丘博保險集團 (CB) 2010 Q2 法說會逐字稿

Welcome to the Ace Limited, second quarter, 2010, earnings conference call. Today's call is being recorded. (Operator Instructions) Now for opening remarks and introductions I would like to turn the call over to Helen Wilson, Investor Relations. Please go ahead, maam.

Thank you and welcome to the ACE Limited, June 30th, 2010, second quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to economic and insurance industry pricing and other trends, our financial outlook and guidance, competition, and growth prospects. 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 web site, for more information on factors that could affect these matters. This call is web cast live and will be available for replay for one month. All remarks made during this call are current at the time of the call and will not be updated to reflect subsequent material developments.

Now, I would like to introduce our speakers. First we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft our Chief Financial Officer. Then we will take your questions. Also with us to assist request 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, ACE had an excellent second quarter which contributed to a strong first six months. After tax operating income for the quarter was $688 million, just over $2 a share. Net income was $677 million, it was up about 27% from the second quarter last year. All divisions of the Company made a contribution to results -- a strong contribution. Per share book value grew almost 4%, and now stands at over $63. Book value per share is up over 8%, year to date and our ROE was 13.8% in the quarter up from 12% in the first quarter.

Our combined ratio for the quarter was 89.7% which included net catastrophe losses mostly from US events of $76 million, and favorable prior period reserve development, of about $150 million. CAT losses were more than double the amount from last year but largely in line with our expectations while prior period development was a little less than prior. Our accident year combined for the quarter excluding CATs and PPD was 92.1%, very good result and flat with prior year, with the loss ratio down and expense ratio up. Phil will provide more detail around the current accident year numbers. I want to make a few comments about the macro and insurance market environment and its impact on our Company.

Economic growth was weak. Particularly in Europe and the US, and it remains so. While conditions are considerably better in Asia and Latin America. Unemployment in the US and Europe remains high and likely will for years to come. In the US there is generally a lack of confidence among consumers and business alike and with little meaningful impetus for sustained economic growth we are likely in a period of prolonged slow growth. In addition, insurance market conditions remain competitive with prices generally soft and softening around the world. I expect these macro conditions will be with us for the foreseeable future though there is much uncertainty.

On a reported basis, our total Company net premiums were flat in the quarter. Commercial P&C was down, A&H, personal lines and life were up. We continue to practice what we believe is prudent cycle management in our commercial P&C businesses, shedding exposure where prices and terms are inadequate to generate an underwriting profit. Our new business writings were down year on year and our renewal retention rates particularly in our retail P&C businesses were up. Recession related reduction and exposures are moderating and had less than a 2 point impact on revenue in the quarter. The lowest in a number of quarters.

Retail insurance again performed better than wholesale, with retail up about 1.5%, while wholesale was shrinking about 6%. Adjusting for a large loss portfolio transaction we wrote last year in North America, as well as less crop premium in our US wholesale business, retail commercial P&C was actually up over 7% and wholesale was up 3%. Though our growth benefited from a positive foreign exchange impact of about 2 points. On the wholesale side of the business we continue to shrink our book where necessary due to inadequate pricing. For example, premiums were down about 8% in our London wholesale business, where competitive London market conditions continue to impact nearly all lines include marine, aviation, energy and property.

Our US wholesale business premiums were down about 7%. Adjusting for the crop however premiums were up 15%. As I mentioned in the fourth quarter, we wrote a large program that moved to ACE because the insured was seeking a more secure carrier and we had the capability. This had a substantial benefit on our US wholesale growth rates. On the retail side commercial P&C in the US was down on a reported basis but grew 7% after adjusting for that one large LPT transaction we wrote last year, US retail revenue, and wholesale for that matter, benefited from a very large new construction project we wrote as well as higher renewal retention rates which were up about 2%. Though again, we wrote substantially less new business than a year ago.

As we detailed during last month's investor day, for those areas of our business where a client is engaging us for our capability and not simply price, business is less cyclical, less commodity-like. We experience higher retentions, better pricing and firmer terms and conditions. These include areas such as the primary lead layers of excess casualty and D&O, our risk management business, construction, and multinational global programs. Once you leave these kinds of areas or specialties such as crop et cetera, the business becomes more cyclical, more commodity oriented. On the international side, retail P&C was up 8% on a reported basis and up 4% on a constant dollar basis driven by double digit growth in both Latin America and Asia Pacific.

Concerning the rate environment, rates for the business we wrote in the US were down about 2.7%, while rates for our international business were down about 1%. Let me give you two new business examples for our commercial lines, the first illustrates our product capability, the second are on the ground local presence, globally. In our North American insurance division net premiums in our construction practice were up substantially in the quarter. Driven by a large complex long-term public infrastructure project in the New York, New Jersey area where ACE was selected as the lead carrier for the primary, excess casualty and builders risk covers. ACE won the business as a result of our underwriting, claims and risk control expertise not to mention our A-plus balance sheet, a critical requirement for this long-term project. In our international insurance business I just came back from a visit to Latin America including the stop in Sao Paulo. Our business in Brazil is doing very well, driven by a fast growing and liberalized economy, major infrastructure spending and newly modernized insurance regulations. Net premiums are up serious double digits year to date. We are experiencing robust growth in commercial P&C, A&H and life insurance.

Another area where we continue to experience solid growth in the quarter is our young and growing personal lines business, both domestically and internationally. In the United States, net premiums in ACE private risk services are up significantly year to date. While our specialty oriented international personal lines business experienced reasonable growth as well, driven by Latin America and Europe. Our global personal lines businesses which are again by design specialty and focus are approaching $1 billion in annual premiums, and we believe will continue to experience solid growth in these areas for the foreseeable future. In reinsurance we experienced a reduction in premium levels in our global rebusiness with both casualty and short tail lines shrinking in the quarter. Our international life insurance business, on the other hand, premiums were up double digits in Asia, Latin America and the Middle East.

Turning to our accident and health insurance business, A&H growth globally was up 5% on a reported basis, and essentially flat in constant dollars. Improving in line with our expectations and what we said in previous quarters. Latin America in particular exhibited strong double digit growth in the quarter, while our business in Asia has stabilized and is on solid footing and should return to positive growth. Meanwhile, earnings in combined insurance were up substantially in the quarter year on year with improvement in both the loss and expense ratio. Combines customer retention ratios, new business writings and growth in agents are all moving in the right direction.

In sum, we expect global A&H growth to steadily pick up in the second half of the year. Before I turn things over to Phil, there are a couple of other noteworthy events. First, as all of you know, earlier this month, ACE returned to both the S&P 500 Index, and the Russell 1000 Index. These moves were anticipated as a result of recent changes in their eligibility criteria. The second event I want to mention concerns the job we have been performing the last three months for BP in the Gulf of Mexico. In late April, at the request of BP, our third party claims administrator, ESIS, went into action and assumed the oversight and administration role for the tens of thousands of claims generated by the Deepwater Horizon oil leak catastrophe.

ESIS put in place over 1000 claims professionals, established call centers, and opened dozens of claims offices in four states. After processing more than 100,000 claims we are now working with BP on transitioning claims handling over to Ken Feinberg, the federally appointed administrator and his firm. As many of you saw during investor day, our Company has very broad capabilities, I think this assignment illustrates that fact as well as our nimbleness and ability to respond quickly. With that I will turn the call over to Phil and then we will be back to take your questions.

Thank you Evan. Our balance sheet continued to grow stronger. Our tangible book value per share has increased about 5% for the quarter, and almost 11% for the first half of the year. Our cash flow was $870 million, and included positive underwriting cash flow of about $500 million. Our invested assets grew by about $750 million driven by our strong cash flow and the increase in the market value of the portfolio offset by a reduction due to foreign exchange.

Net realized and unrealized gains were about $400 million before tax. The investment portfolio gains including foreign exchange were about $560 million, which were offset by $160 million increase in the fair value liability of our variable annuity business driven principally by declines in interest rates and a decline in equity markets. Overall our investment portfolio is in a $1.6 billion pretax unrealized gain position. Investment income was $518 million, income on new cash flow was offset by lower new money yields and our investment income was up only slightly from last year. Our net loss reserves were about flat with last quarter adjusted for foreign exchange.. Our paid to [accrue] ratio of 103% is higher than our run rate over the past several quarters and was affected by the payment of a number of one time large claims in ACE Bermuda. Our reinsurance recoverable leverage continues to drop and now stands at 61%.

As Evan said earlier, our accident year combined ratio before CAT losses is about flat compared to the prior year. Our P&C accident year loss ratio before CAT losses decreased 1.4 percentage points over last year. This is principally due to large LPT contract we wrote last year and higher risk management and crop premiums in 2009 which carry higher loss ratios. Excluding these items the loss ratio was flat. In addition, we had changes in our mix of business in North America, the lines with lower loss ratios, both long tail and short tail. This occurred as we restricted writings in lines where pricing is inadequate and emphasized writings where pricing remains reasonable.

In certain casualty lines loss ratios are not rising as rapidly as rate and trend might suggest because of the favorable impact from prior year experience. Finally, loss ratios in all other lines rose as appropriate. Our expense ratio is up 1.3 percentage points over last year's quarter. This increase is driven again by the large 2009 LPT transaction and less crop. Both of which carry low expense ratios. Excluding these items expense ratio would be about flat with last year.

The tax rate for the quarter is lower than our normal run rate because of a reduction in tax reserves as result of the most recent tax audit. Financial flexibility at the holding Company level remains strong, given our operating Company's dividend capacity and low levels of debt refinancing needs over next five years. Finally, we now expect to be at a top end of the range of our original guidance which was $6.25 to $6.75. With that I will turn the call back over to Helen.

Thank you, Phil, and at this point we would like to take your questions.

(Operator Instructions)

We will go first to Keith Walsh with Citi

Good morning gentlemen. First question is for Phil around the guidance, just a little confused at some of numbers here. You at the high end of the range, but is that including the roughly $0.60 of reserve releases in the numbers? And if I am including that in the numbers, aren't you affectively lowering your guidance if we back that out? Thanks.

We have included the prior period development that we had in the first half of the year and we've obviously added that to what we think is going to happen for the rest of the year. We've selected the top end of the range. We think it's reasonable and prudent and we think it's in the range of possible outcomes. We are comfortable with that estimate.

Okay. And the CAT loss assumptions are the same embedded in that number as you pointed out in January.

We haven't changed our CAT assumptions for the second half of the year. Obviously, the whole year will go up because we had higher CATs than we would have expected in the second quarter

Got you. Okay. The second question, just around crop insurance, how large is this business on a gross and a net basis?

This is Evan. On a net basis, it's a few hundred million dollars, about $300 or so million.

Okay. Great, thank you very much.

We will take our next question from Jay Gelb with Barclays Capital.

Thank you and good morning. I believe, Evan, you mentioned that the impact from the slow economy on growth was about two points, and that was the lowest in several quarters. Can you give us a sense if you feel that could stabilize at that level for a while, or are we towards an up tick there.

Jay, the industry lags in recognition of the impact of recession-related exposure reductions and it's recognition in premium. Because you get -- you generally book an estimate for many large clients and then they report their actual exposures at the end of a period,

and that will have to do with sales, it will have to do with employment levels. And so, we saw a precipitous drop in those, as you know, over the last couple of years. So we didn't -- you didn't immediately feel that and then you did through the latter parts of '09 - well through '09 - and the early part of 2010. My sense is because the economic environment, the growth really has bottomed. We are kind of moving along the bottom, it's very tepid growth, but I think you will just watch that flatten out unless there is a double dip and then from there, if anything, it will begin to tick up.

Okay, and then just two quick numbers questions. The first, what should we be assuming for an effective tax rate going forward on operating income given the benefit in the second quarter? And was there any impact of deep water horizon claims in second quarter results?

I will take the deep water horizon and turnover to Phil the tax rate. In our second quarter, there was-- you would not see an impact of deep water horizon. Any losses we had were contained within our pegs -- excuse me within the lines of businesses that are exposed to deep water horizon.

And on the tax, I would say our tax rate this quarter, as I mentioned, was lower because of a reserve release in connection with the IRS audit. So, I would think a historical run rate -- we've been running from 18% to 22% and it depends on where losses occur, where income emerges. So, somewhere in that range is what I would be thinking about.

Even though it was 17% for all of 2009?

Yes. As I say, you can see if you go back and look at the last two years it bounces around just because of where income emerges or where losses occur.

Okay, thank you.

Next we will go to Thomas Mitchell with Miller Tabak.

I was wondering if there is an outlook for investment income that would be a little bit more robust. What is your thinking about reaching for a little bit of yield now, as opposed to say three months or six months ago and what should we be looking for?

What I would expect is that you won't see a significant change in the makeup of our portfolio. Maybe on the edges tactical changes, but nothing significant. What we see is that cash flow is offsetting the decline in rates. So, as we redeploy the new money, we have enough cash flow to support our investment income and we would expect it to stay relatively constant.

Our cash has been quite robust.

Yes.

Okay. Thank you.

We will go next to Vinay Misquith with Credit Suisse.

Hi. First question is on the guidance. Just a question on whether you're assuming your second half of the year margins similar to last year's second half . I'm trying to get your number. It seems to me that the margins in the second half of this year would have to be better than the second half of last year.

Vinay, look. As you know, we don't get in to too much dialogue about the guidance. We don't get in to work sheets and the parts and pieces. We selected the top end of our range as the point estimate in a range of possible outcomes. It could turn out that our ultimate number is better. Your ultimate number could always be worse. There is plenty of risk and unknowns in the environment economically, financially including foreign exchange. And the insurance market is soft. You can't project with accuracy short tail line exposures and loss experience at any given time.

So, we think this is reasonable. It is prudent. And I understand how others could rationally come to a higher number. I could understand how some may come to a lower number. That's what we selected, and I think by signaling the top end of our range, we are signaling that we feel pretty good.

Sure. And were there any one time items like the LPT you had in the second quarter last year that negatively impacted the second half of last year's margins?

Negatively impacted? From memory, we wrote some LPT in the second half last year, and those always come with a higher loss ratio.

Sure, that's great. Follow up --

Remember those are lumpy. You can't predict them. We could write more or less of that this year. There are individual transactions where they are highly scrutinized in here and we are very selective as we go along writing them and there you go. But, we always have a pipeline that we are looking at.

Fair enough. On the frequency and severity trends, could you gives us a sense for where they are trending? And it seems that you are keeping your accident loss ratio exCATs flat this year versus last year because your starting point was arguably lower than you thought it was. Give us a sense of what you are seeing in the market for frequency and severity thanks.

Yes, but be careful of that, you just selected one piece which was okay, you're adding rate and trend, but then you're getting the ameliorating benefit of watching prior year experience emerge more favorably. That's what you said.

On the other side of the coin, what Phil did say that we were very careful to put out there, there is a change of mix for us as well which is affecting it. And that is, as lines of business, particularly in the casualty related areas, reach pricing levels that produce a combined ratio that is unacceptable to us. We have been shedding and are shedding that business and emphasizing areas where we still see some reasonable margin and that mix change has had an ameliorating impact on current accident year result as well. With that, loss trends that we are actually seeing have remained fairly benign. They have remained pretty steady. We are not seeing much change to it. But, you know what? We are big writers of casualty business and we are not optimists.

Thank you for your answers.

I don't think a good writer of casualty is an optimist.

Sure, thanks for your answers.

You're welcome.

Next, from Piper Jaffray, we will go to Mike Grasher.

Good morning gentlemen. A question around the -- I guess following up on this, actually, the change of mix and how it's impacting -- but, can you talk a little bit about your outlook on inflation as it relates to lost cost? And how you are thinking about that in terms of reserving, particularly given your comments around the global economic landscape.

Our outlook on inflation -- two kinds of inflation here. When you look at the macro environment, so let's say as characterized by the CPI et cetera, our outlook is somewhere between flat and deflation in the developed economies such as the US and Europe. On the other side of the coin, when I think about insurance inflation, there are other factors; tort costs, which have been fairly stable, but you are talking about a political environment where we see a lot of nibbling around the edges and pressure building that could result in higher tort costs in the future; medical inflation, which plays a role. And so, while the inflation environment has been reasonably tame for insurance, when we look out in to the future we do see reason to believe it might tick up.

And, when I look longer term in the macro, that is out past the next two years or three years, no one has a crystal ball, you could imagine, given all the liquidity that has been pumped in fiscal deficits, you could imagine that overall inflation rises as interest rates rise. We are taking bets today on things we are going to pay out many many years from now.

Okay. Fair enough. In terms of the current environment, how much of that do you think has played a role in terms of your frequency of claim activity being stable.

I think it's played a role. There is slack demand, and so, there hasn't been a lot of pricing pressure in raw materials and labor costs and all of that so, sure. You get to miles driven, which are now coming back up, but which were low and travel, which was low. So, you've got a lot of reasons to say that exposure benefited you.

Right. Thank you for your comments.

You're welcome.

Next, Matthew Heimermann of JPMorgan.

Good morning everybody. Two questions if I may. First it looked like the GMDB paid losses are actually starting to decline a little bit. I was curious if you could give color on whether that's driven by just improved market value adjustment? Or is mortality actually running a little bit better?

It's not mortality, mortality has been pretty flat and within our expectation. It is because the account balances are growing and there is less loss on a particular claim.

Okay.

As you see it's marginal. When you look at '09, you can see the claim levels with were much higher and it was because the account balances were at a lower level at that point.

And can you give us a sense of, relative to maybe the beginning of 2008, just the number of whether or not there has been a significant decrease whether through surrender or putting in what the total annuity population has done since the beginning of '08?

I would just say that annuitization --. First of all, very little of our book is eligible for annuitization because there is generally a ten year waiting list and we haven't reached that point. But, as we look at the industry, annuitization rates for companies that have mature books are trending about what we expect. We constantly monitor that.

Okay. Then for Evan, we have got -- you seem relatively-- you don't seem all that constructive on the outlook or the economy. Can you give sense, now that we got health care put to bed, financial regulatory reform has been passed, what impact-- is it easier to give a sense of whether there is a significant impact of either of those two events on the insurance industry broadly?

Health care, I don't see a big impact on the P&C industry from what we can tell at the moment. It will remain to be seen how it impacts workers comp. On reg reform, the industry, as you know, was impacted on the margin from what we can see in the big picture of a 2,300 page bill. You look at the systemic risk, regulator and insurance for the most part is carved out of that. On individual company basis they could survey you and deem something.

On the fund, and for future impairment, or bankruptcies, I think the industry fared well. I was disappointed, I can say, in the role of the federal regulator, ONI, and the preemption authority that it was or was not given particularly to negotiate international agreements. I think that that does us a disservice of this industry and as a country. But then from there, Matt, you got to remain a little bit cautious. There is over 200 enabling bills to be written -- law and regulation. And, you know, the devil is going to be in the detail of all of that and you've got to remain vigilant about it. I don't have enough visibility around that right now.

With respect to the systemic piece, to the extent that this bill had been in place, let's say ten years ago, do you think that is something that may have stymied the development of the benefits on the annuity side?

I don't know. I'm not prescient. What I do know is it's one thing to write a set of regulations and have a regulator put in place to administer.

It's another thing to see regulation administered in a vigorous, thoughtful and insightful way. This would have required great insight. When I look back on the crisis, and I look at the role that current regulators played, or didn't play, in recognizing accumulations of risk and bad underwriting in the credit business, it doesn't give me a whole lot of encouragement about how regulators will behave in the future.

All right. Thanks.

You're welcome.

Next, Brian Meredith, UBS.

Yes, good morning, Evan and Phil. First question, now that we got SRA agreement for the federal comp insurance, can you give us a sense of what the financial impact will be in 2011? And can you still earn an acceptable return on capital relative to what your return benchmarks are in the crop business?

We can still achieve a reasonable return on capital for ACE, I'm just going to give you that punch line and ask Brian to now elaborate with some detail around crop for you.

Thanks. All those SAR holders, we all signed the agreement for 2011 year. You think about the impact of the cuts, they hit both the delivery system and a bit to the underwriting result. One of the features SRA, it redistributed some of the risk reward from the Midwest to non-Midwest states.

As you think about it, the underwriting impact is actually going to vary by company and what their individual mix of business is. So regional underwriters focus on just the Midwest business will clearly have a greater impact than the national underwriters. We underwrite the business, (inaudible) or MGA and we are one of two national underwriters, so we remodeled our book over the last years and put the new SRA in effect and we think it has a point impact to our underwriting returns.

The other thing I noted about the SRA, it also reduces the down side exposures by reducing the maximum possible loss under the SRA. That benefits the national underwriters more than the regional underwriters because of the redistribution of the risk reward. Overall we think as a national underwriters in this business, we come out of the new SRA with some impact to our margin but it's still a pretty good business for us.

When you say a one point impact, that's a one point impact to your crop business or to your overall North America results?

I'm sorry, I wasn't clear. I said a few point impact and to the crop business only.

Excellent, that's terrific thank you. And then, one other quick question. Evan, contingent commissions, Aon, [Marsh] out there now starting to collect them, what's ACE's view towards contingent commissions? Should we expect any lift in the expense ratio or asset ratio as a result of this?

No. To that last part. Look, my view on contingent commissions is fairly well known but, if you like, I will elaborate for you a little bit. First, what I ought to say because brokers are our partners - ACE is a brokerage Company. Brokerage is our chosen means of distribution. We have a high regard for the management of all the major brokerages. I consider the leaders of these firms thoughtful,ernest executives.

In fact, I believe we have a constructive relationship with each of them. That's to the benefit of clients and each of our respective firms. Every firm is different. Each is going to independently determine strategy in the interest of their company. As a Company, ACE has had a long standing position on the subject of contingent commissions that is in agreement with many customers and certain large brokerages. Namely, unlike agents who represent insurance companies, brokers represent their client. As such, we believe contingent commissions for brokers by their nature create a conflict of interest. In fact, if I had my way, clients, and not insurers, would compensate brokers. But that's just not reality.

Regulators in the US recently opined on the subject of contingents once again, and have deemed them an acceptable practice. Therefore, how prevalent they become will be determined by the marketplace. I have no doubt that if customers tolerate the practice of contingents, their use over time will likely become more prevalent, and frankly, I hope that does not occur.

Thanks.

Next, Paul Newsome with Sandler O'Neill

Thank you. Good morning. You are fairly quickly deleveraging the firm. I noticed the debt ratios are going down. Is there an optimal debt level or capital structure you would like over time from a debt or preferred structure? Do you think there will be any changes in the near term?

Paul, I can't speak to the near term. We don't have a plan of levering, but it could be transaction related. You could incur on debt in an acquisition or something like that. Our target ratio with the ratting agencies is around 20%. Our target optimal would be around that 20% to 22% range.

Separately, completely different topic, there have been some notable asbestos environmental events - Firemen's Fund with the charge and this D&A [Bercher] transaction - you could interpret what is happening differently depending on which transaction you are looking at, but, I was wondering if you had thoughts on what is happening in the asbestos world given your exposure.

Yes. Globally, we don't see much change to the environment. New reported levels remain way down. That's been the trend for a while. Because of fewer unimpaired and less by the trial bar of the legal system. The average cost per claim for the seriously impaired, such as mesos, is higher. And these have been and remain the trends as we see it. Individual company reserve adequacy is really portfolio specific. It depends on the individual case experience for each company.

Are you folks up for your, I guess there are a series of reviews, can you remind us of where we are in the process.

Yes. We conduct a review every year. We do a more thorough ground up every two years. That is coincident with the state of PA's external actuary review. This is the deeper dive, we look at it pretty thoroughly every year. This is the deeper dive year in the every two year cycle, we are in the middle of the studies and it's too early to speculate about results. It's something that ripens by the fourth quarter for us. I can tell you, I sit here and I know my colleagues do. Studies are in the middle going on and we have no reason to speculate one way or another.

We will keep our fingers crossed that claims stay low. Good for everybody.

Thank you. You will light a candle for us.

I will. I will.

Thank you, Paul.

We will go to Clifford Gallant, KBW.

Good morning. Two questions, first, interesting you're relating ESIS working with BP. I was wondering if you expect there will be change in buying behavior by the primaries? Particularly, some of the large self insured. And secondly, there was a company, workers comp company in California that's reported some reserving issues and they're talking about unemployment hurting or changing claims experience that people are having a hard time coming back to work so they are -- their workers comp claims are increasing. I was wondering if you had comment on loss trends in that part of the industry.

I'm going to first turnover to John Keogh on your question related to BP. I'm going to ask Shawn and Brian if they want to expand on the workers comp, but to say malingering claims in a difficult economy and that you are seeing more malingering is not an un usual -- I mean that's always been. But, let me ask John Keogh to comment on BP and then the other guys will come back.

Good morning. I guess post BP, our experience -- we are a player in this business - is first property. You are seeing impact of property market really limited to the Gulf of Mexico business and there you are seeing property rates rise anywhere from 15 to 30 points. Whether that's adequate or not, given what is now understood to be the operational exposure as well as the weather exposure of the Gulf of Mexico, is for people to decide.

Rates are up there on the property side. Really no affect on the on shore market coming from BP. Rates continue on property on shore go down. As respects to the liability market, there we are seeing and have seen in terms of submission, an increase of activity coming from both EMP companies and drillers looking primarily to buy more insurance as result of what they saw go on with BP.

What we are seeing there is additional limits being purchased in the neighborhood of $100 million roughly on average. Someone who maybe had $750 million of liability cover, now buying $850 million as a general outcome of the last 60 days of purchasing. And on the pricing side, a very different buy type of risk The exploration of petroleum companies are seeing market and serious increases in their rates.

We've seen renewals go anywhere from 100% to 300% increases in rate per mill for excess liability for the big EMP companies. On the other hand, drillers are seeing more moderate 5% to 15% rate increases as result of the BP situation. So that's a sense of what we are seeing activity as a result of that catastrophe.

Thanks.

Moving on to Jay Cohen, Bank of America, Merrill Lynch.

As I look at your Q2 results and if I back out the favorable development, it looks as if the accident year ROE, about 10.5%, I know it's going to vary by line of business. Do you think in general that describes the ROE that you are writing business at today.

Well, Jay I think it probably understates it because, as you know, as we talked about, we do have capital flexibility and so if I looked on a required capital basis, the ROE on an accident year is higher.

That's fair. I guess on the capital issue could you give it an update of --

It does vary by line of business.

Right.

Clearly. There are lines of business and look let's keep a let's maybe look at perspective here. You want to earn, in ACE, you want to ensure you are going to earn roughly 15% minimum in any line over a cycle, okay? During the cycle there will be years where you are not going to earn 15%. But our natural governor on that, the way we run our Company, is combined ratio.

So, you maybe in a line that's not earning 15% but if you are still earning an underwriting profit on a reasonable basis not some wild eyed optimistic, if you are earning true underwriting profit then we will stay with that line of business. Where it crosses our line is when the combined ratio goes above 100%, is at or above 100%. Then, you know what, we are shrinking it like mad. That's kind of how we see it.

Got it. I guess on the capital flexibility, are you seeing anymore potential opportunities to deploy capital whether it's potential acquisitions or teams of people or new businesses?

Yes. Pipelines of opportunity are pretty robust right now. The M&A environment around the globe right now, so in total, is more active. And it will remain to be seen what that all turns into, but it is. In certain parts of the globe, while we are seeing less opportunity in some places, we are seeing, as I described like a Brazil or other parts of Latin America or parts of Asia, we are seeing more opportunity and we are actually quite excited about that and some of those require capital.

Great. Thanks for that.

You're welcome.

(Operator Instructions) Next we will go to Greg Locraft with Morgan Stanley.

Greg, before you go, our chief actuary, Sean Ringsted, who isn't one to always want to jump out and talk actually wants to answer Cliff's question on California Workers Comp.

Hi Cliff, I was just conscious that the call cut away, so didn't want to think we were ignoring your question. On California, it's a little difficult to look at the tea leaves. If you look at industry data that's come out on the 2009 accident year, combined ratio for the industry is running well in excess of 100% combined ratio. What the data does show is little interesting in terms of severity. Severity is down and frequency is up, which is a reversal of prior trends. What is difficult to figure out, though, is how the economy is impacted in various sectors. So, construcion and manufacturing are down, you've got to shift more to services and so on.

Punch line for the industry in California is still under a lot of pressure from rain erosion. How it impacts our book is something we are going through in our portfolio. And it's where you write the type of self insured retention, high deductable, that type of business with your primary and so on. So, I hope that provides a little color for you.

Greg, sorry, please go ahead.

No problem. I just wanted to follow up on the capital deployment question. I guess what I'm struggling with in our numbers is how we should treat that excess capital that's on the balance sheet. Is that capital that's designed to earn a 15% in the future from a return perspective? And that's sort of question one. The second is just, can you refresh us how you think about share buy backs at this point in time and the return that it offers versus other opportunities that you're considering in the M&A marketplace?

Sure. First, your question on how to think about it from a return point of view. ACE has an objective to earn 15% return on capital over a cycle. And that means on all capital, so hardly are we going to deploy capital whether it is organically or for acquisition, where it will not meet that standard. And any acquisition has to stand up to that exact same standard. Number one.

Number two, on how we think about it and how we think about buy backs, look regarding the equity capital, I think we have been good fiduciaries of shareholder money. We do have a successful track record for acquisitions and organic growth. And as we have demonstrated we are generated superior book value for share growth in ROE's over the last five years and ten years, especially compared to US and P&C industry peers.

By the way I think our ROE right now is still running pretty good. I mean you look at it on a risk adjusted pace is I think it's excellent. We are running the Company for the long-term. Our job is to grow the Company's book value by growing the Company. That is our first objective, our first priority. We need capital to do this,therefore, we do hold shareholder capital for growth. And whether that means , through organic means or through acquisition. And, the growth will come, we are confident about that. It's just a matter of time, we are patient, and the money is not burning a hole in our pocket.

We are also aware by the way that we live in turbulent, very uncertain times and there is a loft risk and a lot of volatility. Look at the current environment, country crisis, debt crisis, fragile nature of recovery in US, Europe, political, regulatory risk around the globe. To the notion of access to capital market,, also, this just in time capital management that will always be there for you at any given time at a reasonable price is overly optimistic look at financial market volatility. We are mindful of our responsible to be good stewards of shareholder money.

This means achieving a reasonable return on shareholder capital over any reasonable period of time. If we cannot put it to work productively,, over a reasonable period, we are not opposed to employing tactical strategies to return that to shareholders including repurchasing shares.

And frankly at the end of the day and we have given a lot of thought we are confident that the Company's interest and those of long-term shareholders are clearly aligned now making any decision about capital management includes our board, and we evaluate the amount of capital we are holding above that which we believe we should hold for risk, measure that against the environment and potential opportunities over a reasonable time horizon. We look out two years to three years. We do see plenty of potential opportunity in many parts of the globe and it is a matter of timing. So we are patient, we are mindful and I think we are pretty balanced in our approach about this.

Okay. Just one follow up on that is do you see or implicit in that are share buy backs, do you think of them as a short-term kind of a way to enhance shareholder returns or do you actually think it works over the longer term.

See it as short-term.

Okay. Then also just on growth, if we look at just the core earnings, ex-reserves and catastrophes which is admittedly one way to look at it there hasn't been much growth for five years in the business that's given you the high end this year, at what point are the per share growth metrics, i.e., book value per share et cetera so compelling that you might consider something or maybe said differently are there actually going to be a few deals we can't see coming in the next let's say several quarters to couple of years that will start to change that dynamic in the business.

First two comments. One, Greg stay tuned. Number two, I don't remove when I look at book value growth, or look at earnings, I don't remove reserve development. You wrote that business. It's just what period are you recognizing the earnings in from that business. It's all part of what we have done as a Company, part and parcel to the businesses that we are in. And so we generated that and whether it comes from current or it comes from prior, I get the difference but frankly when I look at book value growth, overall, I don't. I get it for me it's more measuring other indices and other things you talk about.

Thank you very helpful.

You're welcome.

We will go now to [Ian Gutterman]. (inaudible)

Hi Evan, how are you. Hate to have ask a guidance question, if you see how many emails I gotten during this call with confusion about the guidance I want to clarify for people. The original guidance correct was $390 million of pretax CATs and no prior period, right?

Correct.

Okay. What was the first half CAT assumption in the $390 million?

We don't break it out.

Okay.

We don't do that. We are not working on work sheets here. I get it and it's a slippery slope. So we give an annual CAT guidance.

But that CAT guidance now -- even though it might be unsaid, the CAT assumption for the year is now going to be higher than $390 million because first half was above average correct?

Correct. Correct.

That's where some of the confusion is.

What is correct, we did not change our assumption our own assumption for CATs in the second half of the year.

Thank you, that's what I thought. Some people are having a hard time with that.

I understand. Look I will say it again if it's helpful. There is a range of possible outcomes here and we have selected out of the range of possible outcomes, we have selected the top end of our range as a reasonable and conservative estimate of how our year will turn out.

Fair enough. One quick question back on the taxes, on the nonoperating side, looked a little unusual that you had pretax realized gains but after tax unrealized losses, what happened there?

We had to benefit on the lease of reserves on the IRS exam.

That just affected the investment portion then.

Well we also had the VA realized loss that's not taxable.

Okay. Got it. Okay. Okay that's all I had, thank you.

You're welcome.

At this time we have no further questions I would like the turn it back over to Helen Wilson for closing or additional remarks.

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

Once again, ladies and gentlemen, that concludes our conference, thank you for your participation.