丘博保險集團 (CB) 2009 Q4 法說會逐字稿

Good day and welcome to the ACE Limited fourth quarter year end 2009 earnings conference call. Today's call is being recorded. Later, we will have a question and answer session. (Operator Instructions)

For opening remarks and introductions, I will turn the call over to Helen Wilson, Investor Relations.

Thank you. Welcome to the ACE Limited December 31, 2009 fourth quarter and year end earnings conference call. Our report today will contain forward-looking statements. These include statements related to our financial outlook and guidance, business strategy and practices, competition, growth 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 filings as well as our earnings press release and financial supplement which are available on our website for more information and 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 during 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 saw from the numbers, we had a very strong fourth quarter which contributed to an excellent year. After tax operating income in the quarter was $2.01 per share bringing full-year operating income to $8.17 or $2.8 billion, an all-time high for the Company. Given the difficult economic and financial conditions we faced in 2009, these were simply excellent results and with all divisions of the Company making a meaningful contribution. Book value grew $930 million in the quarter bringing full-year growth to 36% and tangible was up 47% for the year. This was a stand out performance that restored last year's book value erosion and set a new high for the Company. In fact, for the last five years, we have grown book value and tangible book at a compound annual rate of 15% and 17% respectively. Our P&C combined ratio for the year was 88.3% and the 2009 accident year combined, so excluding prior period development, was 93.2%. These are both excellent results that speak to the broad global balance of our operations and the quality and strength of our fundamental business.

Our balance sheet, including our loss reserve position is very strong. Our total capital increased 29% to $23 billion in the year. Our net loss reserves grew 4% and now stand at $24 billion. I might add that our loss reserves are reviewed not only by our own actuaries, but each portfolio is reviewed by outside actuaries and our external auditors. Our P&C reserves are in very good shape in each of our divisions - North America, International and Global Re. Our ROE for the year was 16.2%, an efficient and excellent return on capital and I believe barring unforeseen circumstances, our ROEs will remain superior.

On a related note, some shareholders judge at a given moment in time the best way to increase earnings per share and book value per share is by buying back stock. We understand the argument and recognize the validity of that option, but it's not applicable to all companies at all times. We believe for ACE, a more strategic way to increase EPS and book value per share is by growing the Company, not shrinking it, which is essentially what share buybacks do. We are a global diversified Company with a long-term strategic plan. There's plenty of opportunity around the world to grow our Company over time. Even if you cannot see the opportunity at the moment, it doesn't mean it doesn't or won't exist.

On the other side of the coin, we believe it is prudent to also hold capital for risk. We are, after all, in the risk business. For example, where would we be today if we encountered a major risk event and needed to raise capital during the market upheaval of last year. Just in time capital management sounds great in concept, but it ignores reality. For both good times and bad, we have a long-term patient view for managing our capital. We're truly thoughtful and methodical when thinking about this issue and take seriously our responsibility to be good stewards of our shareholder's money. I might add that our track record is measured by ROE and book value is good, as well as our track record for acquisitions. Combined, our most recent, two years on, is right on target financially compared to where we said it would be, and Phil will add a little more detail to that. As part of our stewardship responsibility, rest assured if we build up what we consider to be surplus capital that cannot be put to work productively over a reasonable period, we will consider tactics to return that capital to our shareholders, including share repurchases. And we, management and the board of directors, mean it.

Turning to market conditions. Given the current reasonable health of the industry's balance sheet and cash flow, and industry cycles, at least until now, typically turn on the balance sheet and cash, we're in a soft market, to state the obvious. From an underwriting risk-reward perspective, prices are inadequate in many classes and industry profitability is under pressure. Our management team has lived through soft markets and seen what happens when companies are not willing to make sacrifices in terms of market share and volume. At ACE, we won't knowingly forfeit future profitability for short-term benefit. We've made it clear we'd rather write less business than kid ourselves about price or reserve adequacy and I believe that our actions over the last couple of years have proven just that.

On the other hand, the profile of who we are and what we have to offer, including the size and strength of our balance sheet, our local presence globally and broad product capability and technical underwriting prowess continues to attract business to our Company. Because of our increased product and geographic presence, we see so much more opportunity, even if we don't ultimately write the business because it does not meet our standards. Our submission counts were significantly higher during 2009 and the number of accounts we wrote also increased substantially as a result of our increased presence, particularly in specialty middle market. Our new business premium writings, however, were down as a result of underwriting discipline. For example, for the quarter, submissions for our principal North America commercial retail insurance lines were up 12.5% while our new business premium writings were up just over 6%. Similarly in our international business, submissions were up 12% while new business premium writings dropped 11%.

Our total P&C net written premiums were up about 9% in the quarter, an excellent result that was helped in part by foreign exchange. In constant dollar we were up 4%, and for the year in constant dollar, P&C premiums grew 3% with global retail up 8% and global wholesale down 5%. Our renewal pricing for our commercial P&C portfolio was up about 1% in the quarter with some classes up single to double digits, and others down modest single digit. Our renewal retention rates are moving up and stood at 88% for our US retail business. We are emphasizing renewal retention and conserving where possible the risks we know. Terms and conditions are holding and are relatively steady for the business we wrote, although there are increased requests for terms or conditions we find unacceptable.

Revenue growth for our retail P&C insurance business followed a few broad themes in the quarter. First, our increased local and global presence allowed us to take advantage of the weakness of other companies that damaged the confidence of their clients and producers who are turning to ACE as an attractive alternative. We continued to experience this flight to capability and balance sheet, especially in those lines of insurance or risk layers where more than price matters. We also gained business in lines and areas in which we have been making investments in our underwriting talent, servicing capability and where there was a reasonable underwriting margin. Second, we benefited in the quarter from growth in those harder market lines of business that have and are experiencing losses and where prices have risen. These include areas such as financial institution professional liability, offshore and onshore energy and aviation. Lastly, we benefited in North America in the quarter from a couple of large transactions where our balance sheet and technical ability made us an attractive choice. Both Brian Dowd and John Keogh can provide more color on growth and pricing if you want.

Turning to reinsurance, Global Re finished an outstanding year with another strong quarterly performance. As I have explained on previous calls, after several years of shrinking due to market conditions, Global Re experienced good growth in the fourth quarter and benefited particularly from business written in the first half of the year when pricing was better. Global Re's fourth quarter and full year net premiums were up 14% for the prior year. For the year, growth came from both long-tail and short-tail lines. For reinsurance, market conditions at January 1 were, in general, more competitive with reduced demand on the part of buyers and more supply as reinsurers had stronger balance sheets partially due to the recovery of the financial markets and lack of major CATs in 2009. As such, property CAT pricing was off mid-single digits but still at sufficiently attractive levels, particularly for US peak exposure. Pricing in non-CAT areas, or lines of business, continued to decrease moderately, creating greater pressure on already stressed margins. As it stands, we wrote modestly less reinsurance business January 1 this year than last.

Concerning our Global Accident and Health business, we experienced the best growth of the year in the fourth quarter with premiums up about 8% compared to prior. Adjusting for foreign exchange, premiums were flat in the quarter, but up 11% for the year in constant dollar. The underlying long-term trends of a growing middle class, particularly in Latin America and Asia, where we have substantial presence and capability continued to favor this business. Economically, these regions are also recovering the fastest, and this will benefit our business. Our A&H business is solid and in good shape. The transient effects of recession will diminish as we progress through 2010 and I expect growth to pick up.

In addition, while our results may not show this, last year we gained ground in securing more distribution, particularly in retail travel, corporate customers who buy accident insurance to cover employees, and more sponsors for direct response marketing. We also used this time to tactically shift our strategy to put increased focus on corporate and travel segments without neglecting our direct response distribution and I believe ultimately this results in a better balanced portfolio.

In summary, I believe ACE's results for the quarter and the full year were excellent and clearly distinguishing as demonstrated by our strong operating performance, book value growth and ROEs, all while continuing to invest in our product and geographic presence globally in spite of economic and financial conditions. I don't know many companies that can say this. Despite the soft market conditions, we have plenty of opportunity in front of us, although it will take place over time. 2010 will mark the 25th anniversary of our Company, and I'm confident in ACE's ability to continue producing superior results this year and beyond. With that, I'll turn the call over to Phil and then we'll come back and take your questions.

Thanks, Evan. In 2009, our balance sheet continued to grow stronger. Shareholder's equity increased by more than $5 billion for the year. Our operating cash flow for the year was $3.3 billion and our cash and invested assets grew by 16% to over $47 billion. Our investment portfolio is in an overall unrealized gain position of more than $650 million. Our portfolio continues to be predominantly invested in publicly traded investment grade fixed income securities and is well diversified across geographies, sectors and issuers. The average credit rating remains AA, with over half invested in AAA securities. The duration of the portfolio is relatively short at approximately 3.7 years. Investment income was $2 billion for the year. Income on new cash flow was offset by falling reinvestment rates and our investment income was about flat with last year adjusted for foreign exchange. The average yield on our invested asset is 4.5% with new money rates between 4% and 4.25%, assuming we invest funds in a similar distribution to our existing portfolio. Net loss reserves increased about $930 million for the year and our paid-to incurred ratio was 93.6%. Adjusted for the impact of our positive prior period development, the ratio was 86.8%. Underwriting cash flow exceeded $2 billion for the year.

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 14.2% continues to be conservative relative to our current rating level and our reinsurance recoverable leverage is down to 69%. Evan mentioned the strength of our A&H business. It's worth noting that our acquisition of Combined has produced a cumulative $0.53 of EPS accretion and 100 basis points of ROE accretion which are both in line with our original estimates. Our ownership in AGO dropped from 21% at the beginning of 2009 to about 3% currently. The change resulted from dilution caused by AGO's share issuance and from our share divestitures during the quarter. We will continue to account for our remaining investment of approximately $125 million by recording any change in market value in unrealized gains and losses.

Before you ask, I'll mention that the increase in goodwill is predominantly related to foreign currency movements on our goodwill that we're experiencing for the first time because we felt it was preferable to allocate goodwill to the legal entity level rather than keeping it aggregated at the reporting unit level. We issued our 2010 guidance in a press release dated January 5th. The guidance range for operating earnings per share of $6.25 to $6.75 for 2010 compares to our actual 2009 current accident year earnings per share of $6.10, which has been adjusted to reflect the 2009 original planned CAT losses. Since this is an accident year number, the $6.10 by definition includes no prior period reserve development. I'll turn the call back to Helen.

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

Thank you very much. (Operator Instructions) Our first question today will come from Vinay Misquith, Credit Suisse.

Hi, good morning.

Good morning.

Evan, I understand that you prefer to grow the business rather than buying back stock, however this is putting a downward pressure on the Company's ROE which is not that significant right now, but what ROE threshold would you look at before you decide that you would like to buy back stock if you find no other acquisition opportunities?

Vinay, it won't simply rely on ROE. I'm not going to give a point estimate here, but it's a combination of how much surplus capital do we think we have, what we see as opportunity in the time horizon for that, and then obviously the current returns and the impact that it's having. We measure it regularly and we think about this. We have a framework for that. We're patient. We're more patient than those who just want to see that instant gratification for the moment. That's where I think the tension is between those who raise their voice in the investing community and us. But I'm not going to put out there an ROE target. We're using, I think we approached this with common sense.

Fair enough. Can you give us clarity on the acquisition opportunities out there. Do you see more opportunities now that the market's down or is it the same as before?

First of all, I see more opportunity now and on the horizon, and I see it in different shapes and sizes. And I see it globally in different regions of the world, in different countries. And I'll leave it at that. And it follows the themes of our organic growth strategy. And it's what will enhance that strategy. And we're not measuring this simply in months. We're measuring it over a reasonable time horizon, a medium term time horizon. But I do see more on the horizon.

Just one clarification on that, would your target ROE on acquisitions still be 15%?

Our target ROE is that acquisitions be accretive.

Thank you.

And our next question will come from Thomas Mitchell, Miller Tabak.

And Vinay, I'm not dropping below 15% as that number. Go ahead, I'm sorry.

In looking at -- it's sort of a two-part question about the favorable development of loss reserves. The first is overall for 2009, is there a way to sort of allocate the positive development between shorter tail and longer-tail lines . The second is, is it reasonable for to us think along the lines that as long as inflation in general stays subdued, you are likely to end up with some positive reserve development over the period

First of all, we give you every quarter for the -- we give you the split when you ask between short tail and long tail. Sometimes we even tell you when you don't ask. This quarter it was predominantly short tail, overwhelmingly short-tail. I think it was 90% or so. Phil has an exact number if you would like that.

On your second question, look, it's unknowable, the future on reserve development. What I can tell is our reserves are in very good shape. They're strong. It's unknowable how they'll develop for the future, but I can tell you that they continue intermediate as we look at them. They're continuing to develop well, and what's clear is if what we see today continues, and again that's unknowable, we would expect positive reserve development in the future.

Thank you.

You're welcome.

Jay Gelb with Barclays Capital is next.

Thanks. Evan, the new Obama administration budget included some proposals for limitation on crop insurance and affiliate reinsurance transactions. Can you give us color on those in terms of if passed as it is in the current form what that would mean for ACE?

Yes. First, let me take the legislation. The tax legislation, as proposed, as we've read it, if that was to pass it would have little to no impact on ACE. With that said, so this is just not about ACE, we think that legislation represents bad policy, bad tax policy, and it is discriminatory, it is protectionist, it violates treaties, and as it is proposed, and so we will oppose it. So no impact on us, we'll oppose it.

The crop...

They're going to negotiate the SRA.

What does SRA mean?

The SRA is in essence the license the government grants a company to be able to engage in underwriting this business. And they negotiate that every so many years, and Brian Dowd has his PhD in this, and he can add more color. But let me just say this broadly. The crop business on a gross basis is over a billion dollars. On a net basis it's a couple of hundred million dollars. It runs roughly a high 80s combined ratio, historically what it's run over the last number of years. You can figure out what the earnings is. Any re-negotiation is not going to eliminate the profit, but it could narrow it. As you can see we're a broad diversified company, and it's not going to be a big event for our Company. The other thing I'd add is the larger players generally, because it's usually an expense pressure in the renegotiation, and the larger players have an advantage over the smaller companies that do this business, and we are one of the larger players.

Thanks for that insight. Separately maybe for Phil. What's your anticipated effective tax rate on operating income in 2010?

Well, we haven't give than guidance, but I think if you look at our range, it ranges between 18% and 20%, something in that neighborhood.

It was a lot lower in 4Q.

It depends on what happens. If we have prior period positive development in low tax jurisdictions that affects it. If we have CATs in low tax jurisdictions, we don't get the deduction so that affects it. It just depends on where the earnings emerge.

Okay. Thank you.

Next is Brian Meredith with UBS.

Yes, good morning. Couple questions here. First for Phil, if I look at your CMBS portfolio here and the disclosures you put in your supplement, it looks like the delinquency rate on your CMBS portfolio went from 4% in the third quarter to 9% in the fourth quarter. LTDs dropped and additionally the price decline that you needed to actually affect principal went from 30% to 10%. Can you talk a little about what happened with that CMBS portfolio in the fourth quarter? Can we expect it to continue to deteriorate like this? Can you give us some comfort that there's no real issues there?

Yes. I'll tell you we have seen some deterioration, no question about that. You can see that we've had additional downgrades to the BB and below category. But we really don't focus on the rating as much as we do our own analytics and our own view of the cash flows of the underlying structures. Our own view is while our structures, in that category that have been downgraded, are trading at about 76% of par. We actually believe they're going to recover substantially and be into the 90s when we look at our ultimate realization. I'll remind you, though that we are marking to market, right? So those securities are marking the 76% level and I would say we'd expect that to recover substantially.

What about the increase in the delinquency rates? Where should we start getting concerned about the portfolio? We're at 9% right now is what it says.

9% in the delinquency rate. That isn't foreclosure.

Yes, but that's going to dictate your cash flow models and losses that you're booking, right?

Right. Our view is at this point, as I mentioned, we believe there's going to be substantial recovery. Maybe I'll let Tim talk about it for a minute, his view on the delinquency.

Yes, Brian. It's Tim Boroughs. On the CMBS, actually the LTV remained unchanged on the quarter. If we're just focusing on CMBS rather than non agency, these securities are super senior and the predominantly rated AAA. It's still broadly over 23,000 loans and so forth. The key to focus on there is the fact that 73% of that portfolio was originated before 2006. So when we say the current annual delinquency rate is 9%, maybe we should have clarified it, that's the market. We're not seeing that in our portfolio. What would have to happen in our portfolio is that then cumulatively would have to rise to over 40%, and real estate values would have to fall 10% from current levels for us to have any principal impairment. So that's why these ratings have really held up there. So we feel that this portfolio is in good shape. When we run this analysis, by the way, we have assumed in terms of further price depreciation that real estate values have come down generally by 40% already, okay? So that's where you're seeing some movement there.

Okay. Thanks. That's helpful. Then second question, and sorry to beat a dead horse in this one, Evan, but on the whole share buyback and capital management, you did say reasonable period of time and I'm curious what you believe reasonable period of time is. Secondly when you look at share buyback here, how much does the valuation of your stock play into it? For instance, if for some reason you saw the big ticket property business in Eastern Europe had an incredible return on it, would you allocate capital for that line of business right then? Similarly, if your stock is at a significant discount to book value and very low P/E multiple and it creates a fairly attractive return, why wouldn't you allocate capital to it as well and think of it from that perspective?

Okay. Two things. One, reasonable period, we're measuring that over a, a little like pornography, you know it when you see it. We're measuring it over -- I'm looking over a year to two-year time horizon. If you don't see any opportunity within that period then it starts to become more academic to you. Then when you get at the price to book, we're mindful of that, but remember, and this is what I said to begin with, fundamentally, Brian, a share buyback is shrinking the Company. It is not growing the Company. It's increasing EPS by shrinking it. Our job, first of all is to grow the Company. By the way, what shareholder does it benefit? It benefits the guy who's trading out of your stock. Now you could say, well, what is the -- look, you guys, are you going to use the capital well? Well, we have a good track record for doing that, and if we don't think we can, then we will return it to shareholders.

And, I hear the last one as long as we're going to beat it to death well look, you bought the Combined. Sure it's accretive, it's done what you said you would do, but you bought it at a certain price and in 2007, and wouldn't you have bought it cheaper if you had waited? Yes, okay. But it did everything we said it would do. That's number one. Let's imagine I did share buybacks in 2007 at share prices then versus now. Is that accretive? I don't think so. So, that's where we come from. And it isn't -- yes, there is a price. I agree with you. But that certain return on an EPS is simplistic because it's not a return for the Company. It's a return on EPS at that moment. And we all get that in the math. Could there be a price? Of course. As part of the total mix, and it's not just about price and what we think is transient price.

We're not contrary about this and we're not emotional, I think we're thoughtful about the subject and at the end of the day, why we don't get so angst about our share price in the short term, and we don't, is that we know that results are ultimately what drives share price. And we're very confident about that. We're confident in the results we're producing and in the quality and distinction of the franchise we're building. We're believers in that. And we believe that ultimately drives share price. If our share price is going to stay low for a period of time because of what we think is this emotional view on buybacks and that's what's going to do it fundamentally, then our share price won't rise in a smooth way, it'll just rise in a lumpy way when somebody wakes up and discovers, wow this is a great company selling cheap.

Right. The other thing, too, to keep in mind is if EPS is accretive, it's also accretive to book value per share.

We get the per share versus the company.

Okay.

We get it. And we're respectful of that. Well, you heard what I said.

Got you. Thank you.

You're welcome.

The next question will come from Matthew Heimermann with JPMorgan.

Good morning, Matt.

Good morning. Couple of quick questions if I may. Just on the strategic front, am I missing anything on my list if I would -- if I put your strategic priorities as domestically high network homeowners business, internationally kind of let's call it country specific or regional P&C and then also accident health and foreign life and emerging market countries?

Well, I would add a couple. I would say large account, specialty middle market, and E&S business in the United States. I would say middle market and traditional middle market personal lines in the emerging market countries. I'd say specialty personal lines overseas.

Okay.

I'm not splitting hairs with you, but I did....

No, no, no it's fair. The other question I have is just the political risk business, which has been a topic of conference calls past, can you talk about what you're seeing in terms of recovery rates in the market on projects that have been stressed and how that contrasts with historical recoveries?

When you say recoveries, like subrogation?

Correct. And I'm thinking more structured credit rather than traditional.

I was going to say, I think you are taking trade credit more than political risk because those are long term in terms of claim settlement and ultimate work out. On trade credit, we are seeing recoveries. It's still early days, but the recoveries as we see them and as we project them so far are in line with what we estimate which is based on our historic experience.

Okay. Thank you.

You're welcome.

Jay Cohen with Banc of America is your next question.

Good morning, Jay.

Thank you. A question on the guidance. As you said apples to apples if you looked at 2009 you were about $6.10 and I'm wondering how do you get to the high end of your guidance? What has to happen given that one would suspect investment income won't be up all that much given that new money yields are below the portfolio yields? I guess the other assumption you have to make is that the accident year combined ratio probably not going to get better, probably somewhat worse. How do you get from $6.10 to $6.75 at the high end of your guidance?

You're not going to love my answer because I'm not going to get very specific about it. Because we don't do parts in pieces guidance. It does break down in terms of growth of business. What areas of our business overall experience the growth and earn and the loss ratios on that business that we earned through, number one. So it's a mix of business question. Then number two, it's within the line of business it has to do with our projection of windows on rate movements because we don't just pick a point estimate to ourselves. We also have a sense of what we think could be the range on that and then we have to mix through that what we think is the persistency therefore, if we maintain discipline and new business and that gets back to the mix of business. It's a combination of that. It has predominantly to do with underwriting. It has a little bit to do with investment income because there is a range around that too, in terms of reinvestment rates and new money rates, all that good stuff.

Is it fair to say to get to the high end of the range, you might need a little bit of help on premium rates and a little bit of help on investment yields being higher than they are now?

It's not an unrealistic like Polly-Annish optimistic. We think it is a realistic, but it is the more optimistic end of the range. Just like the low end of the guidance is the pessimistic end of the range, the more conservative.

Got it. Okay. Thanks, Evan.

But we try to do it within a way that, frankly, what we give you is a result of our own work for ourselves where we say, we don't do this for the street. We do this for ourselves and then we craft and put it out to the street. This is our own work and where we think it falls within ranges of reasonableness.

Great. Thank you.

You're welcome.

Next is Terry Shu, Pioneer Investments.

If I can again go back to Jay's question on earnings guidance. What would you say, Evan, would be the potential downside risk if it were to be below the low end of your guidance? Should one worry at all about claims trends, loss trends? Is that the risk that the industry faces, that loss trends won't remain quite as benign as it has been?

Terry, we gave a range for our earnings for 2010. We gave you what we think is the reasonable pessimistic, to the reasonable optimistic. That is our reason. And anything below that, we're not going there because that's something we can't reasonably foresee, and I'm not going to idly speculate. I don't think that on your second part about claims trends, I doubt 2010 will show us much in terms of inflation beyond what we have already contemplated or expected. That would be very surprising to us.

Right. I would tend to agree. I just wonder as we look, is that something one should worry about and is it a correct view that in the last couple of years the industry has been held by generally benign claims trends?

It is correct the industry has benefited from generally benign claims trends, and as I have said repeatedly all year, I do think that claims inflation, particularly socially and politically generated and driven by legal, is a threat for the industry in the future. And so we are vigilant about that. That is something that we really do focus on.

One other question you talked about building your franchise. When one looks at the property casualty industry, cynically, one would say it's very hard to have a franchise because it's so competitive and most products are commodity products. So maybe you can elaborate a bit more on that. Would you say that you are building a franchise and for instance you talk about large account onshore US. Is it because of your scale, your expertise or maybe just generally talk about what you mean by franchise.

Well, I think you used a word that is right. Frankly, you've given me the opening I've been waiting for because I want John Keogh, I want Brian Dowd to speak a little bit about what they've seen this quarter and how we've grown.

But you used a word that I think is the right word when I read some of the reports that are written. You used the word cynical. And I think it is a cynical, simplistic and incorrect view to think that it is simply a commodity that you don't distinguish one to the other, and that it is only about price. Without going into great detail about that myself, I think the point is, I think history, just looking back on history of our industry the history itself flies in the face of that comment. In fact, do you build distinctive capabilities in terms of your underwriting expertise, your knowledge. In terms of your culture and your ability to be disciplined. In your insight to risk taking, in your breadth of product and ability to serve your customers, in the service you can provide your customers on a global and on a local basis. And the number of companies who can do this across geographies, across a broad spread of products, market by market, large account to middle market to small is very, very few. And to think that that isn't distinctive in franchise, I think, is really people just missing it. With that I'd like to ask Brian Dowd to first talk about North America for a couple minutes. We're going to bend your ear about this.

Thanks, Evan. Talking about North America and in particular some of the opportunities we saw in the fourth quarter. I look at the fourth quarter and our profitable growth opportunities present itself in a number of ways mainly as a result of the investments we've made in our underwriting and product capability. In the quarter we saw improved submission flow, increased retention ratios and an adequate rate environment in targeted classes. In particular, we had strong success in professional risk, construction, ACE global underwriting, ACE financial Solutions and ACE private risk.

First in our professional risk division, our submission activity was up 23% as both our distribution partners and customers recognized the strength of the ACE brand and our product diversity and the ability to respond and handle complex claims. Rates in professional risk did in fact flatten in the fourth quarter, however rates in financial institutions market portion rose about 8%. 2009, we invested in our private Company in our not for profit segment, and we increased our local presence nationally. In fact, we added over 50 underwriters in this area as we saw opportunity, as our customers, frankly, didn't respond to the opportunities. Our competition. We're gaining momentum in this market. Additionally, our focus on customer service led to premium renewal retention ratio of about 90%.

In the construction practice, even in this economic environment, we had the ability to profitably grow this segment. ACE's financial stability, customers need a multi-year commitment and our ability to seamlessly package our products from builders risk, to construction wrap up, to excess, to environmental along with our lost prevention and claim services have differentiated us. Submission activity was up modestly at 5%, however our bound to submit and bound to quote improved as customers made ACE their number one choice. Our new business relative rate adequacy in construction was very strong at 115%, reflecting new business priced better than renewal in this line.

In our ACE global underwriting division which underwrites and services our large complex global companies, we also had a strong quarter. There are only a handful of companies with the infrastructure to successfully handle these type of accounts. While submission activity was basically flat, our new business grew at 11% and our new business rate adequacy was 105%. No question, we were a beneficiary of flight to quality balance sheet and strong service capabilities.

Another area where we remain committed is our ACE financial solutions team where we have an underwriting legal and claim service teams. In the fourth quarter we included a number loss per portfolio transfers, we were virtually the only company with the expertise to structure and execute on these transactions.

Finally, our private risk services divisions, net premium growth in the fourth quarter was 42%. Submission activity was up 108%. This growth is a reflection of our successful nationwide capability expansion. As of year end, we had ACE private risk services platform portfolio and products in 45 states which represents states that are 99% of the high net worth clientele. Our hit ratio on the new business improved to 22% in the fourth quarter, reflecting steady improvement from the 12% in the first quarter, as we built our brand in the space and we appointed new agents and brokers and became more familiar with our capabilities. To give you an idea of what's going on in North America.

John Keogh, you want to speak?

Sure. I guess I'd frame it by saying that internationally over the last so years we've been quietly without acquisition organically opening up businesses and geographic territories we haven't been before. And adding quality and capability in places we've been for a long time to increase our capabilities around the globe. I think what we're seeing -- what we saw in fourth quarter speaks to that. We saw increased interest across the board in the quarter as our retail P&C submissions were up 13% around the world compared to prior year. This range from submissions up 40% for marine, up 20% for financial lines, up 4% for our tech lines business. As Evan said, despite more opportunities, our new business premium writings were actually down 11% in the quarter. I think that that speaks to our underwriting discipline. Though we saw more opportunities, we just didn't see as much as we'd like.

What I'll try to do briefly is maybe take you around the world of AOG and put some color around all that. I'll start in the U K. Here in London we saw a significant increase in our financial lines submissions. We saw a 200% increase in submission flow in the quarter. This translated in terms of net written premium to an increase of 35% in our financial lines business. Marine on the other hand, will show a moderate submission increases actually decline by 16% in terms of net written premium. On the continent we saw a much more competitive market in the fourth quarter of 2009. Submissions were up in the quarter in casualty, tech lines and environmental by 22%, 14%, and 37% respectively. However, net written premium was down for casualty and environmental and up 4% for tech lines. Financial lines on the other hand continue to benefit from a client focus very much on balance sheet strength of the carrier. There we produced strong double digit growth in our financial lines business in Europe.

In Latin America, submissions increased 5% over prior year with financial lines and marine driving most of that activity. In particular by country, Mexico, our submissions were up 50% while submissions in Brazil were up 18%. Despite the increased submissions, financial lines was the only product where we saw a net premium increase during the quarter, up some 50%.

In Asia, our submissions were up over 25% across virtually every product area as a direct result of our efforts over the last several years to broaden our distribution and product range. Financial lines, property, and casualty enjoyed net written premium increases in Asia.

Now turning to ACE Global Markets, we actually shrank our book further in the quarter as rates and many lines in the London wholesale market did not meet our standards. On the other hand, we did see some very much needed rate improvement and political risks in aviation and as a result were able to grow those lines in the quarter. As to pricing, and Evan mentioned this earlier, our international commercial P&C portfolio was up some 3% in the quarter. Within ACE Overseas however, pricing was markedly different in our retail operations compared to our wholesale operations. For the most part, pricing in our retail business was basically flat with the exception of financial lines, there our rates were up some 4%. In Global Markets our wholesale business, rates were up 11% for the quarter as our aviation, marine and our political risk business obtained rate improvements during the quarter. I think with that I'll stop in terms of covering the world outside North America. Hope that helps.

Thank you so much. It's very helpful. Evan, I guess it's fair to say the last couple or year or two it's hard to distinguish one company from another in terms of underwriting because everyone's done well, but you've had better top line growth. So we'll have to see as it unfolds whether you -- when we get into a soft market whether ACE not only has better top line as well as better return. Is that a fair comment?

Thank you, Terry.

Thank you. Thank you.

And our next question will come from Larry Greenberg, Langen McAlenney.

A couple questions. Just wondering if you could give us a little bit of color on the life underwriting line at a pretty substantial improvement quarterly over the course of the year. Is that primarily a function of the stock market recovery and then secondly, I think I heard Brian say that you did some loss portfolio transactions. Were those the large one off transactions that you referenced earlier in the call and in the press release?

Taking the first one, the second one first. The answer is yes. You're taking the life's division. A couple of things. It really is made up of three pieces in there. There's our international life business and it is an international life insurance business, and as I've said before, we're continuing to invest to grow that business organically, and it is on track to begin making a positive contribution to earnings in 2012. That business, because it's on track it's producing a smaller loss, so its income position has improved quarter on quarter, year on year. The second piece that's in there is the US combined business. The US Combined, that portion of Combined, Combined North America, it's Canada and the United States has made a good contribution to earnings.

Thirdly is the life re-business. There you correctly point out part of it which is stock market recovery, and the other one is interest rate movement and volatility, the vols. So it's those three in particular that have the impact. The net income.

I guess what I'm wondering is looking at the trend over the year, the degree to which the stock market recovery told the overall result and whether the fourth quarter is north of what you might consider a normalized underwriting performance.

Oh, no. Not at all. The operating income, we did not unlock in the quarter. And so we're just -- we haven't unlocked pretty much all year. We just stayed in the operating income with the protocol we have disclosed to you. And we continue to disclose in our Ks and Qs of how we handle that. The operating income is not impacted by the changes in the equity market or the interest rates. That's the net income.

I guess I was thinking more about reserves on some of the living benefits and death benefit guarantees.

I understand. What I can tell is our reserves are in good shape there, very good shape.

Fair enough. Thank you.

You're welcome.

And next is Ian Gutterman with Adage Capital.

Good morning, Ian.

Hi, how are you?

Good. You?

Good, thank you. My first question is you mentioned the retention I think was US retail book was 88% and applying that was a good thing. I'm wondering at this point in the cycle, given where pricing is and given where competition is, why wouldn't I feel better if retention was maybe in the low 80s than the high 80s?

And in the wholesale business, you'd find the retentions are down in the 50s.

Okay. Got it.

It varies by the area of the business, but right now, there was a lot more movement last year and in the beginning of the year. There was a lot of shopping, more shopping of the business, particularly our portfolio, I think because we announced our rate discipline and that has calmed down to a degree. It's not as much as it was. And we're not mindlessly defending our renewal book, but it is the business we know. I gave you the rate movement on the renewal book, so you can square the circle with that. Clearly you take flat rate or 1% and you take what you consider to be lost cost trends depending on the line of business and accident year deteriorates as you project it going forward, our policy here does. We're very mindful of that on each portfolio and we're watching it closely. Some the retention rate is lower. Some the retention rate is higher. Our risk management business for instance in the quarter, the retention rate was more like 90%. Then we have some other business where the retention rate's in the 70s because we're mindful of price and what we think is the ultimate accident year or policy year development on that business.

Got it. That makes sense. I also wanted to tackle the capital from a different angle. You've mostly convinced me on growth versus repurchase, so I'm basically okay on that. I think maybe what people are missing is that there's a lot of M&A targets out there as cheap as your stock possibly. So it seems to me the only sort of risk in the strategy is if you wait too long to find a target and then you pass on the opportunity to buy the stock cheap and you pay up for a deal. In the current environment, I don't think that's necessarily the risk other than the size of the deal you can do. I guess that's where my question is. I would hope at this stock price, you would have an incredibly high bar for issuing equity for a deal. So I guess one, is that the case and two, does that limit the size of what you can do to something within, say, 10% of your balance sheet so you can do it with mostly cash and debt?

Ian, We think about acquisitions and we think about anything of size, I don't want to leave the wrong impression that we are just so focused that we have to do a deal. We don't feel like we have to do a deal at all. We feel good about who we are. We feel good about our prospective opportunities organically, over time, and we get that, and less payback for our effort in the short term than in the long term, but still payback given market conditions. But we're mindful, also, that there are and will be M&A activity. And so, I want to keep it in that perspective for everybody.

Number two, we clearly get, and I'll reiterate this, we're not going to do something that doesn't meet a few criteria. Number one it needs to further along our strategy of who we are and who we want to be, and needs to make our Company better. So it has to really meet that hurdle. And number two, it has to make financial sense for our shareholders. And that means for the Company. And we're just not going to break discipline about that. So we get that about smaller, we get that about CAT, we get that about your comment about smaller versus bigger. And we get about cash and debt versus our shares, and the dilution accretion. We get all that.

No, I'm sure you do. I guess how much --

We're just not going to do something that's going to be that at the end of the day, when you take the total mix of those, because there is no point estimate around this, when you take the total mix of those, it's got to come out right.

Right. How much are you willing to -- you've done obviously a great job the past decade now delevering the Company since the last major deal. How much are you willing to push the debt to cap up for a deal in the short term? I assume this is not going to get to where it used to be? Can we get back to 25%? Is that unreasonable for the rate deal?

Ian, we won't do anything that jeopardizes our rating.

Right.

We are very loathe to do anything that just pushes this Company to the red line and restricts any flexibility. We're in the risk business. We know that, and we know unknowns are just around the corner. We get all that. I say obviously -- the only way -- you will be more aggressive versus less aggressive depending on how strategic and transformational it potentially is. That's all.

Okay. My last thought on the topic is --

Those are so opportunistic, who knows, haven't seen 'em.

Right. I guess my last thought on the topic is if it were a P&C deal and just given where a lot of your competitors profitability is, or maybe where it should be versus where they are reporting it, how do you think about the short term versus mid long term where you might be able to get a deal that looks cheap on the surface, but that company's picking to a 97 today, but really should be at a 102 and you're buying them at 102 combined for a few years and maybe that's a 5% ROE in the short term, to be a 15 in the long term once you can re-underwrite the book over a couple years. Are you willing to take that sort of one to two-year hit where the accretion maybe isn't there, but the long-term accretion is very powerful?

First of all, I would hope that if anything was running 97, but it was published 97, but really running 102 then we're good enough to figure that out.

No, I know you're good enough to figure that out. You know what I'm saying, right?

I know you are. Number one, I'm just trying to address it that way. Number one, I hope we'd figure that out. And as far as accretion/dilution, accretion dilution can come, dilution can come from a number of things. That's one way. We wouldn't -- we would consider dilution really only over a short period of time.

Okay. Seems to me.

We're not going to -- otherwise it just grows more and more speculative and --

Yes. I was hoping --

That's how I sit here now and that's how we've been up until now.

I was hoping that was the answer. It just seems the one challenge with some of the things that I think might be available and interesting are the price is probably right, the financing's probably right, but the returns of that property in the short term even though they might have good franchises, maybe aren't so good just given where the cycle is and how do you manage that.

With all due respect, it's one of the reasons I put this in my commentary. I think you guys have a limited view of the potential opportunity. It's very US-centric. And within the US, I don't know how broad the box you're working with is.

Got it. Okay. Thank you very much. Very good answer.

You're welcome.

Dan Johnson with Citadel is next.

Great. Thank you, gentlemen. Can you touch touch on two things. One, there is the large transaction. I apologize if you talked about that earlier and I missed it. If you could give us a little color as to why you won that. Frankly, if this was a year ago and you told me that you'd actually generate a reasonable amount of accident year ex-CAT stability in both your North America business and the Overseas business, I would have thought that was a bit on optimistic side to say the least, and yet that's exactly what you did. Can you talk a little about what sort of was going on underneath the numbers to allow accident years ex-CAT stability when obviously the market's not really giving out price increases that are adequately covering loss cost in some areas.

Brian, you want to address the first?

Sure. I'll talk first about loss portfolio products right now. We're sort of at a unique period in history if you think about traditionally when loss portfolio opportunities are available. It's usually interest rate driven. This unique period of time is a little bit different. A lot of these deals right now are driven by the high cost of LOCs. So you have got a number of customers who have self insured retention liabilities built up over a number of years on the books and historically they're LOC cost on them was very, very low.

Now the arbitrage on getting rid of a LOC at 400 to 500 basis points on a portfolio really drives the dynamics of now why you can come to a bid-ask price spread that makes sense for the customer and for us. So loss portfolio transfer for us right now are probably at the best return that they've ever been at because of that dynamic. Frankly, there's only one or two companies left that customers trust with that type of long tail liability transferring from their books to your books and we're about the only company left with a dedicated team who works on these full time and we have a base of very large customers to mind to figure out what the great opportunities are for doing those. We're in a unique time where we're well positioned for that type of product.

Is this something that just giving the case here, was this a unique one off with this one customer or do you feel like you are decent discussions with others that potentially do the same?

Dan, this is a business of ours, number one. Number two, I think you missed it. It wasn't one deal it was a couple.

Oh, okay. You're right, I did miss that.

The only thing you can't predict, these don't happen in a steady way, you can't predict it. We don't think of it as one off because we have a business that has been doing this for -- we have a small team that has been doing this for a number of years, and we think we've -- there again, anybody can say I'll go write these things, but you really can't. There is a hurdle to doing them right and doing them well. We have built a franchise in that area that is recognized and it is a unique capability.

And these were existing.

But very few.

Sorry. These were existing customers you transferred over or did you take these customers from someone else that's doing it on a --

No, we didn't take this from someone. These deals from someone else who had done them, but these are a combination of customers who do business with us today in other areas and do....

Thank you for that one. On the accident year numbers?

On the accident year numbers it's a number of things. First of all, there's a mix of business question. A&H for instance is steady. High net worth grew, and it has good characteristics to it. We were getting price in the first couple of quarters of the year. Some of the areas that were growing, they have developed from the past as they bridge forward and developed, they have developed better than we had originally pegged them. That happens to then spill over and feed to your current accident year picks. There are some stress classes that we grew in where you got a lot of rate and we think it's actually a very good time. If you structure it right for writing that business, an example could be the financial institution professional liability area.

There are areas where it's not simply about price, and there has been a flight to our capability and to the balance sheet. Construction is one of those areas right now. Large projects, casualty driven. Low property losses this year versus last year. You didn't have the same level of large loss. There's a variety of reasons. Obviously when we see it come out and you mix it all together and it comes out relatively flat, you go back and we are very careful to do that. We go back line by line, division by division, territory by territory and make sure we build it up again from the ground up and make sure that yes, that makes sense to us that it's right, and it is right.

Very good. Thanks for taking the questions.

You're welcome.

Next is Thomas Mitchell with Miller Tabak.

Good morning. I apologize for not understanding why in a business that over the last 60, 100, 200 years, it seems to me has always been driven by capital being destroyed due to either financial or natural catastrophes which creates the opportunity to actually do underwriting business at extremely high returns on capital. I realize that that may be a small part of the business today, but it just seems to me -- I don't understand why you would be in any part of that sector of the property casualty industry and think about using capital for anything else except having it available when nobody else has it. Is there something wrong with the way I'm seeing this?

Tom with all due respect, I'm not sure what you're asking me. What's the question that I can answer for you?

The question is, wouldn't you always want to have as much capital as possible available for the possibility of another Andrew or another meltdown in the financial markets like we had a year and a half, two years ago? That's my question. Why even consider having a pot latch of capital? I guess that's my question.

If I understand your question, it's since you're in the risk business and you can't predict all the risk and you always have the tail exposure, why wouldn't you always hold as much capital as you could for that?

Yes.

Okay. Thank you. I would say this. I think there's a limit to that. There's a limit to that because we do measure the risk and we take into consideration, by the way, in measurement, the basis risk. Measurements are just tools, they're not absolutes. And we do measure the amount of risk we take on relative to our capital. And within that, you have eight rating agency requirements, regulatory requirements and then our own requirements on top of that potentially where you're going to maintain a prudent level, and by the way, we never want to put the Company at risk to bankruptcy. We want to be the last man standing. That's how we kind of run. It might be lonely, but we'd like to be the last man standing.

I think that's how we approach, and do believe that you should hold capital for good and for bad. Not necessarily, though, unlimited, period. There is a point where it's just, you don't see opportunity and you've held enough for risk, and you could reach that moment, and we understand that, and we're thoughtful. And so I appreciate what you're saying and we're trying to be good stewards with that thought in mind as well as other concerns among shareholders.

Thank you.

You're welcome.

We'll take our final question from Jay Cohen, Banc of America.

Thank you. Jay?

Hi, maybe it's just an accounting question. On the loss portfolio transfers, did those transactions distort the earned premium line at all, inflate that line at all?

They did, and they are also booked at about 100% loss ratio, so 100% combined. So they have very little impact on the bottom line, but they do inflate both premium and claims. We try to book them conservatively. Just prudent.

Looking forward, some of those written premiums since they've already been earned will, if we're just taking an average of written premiums over the past four or five quarters, that'll get distorted a little bit going forward.

That's absolutely true.

Maybe I didn't hear it. Did you quantify the amount of the loss portfolio transfers?

No.

That would be helpful just given this issue of distorting the premium going forward.

Noted. We'll take that under advice. I'm not trying to be flip. I hear you.

Okay. Thanks a lot.

You're welcome.

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

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