丘博保險集團 (CB) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to ACE Limited's second quarter 2009 conference call. Today's call is being recorded. (Operator Instructions). For opening remarks and introductions, I would like to turn the call over to Helen Wilson, Investor Relations. Please go ahead.

Thank you and welcome to the ACE Limited June 30th, 2009 second 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, investment and use of capital, general economic and insurance industry conditions, pricing and exposures, lawsuits, 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 measures. This call is being webcast live and will be available for replay for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

Now I'd like to introduce our speakers. First we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Phil Bancroft, our Chief Financial Officer. Then we will take your questions. Also with us to assist with your questions are several members of our management team. Now it's my pleasure to turn the call over to Evan.

Good afternoon. As you can see from the numbers we just released, ACE had a very good second quarter, which contributed to a strong first six months. After tax operating income in the quarter was $706 million or $2.09 per share and ROE was 18%. All divisions of the company made a reasonable contribution to earnings in the quarter. Book value grew 12%, benefiting significantly from the tightening of credit spreads as Treasury yields rose and the yields on corporate securities fell. Book value is now up 14% year to date.

Our P&C combined ratio for the quarter was 87.7. Current accident year results were good and we also benefited from approximately $158 million in positive prior period development. About $100 million was casualty and the balance was short tail related. CAT losses were $24 million after tax compared to $49 million after tax in the second quarter of last year. Net investment income was down over prior year and essentially flat with last quarter.

As we mentioned on our last call, during the fourth and first quarters given the extreme level of uncertainties and instability in the financial markets, we played more defense and built up a substantial cash position. During the second quarter, we deployed much of that cash and at the same time modestly rebalanced our portfolio away from equities and towards classes of fixed income where we judge more favorable risk reward profile.

Our P&C net written premiums were down 5% on a reported basis. Foreign exchange again had a significant impact on year-over-year growth, about 6 points. Excluding foreign exchange, P&C net written premiums were up about 1.5% from prior year.

Premium growth was also impacted by both recession and the general pricing environment. On that point, as we said last quarter, pricing in general was better for reinsurance related risks than insurance, and was better for risk coming through the retail market than the wholesale market.

Overall pricing for our business was modestly better in the second quarter than in the first. However, renewal retention rates were down from what we historically experienced, due to both our resolved to maintain discipline -- a trade-off we accept -- and recession-related reductions in exposure, consumer, business, and employer related impacting both P&C and A&H. In those areas of our business, generally casualty related were more than price matters. Where there is a customer or producer flight to quality or capability, we are experiencing very good growth, particularly in the US. The same can be said about certain distress classes where rates are increasing more rapidly. Where it is simply about price, our premium volume is flat or down.

While it is somewhat simplistic and the marketplace is messy, I'd characterize the competition into three categories that broadly define the competitive landscape. First, troubled companies, some maintaining better underwriting discipline and therefore losing business, and others trying to hold market share at what seems to be almost any price. Second category is large national and global companies that are exhibiting reasonable discipline, although here again, there's a spectrum and their appetite varies by company and market. And the third category is a handful of smaller, newer companies driving for growth and continuing to cut price in order to obtain it. This is particularly visible in E&S and specialty casualty-related classes, excess property placements, and certain marine classes.

So with all of that as context, let me comment first on the reinsurance business. Global Re experienced excellent growth in the second quarter with net premiums up 22% over prior year. Similar to last quarter, growth was due to a combination of firming prices, particularly short tail; better signings on treaties given our rating; and companies purchasing additional reinsurance for capital relief.

Our US and Bermuda portfolios performed particularly well. CAT pricing was up slightly more in the second quarter than in the first, with US pricing up about 15% to 20% and international up 5% to 10%. Pricing in Florida specifically increased on average by about 15%, and we expanded our capacity over last year in light of the attractive returns. Reinsurance property risk pricing was up about 5 points. US and international casualty-related reinsurance pricing for business we wrote was flat to up 5% on average with greater improvement in D&O and E&O related lines.

Now turning to the insurance side, the market continues to firm, though not in all classes. Rates are moving up in some classes, flat in others, and are continuing to go down in others, though at a continued slower pace. This is a general statement with many exceptions, but the overall trend that started several quarters ago slowly continues.

For perspective, and for our portfolio, in the second quarter of last year, overall new and renewal rates were down an average of 10%. In the third quarter the decline had slowed to an average of 7%. In the fourth quarter, rates were down an average of 2% with some lines showing increases. In the first quarter of this year, our overall portfolio rate was up an average of 1%, and in the second quarter our rates were up an average of 4%. In nearly every class, our average pricing for the business we wrote was modestly better in the second quarter than the first. For the market in general, retail and most classes was less competitive than wholesale and, again, in lines and layers where clients seek the service, expertise, balance sheet, and presence of a company like ACE, prices are generally firmer. It's also true in certain troubled classes such as financial institutions, related professional lines, and most recently in aviation.

On a constant dollar basis, our global retail P&C business -- that's ACE USA and ACE International -- grew 3%, while our London and US wholesale business shrank by 11%.

Now let me give you a little more color on that. In North America net written premiums were flat. Retail was flat with casualty growing and short tail shrinking. Overall rates in US retail were up about 5.5% in the quarter. Our renewal retention rate on a premium basis was also up from the same quarter last year, although on a policy basis, our retention rate was down modestly from prior, and that's the impact again of recession and competition.

In US retail, we were able to secure our prices more often on casualty business than short tail lines, and that's that flight to capability and safety element. For example, our professional lines business grew 28% in the US retail. Excess casualty and construction both grew 27% and our environmental business was up 9%.

On the other hand, our risk management premiums -- that is, self-insured comp and general liability -- were down 9% due to the recession's impact on exposure and competition at the smaller end of the business from guaranteed cost writers and one or two overly aggressive markets taking a few accounts. In addition for lines where it's really about price only, premium growth was down. For example, our US large account property was off 18% and our marine business was off 24%.

For US wholesale business, our premiums excluding crop were down 15%. However, rates for the business we wrote were up 9%, with casualty up 4% and property up 13%. But our retention rate was down. Competition continued unabated in E&S casualty and professional lines. We have now shrunk our Westchester E&S casualty portfolio by around two-thirds relative to its high point in 2005.

For our international P&C business excluding A&H, retail premiums in constant dollars were actually up 10%, driven by classes where again more than price matters, such as financial lines where we grew over 60% and casualty which grew 14%. Rates overall in international P&C were up about 2% in the quarter, and all lines and regions were in a pretty tight range, prices varying from about up 4% in professional lines to down 4% in marine. Market tone is slowly improving and prices firming. In Australia, for example, where June 30th is an important renewal date, gross premiums were up 10% and rates were up in a broad range from 1% in property to 11% for financial lines.

For international wholesale, premiums in constant dollars were down 8% as we strove to attain price in a continuing competitive London subscription market environment. Rates for our business were up 9%, driven by property, energy, marine, and professional lines. Much of the smaller company capacity is centered in London and Bermuda, and there continues to be a feeding frenzy for the businesses brought to these wholesale markets, since it's the only way many of these small companies can access the market.

Recession is definitely impacting our revenue, and it's a lagging impact with the second quarter worse than the first. Client exposures are down and many buyers simply have less ability to pay and are seeking more affordable alternatives such as higher deductibles and less limit. And of course some clients are willing to place their business with lower rated, cheaper capacity in a quest to save premium dollars. Exposure reduction impacts growth and that's especially evident in workers' comp, marine, general liability, environmental, and A&H. For our P&C business in total globally, we roughly estimate recession has had a 3 to 4 point impact on our premium revenue growth.

With that, I want to make a few comments about our A&H business. Around the globe consumers are suffering and they are tightening their belts. Consumer credit is shrinking, fewer people are traveling, and employers are cutting back on employee benefits including accident insurance. In constant dollar terms, our global A&H business was essentially flat in the second quarter. Foreign exchange had a significant and negative impact on our reported growth rates in the quarter, about 12% impact.

To break this down further, our ACE international A&H business overall grew 1% in constant dollars, with Asia growing 10% and Latin America growing 3%. The other portion of A&H is the combined, which is also feeling the impact of recession, and their overall premiums in constant dollars were down 4%. Overall, our A&H business growth was impacted by both lower new business writings as well as renewal persistency, which was down modestly. We estimate recession has had at least a 6 to 10 point impact on our growth rate. You'll notice our A&H earnings, while good, were down from prior year. Foreign exchange and a few one-time claims and non claims-related items make up about two-thirds, and the impact from reduced persistency and slower new business growth make up the balance.

However, all is not bleak and we are hardly standing still. In addition to managing our expenses and investment spending carefully, we are also repositioning our products and marketing programs to have greater appeal to individuals and companies in recessionary times. We are also implementing better analytical capabilities that enhance our direct marketing effectiveness, thus enabling us to spend less to win more. While the travel category is currently under pressure, we see exceptional medium and long-term opportunity globally and are making investments now to expand our presence and capability in more markets. This is already paying off as we are winning substantial new distribution market share. The impact of recession on our A&H business, while real, is transitory. And over time as economic growth begins to recover, our business should benefit.

Finally, in closing, let me make a few general observations about the overall macro environment. We remain basically cautious and concerned about the global financial and economic environment. In my judgment, there is much uncertainty given all of the challenges in front of us -- recession, the balance between the risk of deflation and inflation, financial industry balance sheet woes, government deficits, government assault on business, protectionism, and in our sector inadequate insurance market pricing, which is all reflected in volatile investor sentiment. Financial markets remain uncertain and I expect these conditions will be with us for some time.

Yet with all that, I am optimistic with what I see on the horizon for ACE, and I like our prospects and I like our fundamentals. We are focused on the right things at this unique place and point in time -- a prudently managed investment and underwriting portfolio and a strong balance sheet. We have a great spread of businesses, geographies, and product capabilities, a strong underwriting culture, and a company of highly talented optimistic and motivated people. We are making significant investments to expand our capabilities in areas such as our back office operations in the US and UK, our multinational client underwriting and servicing capability, our technology, our A&H business, our enterprise risk management abilities, and our high value personal lines business to name a few. Over the cycle, we will continue to invest in our future. With that, I'll turn the call over to Phil.

Thank you, Evan. Good morning. Our cash and invested assets grew by $2.7 billion.

He meant afternoon.

Good afternoon. Our reinsurance leverage dropped to about 81%, and our tangible book value grew by 16% on a per share basis. Net realized and unrealized gains before tax from our investment portfolio were approximately $1.2 billion, or $1 billion after tax. New guidance was issued by the FASB last quarter related to both mark-to-market accounting and other than temporary impairments or OTTI. We adopted the guidance this quarter and it had no significant impact on our book value. The effect was to reclassify $267 million of prior periods' OTTI charges from retained earnings to unrealized losses within our equity section.

For the unrealized losses remaining in our fixed income portfolio, we believe our strong liquidity and continuing positive operating cash flow support our view that we can hold our highly rated investments until they recover their value as they approach maturity. Our investment portfolio continues to be predominantly invested in publicly traded investment grade fixed income securities as as well diversified across geographies, sectors and issuers. The average credit rating is AA with over 50% invested in AAA securities. The duration of the portfolio is approximately 3.8 years.

As we show on page 17 of the financial supplement, on June 30th the market yield of the portfolio was 5.6%. This yield is the weighted average yield to maturity of our fixed income portfolio based on the market prices of our holdings as of that date. This is effectively our new money rate if we continue to invest our portfolio in a similar distribution. Our book or cost yield was 4.7% and represents our investment income over the weighted average costs of our invested assets.

As Evan said, during the quarter we redeployed cash we had accumulated. This cash was invested primarily in high grade fixed income securities. With a strong recovery in global equity markets, we also liquidated the majority of our publicly traded equity holdings and invested the proceeds in higher yielding corporate bonds. This allocation to corporate bonds is well diversified and targeted to the upper tier of the high-yield sector with an average rating of BB plus. The shifts in asset allocation will, all else being equal, increase book yield and investment income. Based on the mix of our portfolio as of June 30th, our quarterly run rate for investment income is approximately $525 million. Our realized gains also included about $100 million related to the decrease in the fair value of our GMIB liabilities net of the impact of hedges. The second quarter gain was primarily due to the increase in long-term Treasury rates.

During the quarter, AGO issued shares, diluting our ownership from 21% to 14%. This dilution required us to discontinue using the equity method of accounting and to mark our investment to market. The change caused a book value reduction of about $200 million. $65 million was recorded as a realized loss and $135 million was recorded as an unrealized loss. Operating cash flow for the quarter was $760 million and was adversely impacted by the return of about $160 million in collateral relating to the derivatives we use to hedge our variable annuity business. As the markets improve, the value of the hedges declines, requiring us to return collateral we had received from counterparties.

Net loss reserves increased about $620 million for the quarter. In addition, in June we issued $500 million of senior debt with a coupon of 5.9% and a transaction seven times over-subscribed. The proceeds have and will be used to refinance debt maturing over the next six months.

Financial flexibility at the holding company level remains strong, given our operating company's dividend capacity and low levels of debt refinancing needs over the next five years. Our debt to total capital leverage ratio of 17% continues to be conservative relative to our current rating level. This leverage will be further reduced as we use the proceeds from our recent debt offering to repay other outstanding debt when it matures later this year. For the full year 2009, we now expect our operating income per share to range between $7.25 and $8. Catastrophe losses included in our estimate are $275 million pretax and $215 million after tax for the remainder of the year.

I'll turn the call back over to Helen.

Thank you, Phil. And now we'd like to take your questions.

(Operator Instructions). We will move to Jay Gelb with Barclays Capital.

Good afternoon, Jay.

Thanks and good afternoon. Evan, can you talk about the pace of improvement in pricing -- up 4%, that's probably on the high end of what we have heard. Does that include just rate or is that rate and exposure? And why do you think it's in the mid single digits given where we are in the cycle?

Well, first of all, it's rate, pure rate. It's not -- if exposure increased premium more, then that would come through in the premium. This is just the pure rate side. And the balance of the question, why do I think we are getting 4% or -- ?

Yes. Maybe if I could rephrase that. To what extent do you think that that accelerating trend can continue?

I'm not sure. Right now it's a chaotic market. We measure it month by month. April and May were probably a little better than the end of June, early July. But there's always that feeding frenzy generally around the important renewal dates. I do see particularly in the casualty related and the tougher classes and specialty classes where it's not that E&S wholesale, but it's in the retail area. I continue to see our underwriters getting a pretty good rate. But retention is a little lower than it was on a policy basis, more than on a premium basis.

It varies by region of the world where I think -- how is it going to continue going forward? The US right now, I think the market will continue to firm for us, but slowly. In the UK, same thing. Australia seems to have accelerated a little more rapidly. The continent of Europe is firming more slowly, but it also got softer more slowly. It's a more orderly and slower to react market. Beyond that, I can't read the tea leaves right now.

My next question has to do with the growth in professional lines. How does ACE strive to avoid the tail of losses in those lines as whether you would take on new business or move lower down on programs, particularly for the financial sector?

You hardly cover prior acts when you write professional lines business. And when we are stepping into financial institution related, the intention of the insurance you buy today to cover your exposures going forward, and we are not picking up the past.

Right. Thanks very much.

You're welcome.

We will move next to Mark Lane with William Blair and company.

Good afternoon, Mark.

Good evening. Just have a couple quick ones. The first question is regarding accident year loss ratios ex cat second quarter versus first quarter. In international they seemed to be stable, but in the US they seem to be up a little bit versus the first quarter, the same in reinsurance. Any insight you can provide there in terms of just second quarter results versus the first quarter?

For the reinsurance, it's really a mix issue in the sense that we have more casualty business with higher loss ratios in the same quarter last year. When you look at the US, there's some large risk management contracts that are affecting this. There was one outgoing, a return premium in the second quarter of 2008, and in this quarter we had a large inbound. They are both written at about 100% combined and so that's distorting the --

I'm sorry. I'm comparing it versus the first quarter this year.

I think it's very tough in our business to compare sequentially quarter to quarter. It would be easier -- the more relevant to us, is the comparison year on year in the business because of the seasonality, how our business changes a bit from quarter to quarter of what we write, Mark.

Okay.

What is inflating the second quarter in North America is more to do with large account -- a few large accounts written that are more of a risk management nature and they generally have the higher loss ratio attached to them.

Okay.

There's nothing -- there's -- that's simply the noise when we strip it wet.

And so then a broader question just about loss cost trends, are you seeing any changes, either positive or negative in terms of lost cause trends relative to the economic environment?

No. Not really. There's a little noise here and there on individual portfolios, but in the totality, major books as we study them, we don't see much -- we don't really notice any change in loss cost trends.

Okay. Good enough. Thank you.

You're welcome.

We will move next to Matthew Heimermann with JPMorgan.

Hi, Matt.

Good evening, everybody. A couple of quick ones. First, with respect to the A&H business, Evan, I thought in your comments you mentioned an unusual loss in quarter, or a one-off loss in the quarter. Did I hear you right? And if so, what was that?

You did. What you heard me say is that A&H earnings in the quarter were less than in the quarter last year. You'll notice that in the supplement as you study it.

Yes.

But I'm helping you to read ahead on the test. And so what I was really flagging is why is that, and about two-thirds of it we had some one-time good guys last year in the second quarter, and we had some one-time bad guys in the quarter this year that were related to losses. One example is the Air France crash.

Okay.

For instance. And so that's about two-thirds of it. So I'm just helping you to think about the normal, a better sense of the normal earnings of that. And then the balance is related more to recession, because that's new business growth and retention of business, renewal ratio.

Okay. And then if we kind of strip out the noise --

Per earnings comparison.

And then was there any -- on an underlying basis with respect to some of the guarantees you're giving, was there an underlying improvement in that business? Because with the market improving, I would think that the necessary incremental reserves were probably down relative to premium.

Matt, I think you're thinking of the VA life business.

Yes, exactly.

Not the A&H business.

Yes, I'm sorry. If I misspoke, I apologize.

So I was referring really to the A&H. And the VA, we didn't unlock any assumptions and the operating income was on the same assumptions as we used in the past, so if they were improvements from current market, we didn't reflect those in the operating income. And then the net income obviously has the fair value impact which was --

About $100 million.

To our benefit.

That was going to be my second question because if I -- based on the disclosures and, listen, I'm not nitpicking -- I'm happy it's positive given the last couple of quarters. But based on the disclosures in your Q, I would have thought it was even more positive, particularly given the equity market move. So I'm just guessing was there some change in long-term volatility that we missed? And I'm thinking of the numbers net of the hedging that were provided.

What I'd say is we have this locked-in concept, and while the experience is within a certain corridor, we're not going to change the underlying assumptions. So while we did benefit on the equity side -- I mean on the realized gains side, most of that was interest rates, as I said. The improvement in the S&P is almost -- was very substantially offset by the loss on the hedges because that's what we have before they move against it. So it's about exactly what we'd expect to see in light of what we didn't unlock.

Okay.

And if we would have received benefit in the operating side, we just didn't recognize the current environment because we didn't unlock and change any of that, so --

That is fair. And I guess the other thing was normally I think about your business from a reserve standpoint of -- a lot of your casualty reserves I believe are second half annual reviews. I just want to make sure there was no acceleration of any of the reviews in the quarter.

No acceleration and look, we review -- a good portion of Global Re's casualty is in the first quarter. Of our North American business there's a substantial portion that's reviewed in the first half, Global Re, I meant the first half. And then there's the international and the balance of North America and some Global Re in the second half. There was no change, no accelerations.

Okay. Perfect. All right. Thanks for your time.

You're welcome.

And next we will move to Vinay Misquith with Credit Suisse.

Good evening.

Hi.

You mentioned that pricing was up 4% this quarter, and that's great. Just curious how that would impact the margins, especially since last call -- last time said loss cost trends you're forecasting them to be 6% for normal business, and I believe high single digits for the E&S business.

Look, it varies by line but it does one of two things. It either -- one of three things. Depending on the class of business, it either kept that 4%, either helped bring loss ratio down, helped it to remain stable and the same, or it helped to arrest the pace at which loss ratio is rising. So it obviously has a benefit but as a general statement, I can't give you -- it varies by line of business, Vinay.

Sure, fair enough. Second question was on the GMDB I expected payouts in the future. The disclosure on page 12 actually gives out how much you expect to pay out versus how much you expect to receive over the next 12 months, and the net payout has remained relatively stable this quarter versus last quarter. So just curious, I mean, the markets have recovered significantly. I'm curious why the net payouts for you guys would have actually gone up a little bit this quarter versus what you expected last quarter.

Just related to the number of claims, right? Because obviously there's been an improvement in the difference between the guaranteed value and the account value. The only other variable we would have is the number of actual claims in the quarter.

Mortality.

Right.

You expect more claims in the near term because of debts, okay.

Yes. Portfolios mature. Remember, we wrote these portfolios in prior years and as they mature, mortality matures along with it.

Sure. Fair enough. Thank you.

You're welcome.

And we will move next to David Small with JPMorgan.

Hi, David.

Hi. Good evening. I just have a quick question. You made some changes to the claims organization and I just was trying to understand what was happening there. Is that driven by the types of business you're putting on the book right now or is there something else going on?

I'm looking at Frank Lattal, because we haven't made any material changes to our claims organization and if you read an announcement on appointments or some recent appointment of an executive, help us with it. Yes.

That was -- there's a press release out about a week ago that said you created a new role to support major risk claims service.

The UK, you're talking about a position that was filled in the UK. We added a claims advocate who is -- the position is designed to help large insureds navigate through our claim operation throughout the ACE European group, and to help advocate between the insured themselves and the claim operation if they have large claims or large issues. It's customer service, designed for customer service, and to make the transition seamless between the presentation of a claim and getting it adjudicated by the organization.

Okay. Thanks and just one second question on guidance. There's no favorable development in that number, right?

That's correct.

Anything further, Mr. Small?

Nope. That's it. Thanks.

Okay. Thank you. We will move next to Brian Meredith with UBS.

Hey, good evening, everybody.

Good evening, Brian.

Just a couple of things. One just following up on Dave's question. When you say there's no favorable development, you mean for the remainder of the year?

That's correct. We obviously would have whatever favorable development we had in the first six months in the first six months. And then we don't assume any additional for the rest of the year.

Okay. Perfect. A couple of just nitpicking questions here. First, admin expenses in North America up about 13% year over year, 12% to 13%. Anything unusual going on there?

No. We have made quite a few investments in North America. We have our private risk services business that we have been building out and it's going quite well. We are not highlighting it yet. It's like that thing we are still polishing in the basement. We will march it out, and we have been building out our field organization and our underwriting presence in a number of lines. Our D&O, and E&O, our environmental, our construction, in a few areas we have -- we have been improving those capabilities. And so that's why you see the expense up a little bit there. I think the overall expense ratios are looking pretty good on P&C only.

And then just another quick one. The other income line on your income statement, what goes into that? There's a bunch of other income this quarter where it's been actually a loss in prior quarters.

Other income is made up of a couple of things. I mentioned that we had the AGO loss. That was the $67 million that went there. And then we had -- we also had from time to time purchased a credit default protection against counter parties and we had a -- the value of the swap went down because credit spreads came in.

Okay. And then the last question. On the A&H business, can you give us a perspective or general breakdown of where that business is geographically, so as we look at the global economy and see certain areas improving and certain areas not improving, we can get a sense of how it may impact your business?

Yes. It's pretty well spread. When I take ACE international -- remember, half our -- on an annual basis, about half the business is ACE international and about half is combined. And so roughly, don't hold me to the number exactly, about $1.6 billion each. On the combined, about $1.1 billion to $1.2 billion is the US. The balance is international. On ACE international, obviously it's all international, and that breaks down where -- not exactly, but about one-third Europe, about one-third Asia, about one-third Latin America.

Excellent. Terrific. Thank you.

You're welcome.

And we will move next to Jay Cohen with Bank of America Merrill Lynch.

Yes, thanks. Several questions. First, just on the guidance, the catastrophe losses that you gave out, was that just for the second half of the year or was that for the full year?

That was just the remaining part of the year, second half.

Okay. Got it. Next one also a clarification. When you talked about price changes, Evan, I think you said new and renewal. Is that a fair characterization or was that just renewal business?

No. New and renewal. Well, the way we look at it is like this. It's renewal -- that's the renewal pricing because that's what you can judge exactly. And then we look at the relativity between new and renewal business to see if our new business is getting on a like basis -- and it's not an exact science, is getting the same pricing levels. And our relativities, it's -- they -- the closest they have been yet, they are almost 100%, they are in the high 90s to 100%. So that means that the new business is as adequate as the renewal business, if that helps you.

That's helpful. And then lastly, obviously there's been a lot of talk about political risk insurance. It doesn't appear based on the numbers for the past 1.5 years that it's having a big impact on your business at all. And I'm wondering if you could just give us an update of what you are seeing there from a claims standpoint.

Yes. Our -- I'll break it down for you because -- I think, Jay, you want political risk and trade credit, right?

Yes, that's fine. That's good.

For political risk, our loss experience is -- touch wood, it's quite quiet and we have not seen -- we have seen very low level of development, and the development we have is comfortably within our PEGs as we've seen it today. Our trade credit business, that business by its nature is -- runs a higher frequency of loss than political risk does. And its frequency and severity are well within what we contemplate within our PEG loss ratios so that's running just fine. And then we have a third book called structured trade credit where it's for large or multinational type clients where we insure above a self-insured retention where they have their own credit organizations and credit analysis capabilities. And on that business we are seeing a little higher frequency of loss but again, nothing -- and on frequency and severity, nothing troubling and within our expectation.

Great. Thanks for the update, Evan.

You're welcome.

(Operator Instructions). We will move next to Ian Gutterman with Adage Capital.

Hi, guys. Just a couple. One, on the investment portfolio, can you help me a little bit? You talked some about the selling the equities and investments in cash and putting them in high yield. I'm trying to reconcile a little bit. It looks like you sold about $500 million of equities, and I guess to deploy cash too, but the below investment grade looks to have gone up close to $2 billion.

Here's how I would break it down. I would say we sold about $1.8 billion of -- we reduced our cash position by $1.8 billion and we sold about $800 million of equities.

Okay.

Then we redeployed them. So $600 million went into corporates, about $250 million went into agencies, $400 million went into treasuries, and about $350 million into high grade mortgages. So that's $1.6 billion, and then the remaining -- approximately the remaining $1 billion went into high yield.

Okay. I'm trying to flip through the supplement here. It looked like to me that the BIG went up more than that. Is that partially downgrade as well as price movement?

Say that once more. I'm sorry.

Would I assume part of that would have been downgrades into investment grade and also price recovery as well?

Yes, absolutely, price recovery is a big part of the change here. That was just what we put into the portfolio and then we had significant price changes.

I guess my main question about that is, given the below investment grade bucket and it looks like the BBB bucket are bigger than they've been in a while, what capital concerns could we have if we see more fallen angels and the BIG bucket becomes bigger because the BBBs continue to get downgraded?

We are very comfortable with our capital position and I wouldn't expect that to be an issue. The change in the capital requirements as you move one rating level just aren't that significant.

Okay. Just want to make sure. Then my second question, just to clarify on the guidance -- I guess doing quick math here, but essentially from where you were earlier in the year, you have lost a little on the top end and kept the bottom end the same. But the prior period alone, which wasn't in the guidance, is more than $0.50 upside, looking like $0.60 plus of upside. What was the $0.60 plus negative that is counteracting that?

It's a combination of things -- investment, investment income, foreign exchange, rate of premium growth, rate of rate increase. So a number of other areas were a little less than anticipated, and that's offset by the prior period that was not anticipated.

Is there a way to help us quantify on the earnings impact of FX? Obviously you touched up on certain areas or on premium levels but --

We actually gave it to you. We gave it to you right in the release and in the supplement, and I believe it was about $40 million in the quarter.

On operations, right?

On operations.

Okay, [we] saw the premiums. I'll have to go back and look at that. Thank you, guys, appreciate it.

That does conclude our question-and-answer session at this point. I'll turn the call back over to our speakers for any final or additional comments.

Thank you, everyone, for joining us this evening and we will speak to you again at the end of next quarter. Thank you and good day.

This does conclude our conference call. We thank you, everyone, for your participation.