丘博保險集團 (CB) 2009 Q3 法說會逐字稿

Good day, everyone. Welcome to the ACE Limited third quarter 2009 earnings conference call. Today's call is being recorded. Following today's presentation, your questions will be addressed. (Operator Instructions)

Now for opening remarks and introductions, I would like to turnover the call to Helen Wilson, Investor Relations. Please go ahead.

Thank you and welcome to the ACE Limited September 30th, 2009, third 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, gross prospects, investments and use of capital, general economic and insurance industry conditions, 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 filing as well as our earnings press release and financial supplement, which are available on our web site for more information on factors that could affect these matters. This call is being webcast live weekend 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 development. 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'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. As you can see by our release, we had an excellent third quarter contributing to what we believe is a very good nine months. After tax operating income was up 39% year on year in the quarter and up 6% year-to-date. Our P&C combined ratio for the quarter was 88.1. We benefited from relatively light Cat losses as well as prior period reserve development coming almost entirely from casualty reserve releases related to '05 and prior. Excluding cats, the current accident year combined for the quarter was 93.3, bringing the year-to-date to 91.4. A very good performance that points to the strength of our fundamental business. Our ROE for the quarter and the year was 16% and 17% respectively, an excellent return on capital. Book value grew 13% in the quarter, continuing last quarter's trend and is now up 30% year-to-date. Tangible book value is up even more, almost 40% for the nine months. Both book value and tangible book are at an all-time high. Phil will provide more details on our balance sheet a little later.

Interest rates are low. That puts pressure on investment income growth. However, our positive cash flow and consequent growth in invested assets and portfolio repositioning help ameliorate that somewhat. Net investment income for the period was essentially flat with the last quarter. Phil will also speak more about our investment income in a little bit. Our P&C net written premiums were down about 4% on a reported basis with foreign exchange again having a significant impact on year-over-year growth. Excluding fx, P&C net written premiums were essentially flat with prior year. Fx should begin to have a positive effect on growth beginning in the fourth quarter given the weakening of the dollar.

By the nature of some of our businesses, growth can be volatile quarter to quarter, but more stable when viewed over a longer period of time. For example, our crop insurance premiums were down 30% in the quarter versus last year. That had an impact of 3% on our overall P&C net premium growth and 6% on our North American growth rate, and it's mainly due to base commodity prices coming down from last year's high levels. We have a very strong pipeline to business opportunities broadly across the organization and it includes some large transactions. We expect meaningfully stronger growth in the fourth quarter regardless of foreign exchange. Our growth was also impacted by recession related declines and exposure in both P&C and A&H. The third quarter for our business globally, we estimate recession had at least a 4 to 5-point impact on our premium revenue growth.

Turning to market conditions, the trend we saw all year continued into the third quarter. Though, with the apparent stabilization of the economy, rapid recovery of financial markets and industry capital base coupled with a lack of cats, there has been a shift in tone during the quarter towards a more competitive market. Overall pricing on the business we wrote, new and renewal, was up 2% for the quarter globally. Pricing was better for the business we wrote in July than in September. Our revenue growth followed a few broad themes this quarter. Stripping away the impact of fx and recession, we continued to benefit from a flight to capability and balance sheet, especially in those lines of business where risk layers were more than price matters, and from those clients seeking to diversify the risk. We also gained business in lines and areas in which we have invested and continue to see reasonable underwriting margin. Finally, we have benefited from growth in those areas of the market that have and are experiencing underwriting losses and where prices have risen. These include areas such as financial institution professional liability, political risk trade credit, offshore and onshore energy, property cat and aviation. Again, as we have seen all year, Reinsurance business was firmer than Insurance and in insurance, retail was better than wholesale. On the other hand, these positives were offset by areas that are shrinking due to what we believe is irrational competition.

Let me provide some more color beginning with our Reinsurance business. Global Re continued to experience good growth in the third quarter with net premiums up 18% over prior. Global Re benefited from the size and strength of our balance sheet with increased share on treaties we like. We also grew as a result of companies purchasing additional reinsurance due to their capital needs. Reinsurance business activity in the third quarter is traditionally light other than the July 1 renewal period. Property cat rate increases for July held at essentially the same level as in Q2. Up about 10% for US programs, 5% for international. Casualty pricing remains flat to slightly up, consistent with the previous quarter.

Turning to the insurance side, on a constant dollar basis, our global retail P&C business, that's ACE USA and ACE International grew 3.7% while our London and US wholesale business shrank 16%. In North America, retail net written premiums increased 2.5 points with specialty casualty lines generally growing and short tail shrinking. Overall rates in US retail were up 3.5% in the quarter. Our renewal retention rate on a premium basis was also up from the same quarter last year and stood at about 87.5%. Lines such as D&O, E&O, excess casualty, environmental and energy related casualty all experienced reasonable double digit growth. We have invested considerable resources in a number of these areas throughout the year that are seeing the fruits of our investment. Our risk management premiums were down mid single digits in the quarter while a number of other business lines shrank due to competition, the impact of recession or underwriting actions we took to correct loss ratio issues. These include US large account property, commercial and inland marine, onshore energy and construction.

For US wholesale business, our premiums excluding crop were down 11%, however, rates for our portfolio were up 7% overall, with casualty up 6%, and property up 8.5%. On the other hand, our retention rate was down and continued to suffer. Competition continued unabated in the E&S casualty and professional lines.

Turning to the international. For international P&C excluding A&H, retail net premiums and constant dollar were up 5% driven by classes where again price matters such as financial lines and casualty. Rates overall in international P&C were up 1% in the quarter and all lines and regions were in a pretty tight range. Pricing range from up two to down two. We experienced double digit growth in net rewritten premiums in a number of countries. Including the UK, Brazil, Mexico and Australia. Whereas for the balance of our Asia Pacific region, P&C premiums were flat for the quarter and pricing remains competitive.

For international wholesale premiums in constant dollars were down 3% as the London subscription market environment remained quite competitive. Rates in our portfolio were up 8% driven substantially by property, energy, marine, and financial institution pricing. While it is an early read and substantially a fourth quarter event, airline prices at this moment look to be up about 20% so far. We have a number of other newer businesses that are doing quite well and beginning to contribute to our results. Our ACE Private Risk Services business, for example, was started about two years ago to serve affluent and high net worth personal lines customers in the US. The business is projected to produce a couple of hundred million dollars in premium this year and it is earning an underwriting profit.

Our international Life Insurance business, which is focused predominately on emerging markets is coming along. I want to provide you a few examples. In China, premiums in our Life JV with our Huatai Insurance Company are up 76% year-over-year. We now have over 15,000 agents operating in over 100 office locations. Based on total premium, this JV is currently ranked among the top three foreign invested Life Insurance Companies in China. In Vietnam, premiums in our wholly owned Life Insurance Company are up 30% year to date, established in '05, ACE Life Vietnam now ranks third in the market based on first-year premium. In Latin America, our life insurance premiums are up 85% year-over-year. We're also building Life Insurance Companies in other emerging markets such as Thailand and Indonesia as well as parts of the Middle East. Keep in mind some of these increases are on a relatively low base, but we are growing steadily and according to plan. Building Life Companies is a long-term strategy and requires patience. In aggregate, excluding China, we expect to end the year with about 500 million booked, International Life premiums and deposits.

Our A&H business continues to feel the impact of recession as I described on our last call. Driven by factors such as declines in global consumer spending, credit and travel as well as reductions by employers and the benefits they provide to their employees like accident insurance. In constant dollar terms, our global A&H business was again essentially flat. Specifically, our ACE International business was flat in constant dollars while our US A&H business was up 7% and premiums at Combined insurance in constant dollars were flat. Given current forecasts for global economic conditions, I expect our international A&H growth will be relatively flat into 2010 and then pick up as the year progresses, particularly in Latin America and Asia. I also expect growth the Combined will improve and move into positive territory as 2010 unfolds.

In closing, I want to make a few observations. First, not only were the financial results we produced in the quarter strong, but we continued focusing our efforts on building our Company's capabilities, expanding our product offerings, our underwriting and geographic presence as well as special initiatives centered on certain customer segments and our distribution. We are dedicated to constantly improving ourselves. We are never as good as we can be. Second, regardless of market conditions, our strategy and approach to underwriting and pricing do not change. We strive to be consistent in our approach. We might get less payback for our effort in a softer market but that doesn't change how we do business or who we are. More over, as I said before, it's a big world out there. Our global presence continues to identify profitable growth opportunities for us when other areas of the world are experiencing more challenging conditions. Finally, we are a growth company. We measure growth principally in terms of shareholder wealth creation as expressed by growth in book value. We never take our eyes off this goal. With that, I'll turn the call over to Phil and then we'll come back and take your questions.

Good morning. Our balance sheet continues to grow stronger. Shareholders equity increased by $2.2 billion for the quarter. Our operating cash flow was over $1 billion and our cash in invested assets grew to almost $47 billion. $2 billion of that growth came from appreciation and market values. Net realized and unrealized gains before tax for our investment portfolio were $2 billion. Overall, our portfolio has increased by $6.2 billion since year end and is now in a cumulative unrealized gain position.

Included in our net realized and unrealized gains are two losses related to improvement in credit markets. The first for about $130 million is related to the fair value of our GMIB liability and resulted from the requirement to increase our liability following an improvement in our own credit spreads. The second of about $40 million was similar and resulted from our investment in AGO. It represents our share of the increase in their liabilities resulting from the improvement of their own credit spreads. AGO's recent share issuance diluted our ownership to 12%. Going forward, we will account for our investment in AGO consistent with other equity securities where we don't have significant influence. Changes in this market value will be treated as unrealized gains and losses, and we will no longer pick up our share of their income in our operations.

Our investment portfolio continues to be predominantly invested in publicly traded investment grade fixed income securities and it's well diversified across geography, sectors, and issuers. The average credit rating is AA with over half invested in AAA securities. The duration of the portfolio is 3.6 years. Investment income for the quarter was $511 million, about flat with last year adjusted for foreign exchange. It was modestly lower than we've previously expected due to falling reinvestment rates during the quarter. The average yield on our invested assets is 4.7%. New money rates are 3.25% to 4% if we invest funds in a similar distribution to our existing portfolio.

Net loss reserves increased about $340 million for the quarter and $920 million year-to-date. Our paid to incurred ratio was 92% for the quarter and 94% year-to-date. Cat losses totaled $45 million. As Evan said, we had positive prior period development in the quarter of $200 million which related primarily to long tail lines. About two-thirds of the development was from years 2004 and prior. The balance was from 2005. 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 15.6% continues to be conservative relative to our current rating level and our reinsurance leverage is down to 73%. Helen.

Thank you Phil. At this point we will be happy to take your questions.

(Operator Instructions) We'll take the first question from Jay Gelb, Barclays Capital.

Thank you. In terms of the outlook for -- I believe the way you put it is meaningfully stronger revenue growth in the fourth quarter, regardless of foreign exchange. Can you quantify that for us and what do you think the tail end from FX will be in the fourth quarter?

Jay, I'm going to give you an unsatisfying answer. No, we will not quantify that for you. We've just given you a directional kind of forward-looking statement. That's it. We expect it's fairly broad based, and I think my commentary, it stands. That's the amount of color we'll put around it. Foreign exchange, I think you can measure that for yourselves. Just look at what the basket of currencies look like relative to the dollar last year in the fourth quarter, particularly the Euro, the pound, the yen, and the Aussie dollar and the Brazilian real and I think that gives you good indication. It'll have, that by itself, will have a meaningful impact, but my comment was FX aside.

Okay. Then on P&C pricing, overall P&C pricing, I believe you said up 2% in the third quarter versus up 4% in the second. What are you seeing so far in the fourth quarter?

I don't have numbers for the fourth quarter right now. Remember, the fourth quarter begins with the month of October. We're still in October. I don't have it at the moment. It bounces around month to month. Frankly, what we notice is there is no real consistency in each month, it is erratic because you're measuring small percentage points. Deviation -- it doesn't take a lot to deviate.

Can I approach it from a sort of forward-looking perspective? Based on what you are seeing in the market today, do you anticipate that that trend could continue to slow?

As I said, when you look at the growth in the industry's capital base and you look at the lack of cats and therefore how everyone feels like a genius in underwriting because they've now gotten the benefit of low cats and incur an income, I think that sets the table for softer market conditions. As I said, we saw that in the third quarter, and I don't see a lot of reason why we won't see it in the fourth quarter. The fact is, while people would like the business to turn on the income statement, this industry generally turns on the balance sheet. So you can get some sort of shorter term movements in pricings from people feeling income statement-related pressures, but a more enduring turn in any cycle is driven by the balance sheet. The balance sheet's in pretty good shape for the industry.

Great point. Thank you.

Now we'll move to a question from Paul Newsome, Sandler O'Neill and Partners.

Phil, the losses that you mentioned related to the fair value, are those the realized losses that were booked to the life segment that --

Yes.

The two hundred and some?

That's right.

They're both in that segment?

No, I'm sorry, the AGO losses is in the corporate segment, and the GMIB loss is in the life segment.

And the rest of that gain, pardon me, that loss in the life segment is just what?

It relates to other elements, principally interest rates on the GMIB's.

I'd like to revisit Jay's question about the fourth quarter. I don't want to you quantify it, but can you at least qualify as to why you think the fourth quarter will be as strong? Is it simply a matter of looking at your own pipeline? Is there something in the comparable quarters that you're thinking about that actually depressed the revenue line.

That's why I tried to give you a little sense that, particularly a company like us, you measure revenue simply quarter by quarter it's a short quarter. It's a short period and it can be a bit erratic quarter on quarter. It's more stable looking at a trend over a longer period. So for instance, I gave you the sense of third quarter this year versus last year. Last year had the benefit of a better crop writing. And you adjust for that. We don't see that kind of same adjustment quarter prior year versus current year in the fourth quarter. Secondly, I have the insight of seeing what the divisions are projecting for the fourth quarter across all their lines of business. And my colleagues are fairly good at projecting, and that's what it comes out to. So, thus the statement that I think the third is not indicative of the fourth. That's what I was trying to say.

Thank you. I'll let some other folks ask questions.

Thanks.

Now moving on to Matthew Heimermann with JPMorgan.

Good morning, everybody.

Good morning, Matt.

On the overseas general segment, I realize that the loss ratios ex-developement and cats tend to bounce around but is there anything specific that affected the ratio in that quarter? I'd just be curious as well looking forward with A&H having at least FX adjusted decline. Is that having any impact on the loss ratio as well?

Yeah, a little bit. And not a lot. What happens, you saw it last year, you see it this year. There's some seasonality impact in international much of the time. Not every year, but much of the time third quarter is a little higher. And one of the reasons we do a true up of our peg loss ratios. You have six months to look at. We true up the year in the third quarter. So that can have some impact. You see the '09 year-to-date at a 92 versus that's current accident year ex-cat versus last year, I believe, at 90. A&H has some impact on that, and so does P&C. It's mixed. On the A&H, as I said last quarter it's running an excellent margin. But it's running a little lower margin. We've had some recession related losses, claim losses in certain territories. We've addressed them but they are reflected in the peg and that's transient. We've had on newer campaigns, a little lower margin because of response and conversion rates being lower, but still a very good result. So that mix is in there. On the other side of the coin, A&H is less of the total premium because P&C grew a little faster. So the A&H as less of a total it has a lower combined ratio than the P&C does.

That's helpful. Thank you.

It has a lower loss ratio, higher expense ratio.

Exactly.

Okay?

The other question I had for Phil was just, I guess I thought we might see, and I recognize short rates are still low and obviously with spreads coming in, reinvestment rates change pretty dramatically start of the quarter versus the end of the quarter, but with the expansion and risk appetite in the first half of the year, I thought we might see more impact on yields. Was that me being too optimistic or was there other things that are affecting that in the quarter?

We said in our last quarter call that we expected a run rate of about 5.25 for the second half of the year, and we had it in our minds that that would be you know, 5.20 for the third and 5.30 right with an average of 5.25. If you look the quarter, we were at 5.11. There was also a small reclass $4 million, $5 million dollars where we moved our income on private equity funds where we owned more than 3%. We reclassed that down to other income. Really, you're talking 5.15 to 5.16 to 5.20. That was really just a decline in the yields.

Okay. That's helpful. I'll get back to queue. Thanks.

We're now moving to a question from Mark Dwelle, RBC Capital Markets.

You said in your opening remarks, you commented that pricing seemed to be stronger in July relative to September. Was that general to the US market or maybe the North America market more accurately or was that a global oriented comment?

It was a global-oriented comment.

Would you extend that commentary to both reinsurance and insurance or just on the insurance side?

More to insurance than reinsurance.

Okay. Second question I wanted to ask was, related to the accident and health business, as things have begun to crystallize a little bit more with healthcare reform, are there any particular concerns or risks that you see for that business from what's kind of emerging politically?

Not particularly. I think we added up that there could be $20 million to $50 million. I think it was closer to $20 million, don't hold me to the number, of premium that could be impacted by this. I think it's in the student health line. So really de minimus. On the other side, you guys have asked me more than once, and I think it's a good question, would the Combined's business be impacted by healthcare? I don't know in the transition to healthcare whether it'd have any impact or not. I have no way of knowing in the short-term transient period, but I do know in longer term it should have no impact because some of our healthiest markets, our biggest markets, Canada, the UK and Australia, big markets for the Combined and New Zealand. Those are all nationalized healthcare markets.

Okay. Thank you. That's very helpful.

You're welcome.

We'll now move to a question from Alan Straus with Omega Investments.

I was curious with your debt to capital at 15.6% and generating this amount of cash flow, what are your thoughts on share repurchase and return of capital to your shareholders?

Our thoughts remain the same. We think we are good stewards of capital. We will put capital to use well. We have capital for bad things that can occur, risk and the world is full of risk. Just six months ago, I don't think anybody would have raised that question. When the industry, and only six months ago, was under significant capital pressure. And you look at the transient nature of things anybody who can really read the global economy and economic and prognosticate about future economic conditions is likely borders on insanity at the moment. No one knows with any certainty. At the same time, we're in the risk business and things can happen. It's just a moment away that a cat of major event can occur. At the same time, given what we've gone through over the last year, there is opportunity that will unfold in the future, and our minds are on that. Taking advantage of the weakness of others broadly speaking. So we do not have any plans as we look forward to engage in share repurchase.

Just heavy balance in the acquisition versus your own stock price trading in close to book value?

I guess you're assuming that a certain price for the target when you ask that question.

Right.

I mean it's not like given ACE's price to book, I don't think it's because of some weakness in ACE. I think it's an overall view of financial of the financial industry or insurance generally. ACE trades right up there pretty close to the top of the tree and priced to book, varies day to day. Generally speaking, I'd assume any targets we would look at would be priced using the same measures.

All right. Thanks.

Welcome.

Terry Shu with Pioneer Investments has the next question.

Evan, back on pricing again, when you commented on the environment that September was worse than July, however, you talked about all of the rate increases that have achieved in your own book, would you say that the business written by ACE in the quarter or in September is better priced? So if you can distinguish between your book and the rest of the industry?

When I spoke of pricing I was clear. It was ACE's pricing, Terry.

Okay.

So I said the prices we achieved --

Right.

And we're only going to write business if we think it's going to produce an underwriting profit.

Right. So the business that you wrote, even though it's well priced, is not as good as the business you wrote in July, is that what you meant? I'm still a --

What we said -- what I said was, the price -- the rate increase --

Right.

Not book to rate.

Okay.

I said the rate increase we achieved in July --

Right.

On our portfolio --

Right.

Greater than increase we were able to receive on the business in September.

Okay. Okay. But you were net-net -- I'm sorry?

No, go ahead. I'm sorry.

So net-net, you were still able to achieve rate increases in the third quarter or in September, however, relative to your views on loss cost trends and such, it was not as good as what you did in July. Is that sort of the bottom line?

Well, yes, but I didn't make a comment about loss cost or any of that.

Right.

I didn't speak to margin or any of that.

Okay. Okay.

What I spoke to simply was rate.

Okay. Can you talk about, then, profitability and rate adequacy? Are the margins on the business that you're getting now somewhat less favorable so as we look out into 2010, there will be some margin pressure based on your views of claim trends or how you're setting your accident, year loss ratios?

First of all, I'll make two comments. Number one, and that's probably as far as I'm going to go. Number one, in thinking about '10, in aggregate for ACE, you have to know what mix of business is. And the mix by line. And that changes a bit. Number two, of course margins are under pressure. How could it not be when you see rates moving less than you would imagine trend in loss to be. Rate is not keeping pace with trend. That's clear. That's for the whole industry. Clearly. And you also see that we are shedding business in some areas and growing in others. When we think the business will not earn an underwriting profit, we're shedding it. When we think that it'll earn a reasonable underwriting profit, we're growing it. And that's it.

One last comment. Can you talk about frequency and severity trends?

That's a question, not a comment.

That's a question, right.

What would you like me to say about frequency and severity?

Your current views. I assume that frequency remains pretty benign. Do you see any uptick anywhere?

Well, I mean, asked that way, Terry, I'm sure I could find a place that I --

Right.

I'm sure there are places around the world that I'm seeing some increases in frequency particularly where we saw A&H recession related claims. Generally speaking, we're not seeing an uptick in frequency. It is more severity driven. Hardly do we use a rear view mirror look of loss trends to simply project the future.

Thank you.

You're welcome.

And now we'll take a question from Brian Meredith with UBS.

Good morning. Couple quick questions here. Looking at the overseas operations, it looks like the cession rates continued to kind of move up. Is there anything happening there, additional reinsurance buys, the mix of business, and should we continue to see that here going forward?

No, we wrote a couple of large accounts in particular in the quarter that were large global accounts that distorted the net to gross.

Had low retentions.

Yes. They are larger global accounts that have a lot of fronting with them.

So one-time items. In the second question, you talked about your International Life operations. I guess my question is, there's a lot of interesting properties now to become available in the International Life Insurance area. What's your kind of interest level or appetite in looking at those? And would ACE be interested at all?

We look, yes. We look. And our interest is really very much individual property specific. We know countries and territories in areas of life where we would like to expand and to the extent that it is the price reflects an enhancement to our current strategy and achieves a favorable return to our shareholders. It's for not price that is outsized relative to ACE's total market cap. We will look and we could have an interest.

Right. Thank you.

Now we'll take a question from Jay Cohen Banc of America Merrill Lynch.

Good morning. You talked about in a US retail business growth in certain casualty lines, E&O, D&O, excess casualty. We still do hear complaints about pricing in those lines of business. I'm assuming your submission rate has gone up quite a bit. If you could talk about that, what's happened to your submissions and your hit ratio, what that looks like, that might put color around that growth.

Yes. There are guys out there. I'm going to turn this over to Brian to speak about this. The only thing I'm going to add is he'll speak about some numbers, but there are some cowboys out there. There are guys writing this at what we think are pretty nuts terms, and so it's not completely a disciplined market, that's for sure. Brian you want to add something?

Sure. First of all, our submission activity is robust in North American. The retail operations activity grew over 30% on the year-over-year basis. Wholesale was up 5% for the total shop. Prior risk services was up 98%. Reflection over the last couple years, we've invested in a lot of regional distribution platforms throughout the Company. So we're clearly seeing a lot more submission. The retail side of the quota activity is also up about 40%. The submissions are up and we're quoting more of the business. This is for the entire North America, not just professional liability E&O. We're seeing a lot more activity, quoting more activity. Obviously, you start to see changes in how much you pick up.

So we're only picking up an extra 3 points in business. So you're not -- we're seeing a lot more, we're quoting a lot more but the stuff that actually hits our radar and we're able to find obviously doesn't keep pace with how much we're quoting and how much we're seeing. We're seeing an awful lot of activity in all those spots, and frankly, where we're growing is the areas where we still see the biggest margin and where there's this change to service capability and quality you talked about. Evan has talked about in the past where there's a change in who the lead markets are, who has the infrastructure to compete. Our growth tends to be in all those lines where there's a mix of insurance and service capability where the clients need a carrier that can do both. Frankly, on the wholesale side, we're seeing a little bit of the opposite. We're seeing more submissions but all of our ratios are dropping dramatically as the pricing is just too competitive in that area. I don't know if that helps.

I would just add this. In professional lines, the submission activity is up about 19%. And we're binding about 14% of what we quote.

That 14%, does that change much over the years?

Yes, it's down. Yes, oh, yes. It's over the last couple of years it's dropped to almost in half.

That's great. That's really helpful, thank you.

You're welcome.

Reporter: We'll now move to a question from Vinay Misquith from Credit Suisse.

Good morning. On the acquisition front, if you could give us some color on whether you are more focused on P&C versus life and if you could give us a sense for US versus non-US?

I'm going to answer one of those. We're more P&C biased. I think I said it on the last call. We're closer to home. International versus domestic, there is no particular bias. I'm not going to comment any more on M&A.

Sure. The second question was on margins. Looking at the accident year margins for the P&C segment ex-life, for the first nine months of this year, they were flat, 62.3% this year versus the same number last year. Just curious. Given where pricing is low single digits, were the loss cost trends pretty favorable that left margins flattish, this year versus last year?

No. It's two things. One, last year had some large losses entered outside the peg that distorted last year upwards. Number two, we have seen positive development on our business last year and this year. So that kind of has an ameliorating impact because your starting point drops. Hardly are we changing our loss cost trends of how we see the future.

Sure. Fair enough. Thank you.

Welcome.

Will we now move to a question from David Small, JPMorgan.

Just one thing to clarify from your earlier comments, you mentioned you're going to grow -- you're growing in political risk and trade credit. Political risk has been used as a very broad term recently. I was hoping you could clarify what in political risk you're growing?

That's why I distinguish political risk and trade credit. For us David, I'm trying to be smart about this, but we don't include trade credit under political risk. Political risk is truly that. It's mostly project oriented and it is the confiscation, ex appropriation nationalization of a project that could affect debt holders or equity. It would include currency and convertibility as a peril in there. It could include contract repediation or contract frustration by a sovereign entity.

Okay. So you haven't expanded what you've traditionally done?

No. Political risk. No, and in fact, if anything, we've been able to be a bit more conservative, but we think we have -- our business has been -- I'm not going to comment on others, but our business has been stable through the period. I think our guys just have done an excellent job. We remain conservative, and in this period, and I'm speaking about since the recession and economic financial stress began, we've continued to earn a profit. I think that's just fabulous. At the same time, the market overall has experienced quite an increase in loss activity. It's caused a number of people to pull in their horns. The market has tightened. We see it as kind of a hard market opportunity at the moment.

My second question is for Phil, on the last conference call, you gave a number regarding the run rate for investment income. Can you just give us an update on that or should we still use the same number from the second quarter?

I would that say we expect to be pretty flat quarter on quarter from where we are now into the fourth quarter.

Okay. And then my last question would be, during yesterday's call Liberty Mutual had some interesting commentary. I'm not sure if you had the chance to hear it regarding the industry?

He usually does. He's a good leader. He usually has interesting commentary.

Would you agree with his comments around the industry coming out of a bar?

Go ahead and, well, as I said, he has his own way of his own way of creating metaphor. Give me -- ask me each one specifically and I'll tell you if I agree. I'm not a drinker, so I don't frequent bars. I left that to my younger years, but go ahead and ask me the question.

No, it's fine. It was just overall whether the industry, I guess the question is more do you think overall now the industry is being responsible in terms of pricing?

No. I think this -- I think the industry. We have cycles, and the cycles haven't gone away. And I think the industry, I've been clear in my own mind. It's our own judgment. I know everyone doesn't see it the same. I believe the industry overall has booked '08 accident year deficiently and I believe the industry is booking '09 deficiently. I believe the industry, overall is underpricing its product.

Great. Thank you.

(Operator Instructions) We'll now move to Thomas Mitchell, Miller Tabak.

I was wondering when you look at the sort of potential opportunity in a market for property and casualty insurance now. I've always had this theory that the propensity to insure should in theory have a sort of a natural level and that then to follow on, if we think of North America as sort of having achieved whatever the maximum natural level of propensity to insure is, of all of the goods and services that can be insured, what kind of comparative opportunity would be available in places like Brazil, China or east Asia generally? I'm just wondering how you look at that?

They are -- as the economies develop, business develops, middle class develops, and their propensity to insure grows because they have, a, more to lose and b, more ways to lose it because legal system evolves. Shareholder rights is developing. Environmental liability's developing. Product liability develops. Consumerism develops along with the middle class and with a growing business community. And their absolute values are increasing as their economy is increasing physical values. They're creating more asset and acquiring more asset. So one way to look at it is the insurance values to GDP, which we look at, the insurance premiums I should say to GDP. Then look at the growth in GDP. There's many markets where the pie is expanding. On the other side of the coin, you don't want to be pollyannish about it. Because you have different kinds of risks. There's volatility in developing markets and emerging markets. And that volatility means risk. And so it doesn't all go in a smooth line and it isn't all without a price to pay. If you get it wrong or even if you get it right. That help you?

Yes, very much.

You're welcome.

Now we'll hear a question from Ian Gutterman with Adage Capital.

About a year ago this time you sent a message that no price declines were going to be accepted at ACE pending approval by upper management. I'm wondering a), is that still in place, and b), is that still feasible given the direction pricing seems to be headed in the market? Can you tow that line or will you have to lose too much business to tow that line?

Ian, as I am making the statement, I am looking at John Keogh and Brian Dowd who are ultimately the only guy I don't have in front of me is Jacques Bonneau, but I know Jacques. Both those guys are looking at me saying yes that rule remains in effect. It isn't that we won't give a price reduction, but it will go through a management process to make sure that -- that price that -- that reduction in price, which will be modest when we have to give it is reflects a price that's still going to earn a reasonable return on that account. If not, we will walk away from the business. If you wonder about shrinking, I gave you some numbers about shrinking. Once upon a time, we wrote $600 million of E&S casualty. That will be down to $50 million this year. So we don't have a problem with that. Our Global Re business is growing right at the moment. But, that $1.5 billion business. We took down to $900 million, and I could go on. We are not afraid to do that.

That's what I wanted to hear. Just making sure it's still in place. My other question is, I think, a follow-up from last quarter on the investment portfolio. It looks like all of the growth in invested assets was in the a and below. Which I assume was mostly market appreciation, but I was wondering if new purchases in the quarter continued to go towards lower credit quality or has that changed?

It has changed. We did move out a short tail a little bit, about $200 million we moved out of short tail. But we put about $500 million of the cash flow we had into corporate, high grade corporate. We put $100 million into high yield, but modest. And the rest was all in high grade.

Okay. Do you feel just given the movement and spreads, does it make sense to start cashing in some of the successful bets you made in the lower credit quality?

We don't see any important tactical moves coming up in the near future.

Okay. Very good. Then, Phil, can you just quickly talk a little bit about the GMIB market? I understand your CDS influences the mark. I don't remember that being a big benefit on the way down last year.

It was. It affected us but over a longer period of time. It wasn't too noticeable on any one period. The spread snapped back so quickly it happened to have a big impact on this period.

I guess what I'm confused about, the big picture you had losses total for '08 again realized losses in '08 and you're having realized losses year to date in '09. I would have thought, net of all the things that moved, that '09 would have reversed a good part of '08 and it doesn't seem that's happened.

Right. And it won't. It's only because of this anomaly, right in this quarter, as I said, the credit spreads came back. Also interest rates dropped. That contributed to it.

Ian, something else, keep in mind. On the derivative portion of this, that's more interest rate driven, okay? So that's the realized side of it. The equity market, more shows up in the operating side, okay, in the db side. Make sense to you?

Yes. So possibly when we get to year end or the next time you look at that reserve and maybe earlier in the year people are asking about increasing the reserve maybe the next step is to actually decrease the reserve?

It's a long-term business. You measure it over a long term period of time, so I certainly wouldn't commit to any time frames about any of that.

Sure.

What we would tell you is, sure, with equity market recoveries, the reserve, the GAAP reserve on the operating side is in good shape. But you tell me equity markets in the future and this and that and who the heck knows. Interest rates have just come into such a low. All the spreads have come way, way in. We all understand why, and liquidity and stimulus and all of that and trying to prop up the economy for so many reasons. Where's that going over the longer term? You know that trend. So that part of it you'd expect over the longer term, there's only one direction. We can't tell you quarter to quarter what's going to happen, but over the longer term, that'll impact the fair valuing, which is the IB related, whereas the SOP is more the equity market related.

Got it. That clears things up, thank you.

We'll now take our final question today from Paul Newsome, Sandler O'Neill Partners.

Thank you. We had a couple of your peers with asbestos charges. I was wondering if, one, you could remind us when what your normal, your review process is, and then as well as comment if you're seeing some of the same problems that they had. I think one was talking about the increased defense costs. The other like Liberty was talking about an Armstrong charge. I would imagine that's not -- that should be old news. But if you had any thoughts and comments, that'd be great.

First of all, it's a fourth quarter item for us. We do our deepest dive every two years. In parallel as does an actuarial firm retained by the state of Pennsylvania. We did that last year and then we roll forward ourselves and update each year, we take a look, it's more of a top down than a bottom up. I have no information at hand to tell me anything at the moment. The guy's are in the middle of their review and I think most of the activity that you see insurance company to insurance company on asbestos is individual case related and case driven. So it's everybody's portfolio driven. So I wouldn't infer one company to the next.

Thank you.

Welcome.

That will conclude today's question and answer session. I'll turn the call back to your host for closing remarks.

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

With that, that will conclude today's conference, we do thank you for your participation. Everyone have a wonderful day.