丘博保險集團 (CB) 2010 Q3 法說會逐字稿

Welcome to the ACE Limited third quarter 2010 earnings conference call. Today's call is being recorded. At the end of today's presentation, we will have a live Q&A session. (Operator Instructions) For opening remarks and introductions, I'd like to turn the call over to Helen Wilson, Investor Relations. Please go ahead, ma'am.

Thank you and welcome to the ACE Limited September 30, 2010, third quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to economic and insurance industry trends, our financial outlook and guidance, competition, and potential acquisitions and their impact all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filings as well as our earnings press release and financial supplement which are available on our website for more information on factors that could affect these matters.

This call is being webcast live and will be available for replay for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

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

Good morning. ACE had a very good and very busy third quarter marked by strong financial performance and a number of announcements related to major actions taken to further our strategy. After-tax operating income for the quarter was $688 million, or just over $2 per share. All of our principal businesses made a positive contribution to results.

Per share book value was up 7% and 15% in the quarter and year-to-date, respectively. Our annualized ROE was over 13% for both the quarter and the year. We had excellent underwriting results in the quarter, the combined ratio was 88.4, which included net cap losses of $97 million pretax and favorable prior period reserve development of about $201 million.

[CAT] losses were doubled the amount from last year with about half coming from the New Zealand earthquake. PPD, or prior period development, was roughly equal with prior year. Our accident year combined ratio for the quarter, excluding cash, was a very healthy 92% compared to 93.3% the prior year.

In essence, as expected by line loss ratios have increased but this was offset by underwriting-induced business mix changes. Phil, Brian and John will provide more detail around the current accident year and prior period numbers.

During the quarter and in recent days we announced a number of acquisitions we are making that are consistent with the strategies we described to you during our investor day in June. In September, we announced we had signed a definitive agreement to acquire all the outstanding common stock of Rain and Hail insurance services not currently owned by ACE for approximately $1.1 billion in cash.

As most of you already know, ACE currently owns approximately 20% of the outstanding common stock of R&H which is the second largest crop insurance underwriter in the country.

The transaction makes a lot of sense for a number of reasons. This is a great company and a business we know well. It has an excellent track record for producing results. Rain and Hail was an old franchise. It was established in 1919. It is a pioneer in crop insurance and a great brand known and trusted throughout the agriculture community for the services it provides.

The company is rich in data. It has granular details on over 2 million farm fields with some data going back 40 to 50 years. The business is substantial it has 400 staff and field offices all over the country serving agents and farmers. It also has considerable distribution, 7000 agents in small towns in rural communities.

They have excellent systems in technology. Most of their transactions are automated giving it a real strategic advantage. The leadership and employees of Rain and Hail are simply terrific. Hard-working professionals who take a great deal of pride in what they do. They will make our company better.

Lastly, given ACE's product breadth and capabilities and the reach of those 7000 agents who have been asking Rain and Hail for more product, this is simply another opportunity we will capitalize on years to come.

The financial returns are particularly attractive with results that are immediately accretive to our earnings, return on equity and booked value per share. We expect to reach--to achieve a return on capital in excess of our 15% hurdle rate.

Also in the quarter, we announced that we had reached a definitive agreement to acquire Jerneh Insurance, a top 10 general insurer in Malaysia with a strong presence in both personal lines, small commercial P&C as well as a respectable presence in industrial commercial P&C. Our agreed price is approximately two times book or about $200 million. The transaction offers good industrial logic and attractive financial returns to our shareholders. We like the strategic fit between ACE and Jerneh and believe our two companies are quite complementary.

Jerneh has strong distribution with about 1300 agents and 22 branches where as ACE Malaysia is more of a brokerage company. Jerneh's particular expertise is personal lines and small mid size commercial where as ACE is focused primarily on medium-sized and large commercial accounts, specialty products, global capability and A&H.

Jerneh is a great brand in Malaysia. They have the best underwriting reputation of any local Malay P&C company. We project a reasonable level of efficiencies, both expense related and through a higher net retention of their premiums. In terms of returns, we expect to achieve our target hurdle rate reasonably quickly.

Earlier this week you saw we signed a definitive agreement to purchase New York Life's operations in Hong Kong and Korea for $425 million. New York Life is a venerable and highly professional agency oriented life company, though their focus and management capability is predominantly in the US.

The two life companies we are buying are relatively small solid agency operations that have been managed conservatively. ACE has a good track record for building and managing insurance companies globally, including a young but successful track record for building and managing life companies in Asia.

We view these two companies like later stage greenfield operations. If we started from scratch it would take seven to nine years at least to grow to the scale required to achieve breakeven. That assumes we can even get a life license in Korea which has not issued any new licenses in more than five years.

We've approached this opportunity conservatively assuming modest expense savings and a conservative increase in agents and revenues and even with these-- these assumptions -- these two companies represent reasonable growth opportunities for ACE since their current size is so small. We expect to benefit from coordination with our P&C operations including distribution, clients, support ops and basic management knowledge of the two markets.

In terms of financial returns, we bought these operations at a very good price that reflects their state of development and current financial profile. From a ROE perspective, we expect immediate mid teen returns that are sustainable. Again, assuming relatively modest growth in Asian count and new product, not to mention a broadening of distribution. In fact, I expect we will exceed these ROE targets over a reasonable period of time.

The non-life transactions are expected to close in the fourth quarter of this year while the Asia life companies are targeted to close in the first quarter, all subject to regulatory approvals and closing conditions. In sum, the three acquisitions we have announced not only have strong industrial and strategic logic but have good financial return characteristics.

Before I hand the call off to Phil, I want to make a few comments about the insurance market environment and its impact on ACE. We are observing typical soft market behavior with prices continuing to soften around the world and more competition around terms and conditions all of which is natural for this part of the cycle.

On a reported basis, total company net premiums were up 4% in the quarter. Adjusting for FX, premiums were up 5%. As with previous quarters, we are seeing a similar pattern where primary commercial P&C was up about 2% with retail growing 4% and wholesale shrinking 2%. Global RE was up significantly in the quarter, over 30%, predominately due to a large casualty related structured transaction in the US. Barring that, re insurance premiums were down as we would be expected given our underwriting discipline.

In US retail P&C insurance, our new business writings were down substantially year on year while our renewal retention rates held steady. Overseas, new business writings were up driven by new multi national business opportunities.

Renewal retention rates were up slightly everywhere except continental Europe where inadequate casualty rates led us to shed some business. Rates overall in US retail were down 2%, ranging from plus 2 to minus 4. In our international business, overall P&C rates were down 1% with a range of flat to minus 2.

Recession related reductions and exposure of about 0.5% had a modest impact this quarter on revenue, continuing the improving trends of recent quarters.

Brian Dowd and John Keogh are available to provide more detail on what areas of their business grew or shrank as well as color on the rate environment in their territories. Please ask them questions.

Turning to our accident and health insurance business, A&H growth globally was essentially flat on a reported and constant dollar basis. As predicted though, our international A&H growth has begun to pick up in the second half of the year. Our ACE international business was up 4% in the quarter with Latin America in particular showing strong double-digit growth and our business in Asia returning to solid single digit growth and Europe as well did better with single digit growth.

Combined insurance premiums were down from prior year while customer retention ratios are steadily improving quarter on quarter, new business sales continue to feel the impact of recession. With that, I'll turn the call over to Phil and then we will be back to take your questions.

Thank you, Evan. Our balance sheet is very strong. Our tangible book value per share increased 8% for the quarter and 19.5% for the year. Our financial leverage has dropped to 12.5%. Operating cash flow remains strong at $1.1 billion. Our cash and invested assets grew by $2.2 billion, almost 5%, to about $51 billion. The growth was driven by unrealized gains of about $830 million pretax and our operating cash flow.

Overall, our investment portfolio is in an unrealized gain position of about $2 billion after-tax.

Investment income was $516 million of 2% adjusted for foreign exchange. Income on new cash flow was offset by declining yields in the portfolio. There is nothing unusual in the investment income in the quarter.

Current new money rates are 3.25% if we invested in the similar distribution to our existing portfolio. Our paid to incurred ratio was 99% for the quarter and 98% for nine months. We had favorable prior period development of about $200 million pretax primarily related to long tail lines from accident years 2005 and prior. Adjusting for the favorable PPD, our paid to incurred ratios for the quarter and nine months were 89 and 90. CAT losses for the quarter were $86 million after-tax with about 55% coming from reinsurance and the balance from insurance.

Overall, the P&C current accident year loss ratio before CAT losses dropped 1.7 percentage points over last year. In North America, if you eliminate crop, the current accident year is about flat. Line by line the loss ratio is actually up as one would expect but there is a change in mix, we wrote less business in higher loss ratio lines.

In AOG, a number of large property losses distorted our loss ratio in the third quarter of 2009. Secondly, our lower loss ratio regions of the world are growing faster than our higher loss ratio regions, again a mix change.

Finally, last quarter we updated our guidance to the upper end of our original range, which was $6.25 to $6.75. This included actual results through June 30 including actual CAT losses and our accident year forecast for the second half including our original CAT projections for the second half.

Our third-quarter accident year results, including CATs, are slightly over target and we did have positive prior period development in the quarter of about $157 million after-tax or $0.46 per share.

We now expect a range of $7.20 to $7.40, which includes our actual experience for the first three quarters including PPD and CATs and our forecast for the fourth quarter current accident year results, which includes our original estimate of fourth quarter CAT losses.

With that, I will turn the call back to Helen.

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

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

Good morning. ACE had announced pretty significant hire recently with Juan Andrade. Evan, can you talk a little bit about the strategy in small commercial lines and personal lines globally?

Yes. Juan will be joining shortly. ACE already writes, and we have talked about this before, we already write personal lines and small commercial around the globe. In the United States, as you know, we have a high net worth personal lines business.

Frankly, when you add up our small commercial business, it is in the $700 million - $800 million range already. A lot of that we do kind of out of our back pocket. And internationally we have a specialty person more specialty oriented personal lines business that we have been steadily growing traditional personal lines in Asia and the beginnings of that in Latin America.

Again, in those regions of the world we are growing small commercial business. And you look at the Jerneh acquisition and that is an example of complementing what we are doing organically with acquisition in a targeted way.

And Juan's role will be to bring more executive level -- and, by the way, as you just heard as I went through about Rain and Hail, don't miss that Rain and Hail has 7000 agents and a great brand in rural and small town America, and that is an opportunity for us over time.

And Juan's, we wanted to bring more executive level focus and expertise to that whole basket I just described that we think is globally an opportunity for ACE and Juan will worry that bone full time.

Thanks for that. And then just a follow up, can you talk a little bit about the pipeline for M&A with the three deals that have been announced. I think people have been waiting for something to happen. I am trying to get a sense of is ACE sort of complete on the M&A front for the time being or are you still looking at opportunities?

Jay, I have got to be careful, I am going to be accused of being a serial acquisitionist now. There is -- I don't want to give you a simplistic answer. There is -- I can't tell you, I don't want to create expectation either way so I'd rather make no comment.

So I will say there is a constant pipeline, as I've said, of things that we are looking at. There is nothing at the moment that is imminent of any note. The world is quite dynamic. There is a lot of stress around the world and that creates opportunity.

We are constantly looking and we will. We are very, very disciplined. If it doesn't meet the strategy or doesn't meet the financial returns, we just are not going to do it. And, these three just happened to ripen at the same time but we looked at an -- kissed an awful lot of frogs before they turned into anything beautiful.

Thank you.

You're welcome.

Our next question comes from Vinay Misquith with Credit Suisse.

Hi. Good morning.

Ask your life questions. I read your note.

Nice acquisition on New York Life. I was just wondering, some competitors are making 20% to 30% ROE on the business in Korea. Do you think you could get the New York Life operation up to that ROE? And why is that operation right now earning lower ROE? Is that just a scale issue? And the last thing related to that is do you have any asset liability mismatched within that operation?

Yes. Vinay, when -- I am mindful that some are earning 20% to 30%. Korea on an embedded value basis was making a substandard or negative return because it has expense over run so it is a scale question, it is a size question. It is a very small operation. I am mindful that Korea is a difficult environment. Culturally it is difficult, I've done business there for many years. ACE has a decent non-life business there.

The Korean life market, while some will say it is mature, I disagree with that statement. I don't particularly well run life industry. There are some decent players, but I don't think it is particularly well run. New York's Life operation there is quite small and the opportunity -- it doesn't take a tremendous amount of growth and you don't need to be in the top 10 for it to be a meaningful growth opportunity for ACE.

There is no negative spread issue. The in force portfolio of assets yield rate that more than equals any guarantees. And, in fact, an awful lot of the business is [VUL] at separate account. There is no real guarantee rate on that.

There is more compression on new money because there is, as you know, in Asia a duration mismatch. So as you get the rollover there is some compression where the current new money rate about equals, and it does equal, the yield required on the older portfolio that rolls over. Any of that has been priced into the deal and, as you know, we priced on the cash flow on embedded values to earn 15%.

I do believe as we go forward and you can grow more scale, we should be able to exceed that mid digits return. That is our objective and I would be disappointed, if we don't achieve that.

That's great. Thank you. The second question would be on the retail operations. I believe in the US retail, you mentioned there was a small amount of growth. Can you just comment on that and the competitive landscape? Thank you.

Good. I am going to ask Brian to comment on the competitive landscape.

Fundamentally, the growth was because we wrote a fairly good size structured transaction. Last year in the fall, we told you about a program of some size that we wrote from a competitor that was having -- that was moved to us because of competitors' issues; their confidence in that competitor. That is really fundamentally plus some increases in net retention in some lines. Why we got -- why you see the growth we have.

Color on the market and what is going on in the US, let me turn the call over to Brian.

Thanks. As Evan mentioned, rates in North America were down an average of 2.2%. Themes in the quarter were consistent with the prior quarters. Our wholesale business remained a little bit more competitive than the retail business. Our commodity accounts were more competitive than accounts we have used our service capabilities.

The lines we experienced the most price competition were property with rates falling about 5.5%, professional liability, particularly financial institutions where rates fell about 4%. Remember, these were the lines that we saw the largest increases in the third quarter of 2009 with rates rising 11% and 6% respectively. We also saw increasing competition in our medical liability lines, especially long-term care where pricing was down 4%.

Finally, we lost a number of smaller risk management accounts to guarantee cost workers comp carriers who are underwriting at significant discounts. In all of these lines, competition caused rate erosion, decreased retention rates, lower new business.

On the other hand our retail and wholesale umbrella pricing held up at about plus 2% repricing. We also saw modest increase in some E&O classes and energy related casualty accounts.

Also, while the rates remain constant from quarter to quarter, the market is starting to get a little more competitive in terms and conditions. We are seeing more requests for broker manuscripts and endorsements as well as more requests for multi-year deals.

Frankly, broker competition remains robust and, as a result, our submission activity continues to be strong increasing at about 6%. And while it varied by line of business, our efficient metrics; bound to submit, bound to quote, were basically flat. Overall, I would say the market stayed about the same in the third quarter as it was in the second quarter.

Thank you.

You're welcome.

Our next question will come from Matthew Heimermann with JPMorgan.

Good morning, Matt.

Good morning. A couple questions. First, big picture. With the election next week, just curious if you thought a change control of Congress would have any real material impact on the industry in terms of whether it be tax issues or other issues affecting the competitive landscape?

To me, the elections, what is going to impact the industry more I think is in the elections is the state elections. Where more legislatures and more governorships are going to move in the Republican direction, at least as if you believe the polls you are seeing right now. And I think over time that is good to the industry, particularly, when you think of state courts and judgeships. I think from a judicial point of view, it will be better for us.

Generally, I think for all business, the change in Congress -- what it means is the country is going to have to govern more to the middle and that's where most of the country's [insensible] policies reside is in the middle. And to get anything done, legislation is going to have to be more centrist if you are going to get bipartisan support.

On the judicial side, there has been some erosion in the last four years on some of the non-economic caps and there's been some State adjudged challengings, I think in Georgia, for example. Would a change just kind of arrest that decline or do you actually think you might see improvement as well?

Remember it happens -- I can't speculate about that easily. Where you have seen erosion on the other side of the coin you have also seen -- we can cite the examples where you have seen things move in a more conservative direction, what I would like to say is sensible. But any of these changes at a state level happen over time and you are not going to see something, I don't believe you will see anything instant.

Okay that's fair. For Phil, just when I think about changes in your excess capital position, I mean, if my math is right these three acquisitions I think only really probably used incrementally about $500 million to $600 million of capital. Is that kind of the right way to think about the magnitude of the change?

No, it would be probably double that. As we have said in the Rain and Hail transaction, the price was $1.1 billion. As we said, we will be able to recover that relatively quickly.

So, the number is probably $1.2 billion. We actually spent $1.8 billion but some of that will come back in the form of capital management.

Over time though, not as an instant moment.

I can follow up off-line on this but I just thought given that the actual good will asset generated -- I mean, you are getting capital back on some of these deals so I was thinking of it that way.

We can take it off-line and I will walk you through it. I believe the number is about $1.2 billion.

Okay. One data request, I think that would be helpful to everybody, if you could give us more color on just what the intangible amortization associated with these transactions might look like just so we don't screw up the margin side of things?

It is a little early for the New York Life. But for Rain and Hail, for example, we are saying that after-tax the amortization on the intangibles is going to run in the low 20s to mid 20s, like around the 25 range. And you were asking about investment income -- that is probably running about the same level.

Okay. Thank you much.

Or next question will go to Greg Locraft with Morgan Stanley.

Hi. Good morning, guys. Nice quarter.

Thank you.

I wanted to follow up on a couple things. The growth in the reinsurance side, is that that one contract you were mentioning, Evan?

Yes, and other than that it was negative single digit.

Okay, perfect. Great. Second, is perhaps for Phil. Could you talk perhaps about the maturities in the investment portfolio the next couple of years and how the new money yields should compare to what's rolling off for our models?

We mentioned there was nothing unusual in the quarter. While we are not giving guidance on where are investment income is going, I would not expect any significant change in the level of investment income.

Okay. Is that a comment on a dollars level or is that a comment on a yield level?

It is on a dollars level. We certainly will see yields drop. As we say in our disclosure, our book yields are in the -- let's say, 4.5% range. The market yield is about 3.25%. Over time it will migrate down.

Okay, great. Last for me is just Solvency II. Wanted to get your thoughts as to what that will do to the corporation and also the overall marketplace in which you compete?

Well, as you know, Solvency II, whatever the final outcome is on the formula for calculating Solvency is -- that is still out there, and it has not been finalized yet.

The regime change it does bring you to an IFRS and fair value-type accounting, so a lot of work has to be done. We are doing all that work now to build our own model, etc.

IFRS will apply to Europe and so it applies to our European sub, not the rest of ACE. And our European sub, to give you an idea, has what about $1.5 billion, Phil?

$1.2, yes.

$1.2 billion of capital. So that gives you a sense that that is what we will step up to. The questions that remain outstanding to me are around governance, regulatory governance. And this notion of a global supervisor or colleges or how it is going to be determined that you are -- that internationally significant companies are oversighted on a cross-border basis. And that sits out there.

And what kind of diversification credits do you get as a global company and recognition, and that sits out there. How do other regulators; other regulatory regimes adopt or not Solvency II? The Europeans are not the regulators of the world and other regulators will make their own minds up. And then you get to the question which is political to a large degree of equivalency and one recognizing the other. And that sits out there.

It really is a stay tuned but I can tell you as a company we are quite focused on it on both an accounting and on a regulatory basis. Right now, Solvency II is more of a burden than a benefit to insurers who have to participate in it. Though it has the promise of benefit in its original construction, regulators haven't focused on that part of it. And I think if they are not careful, they are going to create issues for European companies.

Okay, much appreciated. Thanks.

We will move next to Brian Meredith with UBS.

Good morning. A couple questions here for you. First a quick numbers one. Phil, if I look at the admin expenses in North America down significantly year over year, anything unusual going on there?

Brian, [did] such a great job. The admin expenses are down because of an increase in the funds that were generated by ESIS and that related to third-party claims administrative services. We are not expecting that to continue beyond the third quarter.

Did that have an effect on policy acquisition costs also kind of popping up?

No, that is a different reason. First of all, our base commission rates are not up for North America; 1.3 points of the 1.7% increase is attributable to one-time items last year and this year. The balance was due to a change in business mix and less seating commission in areas that were retaining more business.

So the four-tenths is more of what you ought to imagine might be an elevated acquisition rate going forward.

Got you. Evan, on international life insurance, just curious that New York Life acquisition there is a fair amount of spread based business there. Is that a strategy of yours going forward to grow in the spread based business? I thought it was more your focus on protection and [Canadian nation] indemnity-type businesses?

No, I am sorry. We said savings and protection oriented in life insurance.

Look, it depends where you are in the region of the world. In Latin America right now the business is more protection oriented because that is the culture, that is what the market buys. That area of the world, as you know, had decades of hyperinflation. People putting money away for the long term with an institution locked up in savings oriented, just other than say Chile, has not taken off. I believe that will change in the future but at the moment it is more protection.

In Asia, savings oriented cultures, old savings oriented cultures. It is much more savings oriented whether it is separate account, general account, par or non par.

Okay. Great and then last question. (multiple speakers) Yes, last quick question here. If I am thinking about your potential for M&A here going forward, what would you say is kind of your cash availability or ability to kind of size of acquisition you can do going forward excluding the use of common stock?

Oh, I don't know. I'm not sure I could be smart but I -- we have, we have good flexibility. We are good capability and good flexibility both on equity and on debt.

Okay, great, thanks.

Next question comes from Ian Gutterman of Adage Capital.

Good morning, Evan. I just want to clarify a couple number things and then I had some questions on the deals.

Phil, when you said if you kept the current composition of the portfolio, new money would be 3.25. I guess the question is do you plan to keep the current outlook of the portfolio or do you think you'll maybe change some things to improve the yields?

What we have said is that any change we will make will be tactical. We don't see significant change in our strategy and we are not going to change our risk profile to reach for yield.

When I said that the investment income would be relatively flat, the thought was that as the portfolio turns over into the new money rates that we are talking about at 3.25, if they stay where they are, that will be offset by earnings on new cash flow. And that is how we would get to relatively constant rate.

Okay. I just wanted to make sure that was the case. The reinsurance, the large deal, is that something that was a one-time deal that we should not expect to recur next year or is that something that could possibly be a long-term business? I basically was just wondering if we should expect a major down for next year's Q3 or not?

I can't give you an answer to that right now.

Okay, fair enough. I thought if it was obvious, I'd ask, but okay. So on the deals, I guess --

It's obvious to ask but the answer is not -- there is not a clear answer right now.

Understood, I know what you mean. On the Rain and Hail, there has been a lot of speculation that post the changes coming next year that we are going to see a lot of consolidation in that space. Was part of the reason to buy Rain and Hail and get full control is because you want to take part in that consolidation or are you happy being where you are as far as your share in that space?

Where we stand at this moment is we are happy with where we are.

Okay great. Then just lastly on Korea. I was hoping you could just expand a little bit more on what is attractive about that market. I guess from what I know, the US life companies that are there, they have had a lot of struggles. It seems every time you talk to those companies about it, there is a lot of talk about hyper competitiveness, agent poaching, more and more aggressive offerings on the product side. It just seems like a market that is getting worse and not better. Why do you feel that that is a healthy market to be in, especially if you want to try to gain share in it?

It is -- all the things you say about that you just said about Korea are true. I have been doing business in Korea for over 20 years. And, those things that you just said have always been true about Korea. About the irrational competitiveness, [chayball] business practices, xenophobia, aggressive poaching, unions -- aggressive unions. In fact, I don't mind telling you that when I first took over Korea from Japan in my prior life we were in a union negotiation and they actually locked our manager in his office and lit it on fire.

So, I am telling you this because eyes wide open. Korea is difficult. With all that said, we have built a non-life operation that is maybe modest of size that earns good money, is solid and does a good job. You have got to understand how to manage in that environment. It is difficult.

When we built our plans, we were not pollyannish. In fact, the guys gave me a plan and I am going to hold them to it for pricing purposes, I lagged it another year figuring that execution will be even more difficult.

With that said, it is a big wealthy country. I think there is lack of professionalism that increases stress. If you were disciplined and you were focused over time you can take what is a very small company and you can make it a lot bigger than it is today relatively to what it is today, though it still may be and will be of relatively small size in the country.

Got it. Okay. Very helpful answer. I appreciate it.

Your next question comes from Jay Cohen with Banc of America Merrill Lynch.

Yes, thank you. Good morning. Two questions. First is if you could talk about the profitability of the crop business in the third quarter and what things might look like in fourth quarter.

Then, secondly, if you could talk more about combined insurance. You suggested the growth was challenging and obviously the economy plays a role. But I know you modernized the sales model there, and I am wondering if the is having a positive impact.

I will take combined first and then ask Brian to do crop insurance. Yes, in North America we have -- in the US we have modernized the sales force. We are working on that in Europe. Right now we are at the beginnings of that.

In the US in the modernizing of the sales force we have seen -- and you know, we are about 18 months into it and it is a -- remember combined, had not had a change like that in 80 years, from what I can tell. And I would say half -- we have now rolled it out throughout the United States and half of the agency force, half of the territories are performing as we expect them to perform to the new models.

Their productivity per agent is up to or in excess of what we expect from that modernization. The other half lags and that to me is a consequence of time. It is how long that other half has had it and it is a consequence of managers who either get on board or just are not capable of living with it. So you have to keep working that. It is going slowly, surely right as we expect it to.

The agent productivity is getting there and I expect the rest of the country will come up to that same level. New agent growth recruitment -- so productivity is good, new agent recruitment lags. Getting new agents, once we get them on board they are sticking but new agent product -- new agent recruitment lags and that is the focus in North America.

In Europe, it's -- we are at the beginning of that modernization of this and then it is very interesting. Regions where you don't have the same economic stress, Australia, New Zealand, Canada, revenue growth is better. Does that help you?

Yes thank you.

I am not concerned. I am concerned every day about everything. I worry about it from a day to day but I don't worry about it from a strategic point of view whether the strategy is right, whether the fundamentals are right. It is a timing question and over time it will get there. It will be fine. It will return to growth. It is a little sluggish. I will turn to Brian for R&H.

On the crop side, first in the third quarter we really don't have much of an impact to profitability in the third quarter. Most of our profits are in the fourth and first quarter as the crops come in and you do the settlement with the government. Virtually no effect to the third quarter. You look for the -- overall I am reasonably optimistic about the overall crop conditions.

Year to date crop conditions remain favorable and the crop is well ahead of last year in terms of development which eases your concern around potential freeze impact or the weather this last weekend in the Midwest. So we feel pretty good about that. Hail losses so far are trending lower than historical years but the year is not over.

The other thing to keep in mind, current projected corn and soybean harvest prices are about 30% over the 2010 base price which significantly reduces the risk of losses rising in 2010 just from a drop in commodity prices. Overall, we would expect a pretty good set of circumstances for both yield and commodity prices. I would expect things don't change, a pretty good crop year when we settle out in third and fourth quarters.

Great. Thanks a lot.

Next question will come from Larry Greenberg with Langen McAlenney.

Good morning. I am wondering if you could elaborate specifically on the E&S market. I know your volume there has dropped dramatically over the last couple of years but can you just talk about conditions there today and specifically what the appetite is of the standard market place moving in and moving out?

Yes. I am going to start it and then I will actually ask John and Brian to talk about it. Because John has it from the London point of view and we haven't heard from him today and Brian will have it from the US point of view.

You've alluded right, the E&S market is competitive, very competitive. And the pond is shrinking, which happens in this part of the cycle, as standard markets write more of the E&S business. They broaden their appetites and relative to standard market risk pricing, they think the E&S pricing looks strong but they seem to misunderstand the risk.

It is competitive and so we do continue to shed though our diversification within E&S has served us quite well. With that, I will ask John first to make comment and Brian to talk about Westchester.

In our London wholesale business, we continue to see in third quarter what we've seen throughout this year, which is increasingly more competitive pricing and more competitive terms and conditions. As a result, we shrank our wholesale business by 10% in the quarter. That is consistent with what we have been doing throughout this year. Really a reflection of our view of the risk we are seeing in London versus the prices that we are witnessing.

To Evan's point, we are seeing less business coming to the London wholesale market. More and more of it is staying whether it is in the US standard market or international standard markets as opposed to having to come into the London wholesale markets. So there is less opportunity, fewer submissions.

If you look at the market itself over the last year and just take a look at how many new competitors have come in to that market, how much new capital has entered that market be it the aviation space, [D&O] space, energy space, marine space, there is more supply capital against a shrinking demand. I think that is in essence what we see in the London wholesale market right now as the dynamic and trend.

Good morning, Larry. I did see a few of the competitors suggest in their commentary that some of the standard markets are starting to walk away from the E&S business. Statistically, we have not seen that. We have statistically seen as much competition as ever in the E&S space.

Our strategy, particularly in casualty, has been to walk away. As you noticed, we have been shrinking that. I look back three years ago it was probably 40% of my E&S business was casualty, today it is less than 21%. We are definitely seeing the world in E&S is too competitive to continue to write, so we continue to shrink the book. We don't see it getting less competitive yet. It is still pretty fierce.

Larry, it is John Keogh again. I want to make one other point, too, because someone is going to sure ask this question. Is the 10% reduction simply a reflection of lower pricing and the same exposure base? In fact, in our wholesale London business we actually got a 1% rate increase on the book that we retained in the quarter. So that 10% shrinkage is in exposure.

Great. That is really helpful. Evan, I know you have been a little bit cautious in your macro view of relations with China. Can you talk a little bit about that and perhaps how things are going with the Chinese partnership you have there?

Yes. Our business in China is doing fine. The Chinese economy is doing well, as you know. There is actually more insurance penetration, more buying of insurance. There is more consumerism in China. It is rising and people are acquiring more assets. Private sector businesses are growing and that is increasing both non-life and our life insurance is going well.

Our partnership is steady, is solid and ACE's role within that is just fine. We own 36% of the life as you know, and our objective is to get to 50%. And that is out there.

Relations, US and China right now, in China's view I think post the crisis, China looks at US was the master, was the teacher. There is a view that the teacher maybe is the student now. That our model in Chinese minds has been discredited and maybe is not the best model. China did well through the crisis.

And, as well, China has the idea that we helped the world out during a crisis, why isn't the world little more grateful to us. At the same time, China doing well, there is a rising self-confidence as seriously grown in the country but it is self-confidence that has crossed the line and borders on arrogance.

Just like the United States politics is local. There is a lot of internal focus in the country they are not used to and they have never been really engaged in international relations. They approach it reluctantly. They are very health centered and very inwardly focused, and they don't quite understand how their own actions because of their meteoric rise in size how their own actions are, in fact, affecting the rest of the world. They continue to misunderstand that and that creates tensions.

At the end of the day it is not about the renminbi when you want to look at trade differences. That sits nicely on a bumper sticker. It is about other issues that are more structural in nature. At the end of the day the United States has to save more and we have to get out of the way of business and innovate more, and allow people to get back to work. And China has to understand it cannot continue to just grow economically by export. It has to grow more internally. There you go.

Thank you very much.

You're welcome.

We have time for one more question that will come from Thomas Mitchell with Miller Tabak.

Good morning, Tom.

Earlier you mentioned the increase in crop prices. If we look at things from a slightly different point of view but staying with that there has been a pretty strong uptrend in farm crop prices and farm land. Is there a way to look at the farmer as your customer as a potentially rapidly increasing potential source of business in other ways?

You are saying for other product?

Yes.

We do have a small farm book right now with Rain and Hail. That is one of the reasons I did say that noted Rain and Hail has great brand, old relations, over 7000 agents in small towns, which includes more than farmers, and rural communities that are very farm centric. We think there is an opportunity over time, please don't ask me next quarter, over time to take advantage of the breath of product that ACE has. As I said, that will be part of the bone that Juan will worry.

To follow up a little bit. This is a little bit sort of speculative. I know we have very special rules on crop insurance in the United States. Is there an opportunity to expand internationally?

We have looked at it before. We are going to crawl on it again; the world changes. And remember that the crop insurance in the United States is a public private partnership and so it is a creature of law in the United States and data and government regulation. And so it doesn't simply transfer easily to other parts of the world but our mind is on it.

Good, thank you.

You're welcome.

That does conclude today's question and answer session I will open it back over to Helen Wilson.

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

Again, that concludes your conference call and we thank you for your participation.