better that way. So it is really gaining and showing in the bottom line there. On the initiative side, for growth, that is fundamentally on track, and what I would say is the new sales model, as we continue to roll it out, the productivity among agents who have been in areas where we have rolled it out, are -- continue to be very impressive. And that's very good.

What we do find, though, is when we roll it out, there is a disruption, a lull between going from the new -- the old going to the new, so you suffer a little, and then you overcome that period, and growth in that territory really picks up. We're suffering from the recession in growth. So the new initiatives is on track, and I expect -- just to finish that thought, then I'll come to the recession, is on track, and we expect it will be throughout the United States, over the next two months, and it will be mature and on a run rate that will show growth in the United States for first time in quite some time, between the end of the year and early 2010. And then we're beginning to roll that out now into the other major matured territories as the year goes along, namely, the UK and Australia later in the year. So that's good. And we're encouraged by what we see, but again, as I've cautioned all along that takes time, and -- to really show in numbers.

On the other side, recession is impacting the Combined. Sales overall are down, and lapse rates have ticked up, but not materially, but modestly about a 0.5%, and we're putting more conservation action in place, and I think that's just transient. On the other side of the coin, recruiting new and quality agents as we roll out the new plan, well that gives us a little wind at our back, because boy there are a heck of a lot more available in the job market today.

Okay. And so net-net is the drag from the economy less than equal or greater than the benefit from the new sales model in the short term at least?

Net-net, the recession -- because the new sales model is just hasn't been rolled out completely, and that takes time to roll it out across the country. It's only in part of the country, and you change an old culture like Combined carefully. We've cautioned that from the beginning. So recession, no, we're more than offset, is a negative that is not overcome by the rest. So revenue is down from what we projected. On the other hand, income is essentially on track and has been ahead of plan since we bought it. And that's because of the initiatives -- the efficiency initiatives we put in place.

Great. And just lastly, economic impact on your international A&H business, the core A&H business?

Yes, good question. It's impacting it. Growth has slowed substantially, and remember something about both the international A&H and Combined international, both of them suffer from foreign exchange. So nothing you can do about that. So I'm going to give you some numbers on the international A&H in currency so you get a sense. And what's impacting it in a major way as a headline is travel is way down and certain countries where we do a lot of travel insurance, there is a negative impact, because if people are not traveling, they ain't going to buy travel insurance. So that's temporary, but it's a phenomena.

And secondly, because, and I said in this earlier quarters that we do sell to a lot of bank customers and credit related customer basis, and so with credit down around the world that impacts it. But in a lot of places we're still growing pretty well, so overall this is what happened. Asia Pac grew around 7% in the quarter. Latin America grew about 10%. Europe still grew by about 4%, and Japan was down about 8%. I expect that to turn around. So overall, A&H growth was about 3% in the quarter. I expect that it will -- international should pick up and be modestly better in the second quarter, and will continue as the year goes along to improve.

Very good, thank you for the time.

You're welcome.

Our next question is from Matthew Heimermann with JPMorgan.

Are you back?

Hi. One follow-up, which was just, it seemed like a lot of people were hesitant to move business following some of the financial distress last fall, kind of just this mentality that people didn't want to move to the next blowup. At least, that was the sense I was getting from risk managers. Do you think that if we do get some stabilization, and I know you talked about the fact that people have less financial flexibility and might be looking for deals. But do you expect to see shopping, so to speak, increase if we do get some stabilization in the macro?

I think shopping -- shopping has not decreased. Shopping is very intense. You have to distinguish, though, between window-shopping and actually buying, and shopping is always a euphemism for, I'm looking for a cheaper price, so it's kind of yelling boo to the current carrier. And some -- and we know if the only thing you have to offer is price, there are some guys who are just -- they're irrationally offering cheap prices to keep the business, and risk managers are -- depends on the risk manager and depends on the line of business. Shorter tailed business, they're willing to take more risk than in longer tail business, because they say, well if there's a counterparty credit problem, or they really get distressed, you know what, I'll be in and out relatively quickly. So that's kind of the calculus that's going on.

With respect to actually moving carriers then, ex the window-shopping, would you expect that on the long tail side that you might actually see more movement between carriers once we (multiple speakers)?

Well, did you -- you heard the numbers I gave about certain lines of business. Where ACE's growth rates are, I think, quite impressive, and that's because of that flight to capability, or that flight to safety, and where we're winning a lot more first primary or first excess, and that is people moving their business.

That's fair. Just was trying to get a feel for what inning we were in.

Well I think the inning -- you have to distinguish a couple of things. First of all, don't just think that in the early inning, it was simply about bankruptcy or no bankruptcy. Now, as you go along, it's not simply just about bankruptcy, it's about capability, and an excellent operating and underwriting environment or a damaged insurance carrier you're doing business with. And I'm not speaking about any one, just in general in that class of carrier, and I think that more and more is features in the thinking of risk managers, and that will be some of the more enduring part of the trend.

Do you think that the end of this process will be kind of the late inning, so to speak will be the capitulation of some of the distressed carriers themselves, if their balance sheets are in fact smaller that at some point they actually have to kick business out?

I think what ends up happening at some point, underwriting, you can only -- if you have underwriting behavior that is going to generate underwriting losses, they eventually appear. Now, how long the word eventually takes, I cannot predict. We all know it can be shorter, it can be longer, but in this period, given all the changes that have occurred since Sarbanes, you certainly can't kid yourself the same way you could in the 1990s, and it will show faster, and I think that's when companies are forced to take very severe action and rating agencies get involved, etc. And whether it's a voluntary capitulation or it's a forced one, eventually it comes home, and you either have to kick out business or you have to raise prices substantially to make up for your losses.

Alright. Appreciate it. Thanks.

Got it.

Our next question is from Everett Gong with RiverSource Investments.

Hi. Just a quick question, on the insurance side I think you mentioned you're seeing more attractive terms on the primary and lower layers versus excess. I'm curious if that's pretty much across all insurance lines or is it more some versus others?

More versus others - more casualty?

In other words, are you seeing that phenomena across all classes of insurance lines, or is it some lines more so than others?

I know, I think I heard you. It's more long-tail lines than short-tail lines, and it's more commercial, large commercial. We don't play in the small commercial business. So if you're asking about areas where we don't participate, I can't really comment on those, but in the businesses where we participate, it's more on the long tail line than it is on the short tail lines, and it's more important the bigger the account.

Our next question comes from Thomas Mitchell with Miller Tabak.

Hi, Tom.

I know that this has been discussed at points in the past, but now that it looks like the Democrats are going to have a solid, possibly filibuster-proof majority in the Senate, as well as a big majority in the House, and since Mr. Obama was a sponsor, when he was in the Senate, of various concepts of fighting tax havens, changing the law on tax havens, I'm wondering what your perspective is on the outlook, and whether or not Switzerland will or will not end up being designated as a tax haven if new legislation gets some traction.

First of all, I think as you noticed from the G-20, so you have to really distinguish, I think, between emotion and theater within Congress, and reality. Number one, at the G-20, it was agreed that really the ones who will dub tax havens or not is the IMF, and that the IMF will publish a list of that. And they, in fact, have, and they now have on their list, let's see, they have black, gray, and white. Switzerland falls into the gray, pending implementation of a law that really surrounds -- and all of this is about tax evasion for individuals and greater disclosure, so that countries, one to the other, can find their tax evaders. And the noise is all around that. And Switzerland is working to implement a law that will satisfy IMF and others' requirements, and so there you go.

On the other side -- and that's where Congress is aiming most of their effort to do with the notion of tax evasion and offshore centers. The notion about insurance and so let's get specific to insurance. And by the way, will Congress pass laws that step on current tax treaties and violate them? Well, unlikely. That's not their track record. And current laws, current legislation that has been kicking around related to insurance clearly violates treaties, and there's been opinions out on that, and I don't believe that Baucus and others will easily pass anything that will go in that direction.

Good, thank you very much.

You're welcome.

We have time for one more question. That will come from Brian Meredith with UBS.

Great, thanks, one last question for you, Evan. One of the big advantages that I think AIG had was amount of limits they could actually put out there per account. I know you've increased your limits in certain lines of business. What's your view going forward as far as increasing limits? Do you have the capacity to increase limits, and how do you think about that?

Well, I think about it this way. If I like the pricing environment, we'll have the appetite to take more and to put in place reinsurance treaties that would increase our capacity. But given the current pricing environments and the terms, we're happy with our -- with both our retentions and with the gross amounts that we offer.

So increasing limits wouldn't necessarily increase your ability to pick up market share right now?

Modestly. And it wouldn't increase -- and if you just increased your gross limit, what are you going to make, a little bit of override for the counterparty exposure? That doesn't make a lot of sense. Also remember there's a trend that's occurring in the marketplace, and that is clients and brokers are reticent to put too much limit with any one carrier. They see that lesson from, you said AIG, from AIG, and there was too much concentration, and so they're going out of their way to go the other way. That's the trend in the market.

Thank you.

You're welcome.

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

That does conclude our call. Thank you for your participation.