丘博保險集團 (CB) 2011 Q2 法說會逐字稿

Good day, and welcome to ACE Limited second-quarter 2011 earnings conference call. Today's call is being recorded. At the conclusion of today's prepared remarks, we will have a question-and-answer session. (Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Ms. Helen Wilson, Investor Relations. Please go ahead, ma'am.

Thank you, and welcome to the ACE Limited June 30, 2011, second quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to the Company performance and guidance, recent corporate developments and acquisitions, age of business mix, economic outlook and insurance market conditions, 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 1 month. All remarks made during the call are current at the time of the call, and will not be updated to reflect subsequent material development.

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

Now, it's my pleasure to turn the call over to Evan.

Good morning. As you saw from the numbers, ACE had an excellent second quarter. In fact, for the first 6 months, given the extraordinary number and size of natural catastrophes, the competitive insurance market, and sluggish economic conditions in developed markets, our persistent and long-term strategy to build a global diversified Company and our use of capital have distinguished our results in terms of revenue growth, earnings, and risk management.

After-tax operating income for the quarter was $686 million or $2.01 per share. All divisions of the Company made a positive contribution to the quarter's results. For the quarter, per-share book value grew 3%, and now stands at $71.36, and our ROE was about 12.5%. The source and balance of our earnings, in our judgment, was simply outstanding -- underwriting income of $245 million contributed 36% in net operating income with balanced contributions from both current accident year and favorable reserve development.

Net investment income was up 10% in the quarter, reflecting both growth in our portfolio and a number of other favorable dynamics, which Phil will discuss. Our high-quality conservatively-managed investment portfolio continues to perform well and is generating substantial investment income. Our P&C combined ratio was 92.6%, which included net catastrophe losses of just over $100 million, the vast majority of which came from the US tornadoes and Mississippi flooding.

We also had a reserve takedown from the first quarter CAT estimates, based on an updated view of those events. Our overall CAT impact was reasonably modest, given the severity of the US CATs in the quarter; and again, is a direct result of our global spread of business and lack of over-concentration in any one business, region, or product line. Our balance sheet is in great shape, with a capital position now exceeding $29 billion, vested assets have increased 7% during the year to more than $56 billion, which again speaks to future earning power.

I want to make a few comments about revenue growth, pricing, and the general insurance market environment. Total Company P&C net premiums were up 15% in the quarter, with premiums up 21% in North America, and up 14% in overseas general. We benefited in the quarter from a combination of our recent acquisitions, growth in our A&H and personal lines businesses globally, and modestly improving exposure growth and better pricing in commercial P&C, particularly in a number of property and energy lines, and certain casualty classes. Our long-term and patient strategy to pursue product and geographic diversification, and invest for growth both organically and through acquisition is paying us back in terms of revenue growth and earnings.

This is clearly visible in the substantial contributions to our growth in net premiums written from areas such as crop insurance, which was up 400%; personal lines globally, which was up 42%; and international A&H, up 20%, as well as P&C in Asia and Latin America, which were up 27% and 13% respectively. Foreign exchange benefited our overseas business by 5% to 10% depending on the currency where the business is located. Our life business, also the beneficiary of recent investment, experienced double-digit revenue growth as well as growth in earnings. All of these businesses were major contributors to revenue and earnings in the quarter.

We also saw positive exposure growth as a result of gradually improving but sluggish economic growth in both the US and Europe. Payrolls, sales, and inventories are all growing, though anemically. This contributed to our revenue growth as well.

Lastly, we benefited from better pricing, both as a result of a modestly improving pricing environment, and our continued disciplined approach to underwriting portfolio management. We saw single- and double-digit price increases in certain classes of property business, such as single peril CAT exposed risks, and large account property requiring significant CAT capacity. We also saw double-digit price improvement in certain international marine and energy markets, both of which have sustained large losses this year, and are losing money for the industry.

While we are seeing price increases in certain classes, and this is an encouraging sign, it is not broad based. In general, we think the market is moving far more slowly than the fundamentals say it should be, not only in casualty related classes of business, but also many of those property classes where we are getting rate. For casualty, the good news is that the floor underpricing has firmed, and we are clearly bouncing along the bottom. In my judgment, I believe we will continue to benefit from the 3 drivers of growth for the balance of the year.

Given our second-quarter results and our momentum, it is frankly exceeding both the industry and our own plans, we are quite bullish about the second half of the year. Remembering, though, that we are in the risk business, and there is always the potential for unanticipated volatility. From where I sit today, we are quite confident about our prospects for double-digit revenue growth, and our ability to meet or exceed our earnings projections in the second half of the year.

Turning to North America more specifically. Growth primarily came from those P&C specialty lines I mentioned earlier, such as crop and high-net-worth personal lines, while retail commercial P&C was down about 10%, due mostly to underwriting discipline and the absence of any large one-off transactions this quarter compared to prior. New business was down by one-third, though renewal retention rates as measured by premium, were the highest they have been for some time, benefiting from both rate and exposure change.

Prices for our entire renewal book were up on average for the first time in a long time, about 1%. We saw the biggest price increases in the property areas I referenced earlier, ranging from 5% to 10%, but we also saw an improving trend in casualty pricing, again, a firming floor. We saw sequential price increases in our casualty book in June over May, and May over April.

In our international commercial P&C business, retail net written premiums were up 20%, while wholesale was down 1%, both benefited from favorable foreign exchange. Market conditions varied widely by region. Premiums were up double digit in Asia, Latin America, UK, Ireland, and even on the continent. In Australia, prices were up substantially for CAT-exposed lines as you would expect, but essentially flat in other property and casualty lines. A good example of an orderly but hardly rational market response to loss activity, with overall pricing impacted by an abundance of capacity chasing business.

For our international commercial P&C renewal book, rates were up 2% overall; with, for example, distressed property up 20% to 30%, large CAT-exposed multi-national up 10%, and our wholesale PowerBook up about 20%. Renewal retention rates held steady. John Keogh and Brian Dowd are with me here, and can provide further color on market conditions and pricing trends.

Our international A&H business continued its return to steady and improving growth, up 19% in the quarter, with a 10% benefit for foreign exchange. Asia-Pacific and Latin America both produced excellent double-digit performance.

Operating income for international A&H was also well ahead of prior year, up 30%. By the way, income for all of A&H was up on the order of 23%, as combined also contributed a double-digit increase in income, a really good performance. A&H's underwriting results across the board were simply great in the quarter. A product of focused underwriting and claims actions we have been taking over the past 2 years to improve our portfolio management.

Turning to reinsurance, while premiums is measured on an underwriting year basis shrank 2%, mostly due to underwriting discipline, global reproduced the combined ratio of 67.9% for the quarter, benefiting from relatively modest CAT losses and the reduction in their first quarter CAT estimates. Again, in the context of this year's extraordinary level of natural catastrophe activity, global REs combined ratio of 99.1% for the first 6 months is truly a testament to their risk management skills and conservative approach to underwriting.

In closing, we are optimistic about our growth prospects for the balance of the year. Ours is a winning strategy. We are growing our businesses, and following a strategic path of diversification where we see opportunity around the globe; while at the same time, maintaining tight underwriting discipline and trading market share when we can't make an underwriting profit. Our recent acquisitions are paying us revenue and earnings dividends right now, and will continue to do so into the future.

With that, I'll turn the call over to Phil, and then we'll be back to take your questions.

Think you, Evan. We had a very strong quarter. Cash and invested assets grew by almost $2.2 billion to over $56 billion. Our tangible book value per share increased 3%, and our operating cash flow was strong at over $1 billion.

Investment income was $569 million, up 10% over last year's quarter. This increase was stronger than we anticipated, as our book yield stabilized despite the lower interest rate environment due to a slower rate of turnover in our portfolio. This was especially true for our mortgage portfolio, where prepayment slowed significantly.

We also benefited from a positive impact from foreign exchange, and distributions from our private equity portfolio. We expect our current quarterly run rate for investment income to be in the range of $550 million to $560 million. It's subject to a variability in portfolio turnover rates, PE distributions, and FX. Current new money rates are 3.4% if we invest in a similar distribution to our existing portfolio. Our current book yield is 4.3%.

As you can see on page 21 of the financial supplement, we have provided additional disclosure on our European debt holdings. We have no exposure to the sovereign debt of troubled European countries, and our European corporate bond portfolio is highly rated. Our exposure to European banks is rated AA on average, and totals $1.2 billion or 2% of our investment portfolio. Of that total, over $700 million is rated AAA.

Our operating cash flow included about $300 million of cash collateral we received related to a large one-off transaction. Our net loss reserves were up 2% for the quarter, and are now up approximately $1 billion for the year. Our paid to incurred ratio was 83%. We had favorable prior period development of $146 million pre-tax, which is about flat with last year. Almost 0.5 of the development is short-tail and the casualty development is predominantly from years '06 and prior.

CAT losses were $101 million after-tax. Losses from second-quarter CAT events were $136 million, and we had favorable development of $35 million from first quarter events, principally the Japanese earthquake, and primarily in our reinsurance business. The expense ratio was 29.7%, down from 30.9% last year due primarily to a changing mix of business, especially crop. While our accident year combined ratio was up, in line with rate and trend, and again the impact of crop.

Our acquisition of the Hong Kong operations of New York Life closed on April 1, and has been consolidated in the quarter. The operating income of our recent acquisitions of Rain and Hail, the Hong Kong and Korean Life operations, and the Malaysia P&C operation is in line with our expectations.

In our 2011 guidance, discussed in the first quarter call, we said we expected operating income to range between $5.40 and $5.70 per share. Catastrophe losses included in that estimate were $693 million after-tax. Our operating income projections included in guidance, remember, were for current accident year results only, and by definition did not include any estimate for prior period reserve development in future quarters.

In light of the level of first-half catastrophe losses, prior period development, higher investment income, and what we project as a slight improvement to current accident year underwriting for the balance of the year, we are increasing our guidance for the full year. Operating income is now expected to range between $6 and $6.20 per share for the full year. This includes $544 million after-tax and catastrophe losses for the first half, plus $200 million after-tax and catastrophe losses for the balance of the year. The guidance also includes $187 million of after-tax favorable prior period development reflected in the first half. There is no prior period development included in our guidance for the second half.

As announced last year, ACE plans to repurchase, during the balance of the year, enough common shares to offset the dilution from the incentive-compensation-based increase in our share count.

With that, I'll turn the call back to Helen.

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

Thank you. (Operator Instructions) And we will first hear from Keith Walsh with Citi.

Good morning, everyone. First question for Brian or Evan just on crop. The large second quarter losses, any impact there to the crop business, any losses that you're seeing there?

Let me just take that and if you get deeper into it, I'm going to turn it over to Brian. The way we handle crop, our peg loss ratio is based on an average, a long-term average loss ratio for the business. And that's what we have pegged in our business to date.

The last few years, I might add, have run better than the long-term average. The weather events that we have seen to date have not caused any pressure -- have not caused us to increase our loss ratio on that long-term historic that we are pegging now.

We are mindful of weather conditions, and our estimate, when we look at our estimate for the balance of the year, as we sit today, we see a modest impact potentially to that loss ratio in the second half of the year and that has already been contemplated in our estimate.

Okay. And I think you have partially answer this, but for Phil, within the guidance that you're talking about of $6.00 to $6.20, I think at September of last year, you told us about $0.22 coming from Rain and Hail. Is that still on track to contribute that amount?

Yes. We are on track. We see that -- as I said in the commentary, we believe we're still on track with all the acquisitions.

Great. And then last one, on some of the calls we've been hearing some talk about loss cost trends starting to pick back up and just any commentary you would have around that would be helpful. Thanks.

Well, as you know, we're not -- as I've said to you many times, if you're in the PNC business, and particularly you're in the casualty business, it's not a business for optimists. And we haven't believed that the past is any indication of the future.

So, we've maintained conservative estimates in our accident year pegs. With that, I'm going to ask Sean Ringsted our Chief Actuary to answer your question about frequency and severity. But, we don't see anything of a material nature at this moment. Sean?

That's right. We don't see any material changes in claims frequency or severity. Perhaps frequency is up across the board a little, but it's moderated by increased exposures in the premium audits. Overall, frequency remains relatively benign.

Remember, you're going to see a little increase in frequency as you see economic conditions improve.

Thanks a lot.

You're welcome.

We'll take our next question from Jay Gelb with Barclay's Capital.

Thanks and good morning. Good morning. First question for Evan, can you talk about what your thoughts are on the sustainability of rate improvement in the US?

I understand that the rates typically follow the loss and the industry certainly had some large losses internationally and even in the US in Q2. But, if we don't have a significant hurricane season this summer, to what extent do you think the market can return to a bit more aggressive competition?

There's plenty of capital in the markets. And overall, balance sheet of the industry is not in bad shape. It's in reasonably decent shape. That's overall, it varies by company.

And my sense is if you don't have an active season then that will be a negative to the current trend we see in short tail pricing, of course. And with casualty, as I said, it's bouncing along the bottom. There's a firming floor.

And so you're seeing -- you're able to get some price increase, but you're hardly able to write new business, which speaks to the competitive market when business does come to market. So, its bouncing along there.

It's hardly a trend of a seriously firming market. But the first thing you have to do is find the floor as it starts to reverse direction and move up. But prices in casualty that the market is securing overall don't match trend. And so, it continues to erode -- current accident, you put pressure on current accident.

That makes sense. And then my follow-up question is on the growth outlook. It seems that in the second quarter, a big contributor to the growth was higher net retentions, particularly in the North American business and to a lesser extent in the overseas general business, that net to gross written premium. Is that due to a mix shift or what else is potentially driving that and will that also be the reason for faster net written premium growth in the back half?

Keep in mind, the biggest driver is crop. And it isn't because there was some change in the way the book is managed. We bought the company Rain and Hail, and they had a big net retention on crop. So, we were fronting the gross, we'd cede to the government and to Rain and Hail, and now Rain and Hail's share is consolidated into ACE.

That's what we explained to you during the time of the acquisition. So, that's why the net increases substantially faster than the gross. And by the way, that's also why Phil says on one hand the expense ratio is down because of crop -- is one big driver of that, but the other is crop runs a higher loss ratio than the average, and that has an impact on our current accident year loss ratio.

So, that's why we saw the North American underlying loss ratio go up 3 points year-over-year?

That's a good part of it. And then the balance of it is, is simply rate in trend in casualty. The math doesn't lie.

Makes sense. Thanks.

You got it.

Michael Nannizzi from Goldman Sachs.

Thank you. I just had one quick question if I could. Phil, on the short term financing. I thought that you guys had talked about paying that down over the next couple of quarters. I was just wondering, what is the rate you're paying on that and how does that compare to the investment yield your getting in the portfolio. And just one follow-up. Thanks.

Is a very low rate. The rate's about 50 basis points. It's a repurchase agreement. So, there is a fairly reasonable spread.

You say our book yield is 4.3%, so there's a reasonable spread between the borrowing. And we'll be making the decision of the balance of the year as to when and if we pay that off.

All right. So, that's still kind of to be determined. And then in terms of -- you talked a little about the loss ratio in the second quarter in North America in Rain and Hail. If we were to back out Rain and Hail, if we were just to look at the legacy book by itself, what would the change look like there, and can you just kind of talk about was it non-CAT weather or was anything else kind of at play in that change?

Well, so, the current accident year loss ratio for North America, as reported was 74, and it would have been about 72 if we removed the acquisition.

Great. Okay. Thank you very much.

You're welcome.

Your next question will come from Larry Greenberg from Langen McAllenney.

Hi, Evan. Not to look for splitting hair level of detail on pricing, but I think last quarter you kind of described things as a stabilizing but thought we'd bounce along the bottom for the next couple of years. Has anything changed from that view?

You'll recall, Larry, that -- and frankly, my view hasn't changed. What I did say last quarter was I distinguished between short tail and longer tail. I thought that the first quarter events and then the second quarter events will have an ameliorating impact on pricing in short tail business; and I also referenced, I believe, the energy business in the energy market and said that I thought that the losses there were such that you'd see along the CATs would be a catalyst to improved pricing. How much and how long remains to be seen.

I'm still -- I remain of that view. And in casualty, when I said we were touching on bottom and I see that firming and I see us getting some price.

But, I thought we were on the bottom there and that price would not equal trend for a period of time. I can't see it. I don't see the catalysts on the horizon.

But, there's plenty of external events and risk out there. And so, some of that happens then you might see it improve more quickly. Otherwise, I think this is where we are for a couple of years.

Great. Thanks. And one of your CEO brethren mentioned that they are seeing actually increased competition in excess workers comp these days. Are you seeing crazy things like that?

This is a relative of mine, you said? I'm only kidding. I'm going to ask Brian Dowd to answer that question. I don't think I see it, but he may.

We've seen along the margins some extra players, but one of the biggest players, if not the biggest by a wide margin has more or less withdrawn from that because of workers comp. So, we've probably seen a little bit less competition in our space for excess workers comp. We tend to play in the larger account, national space versus the smaller insurers. So, in the larger space we've seen less competition and access for workers comp for our space.

Great. Thank you.

Greg Locraft from Morgan Stanley Smith Barney has our last question.

Good morning and thanks. I just wanted to take your temperature, Evan, on the M&A landscape and consolidation is heating up a bit globally. Any thoughts on that front?

Well, my temperature is running 98.6, and I'm not running hot and I'm not running cool. And we're just rational. The trends to me have not changed. There's the micro industry pressure of a relentless soft market. And so, the drive for many who as they feel the pressure towards consolidation. And some of it will be intelligent in my judgment, and some of it will destroy value.

The more macro-oriented trends that you see in financial services broadly that also I believe drive insurance MNA on a global basis, those trends remain, whether it is regulatory pressures on those that have insurance companies and capital requirements, whether it's their own -- the results of their basic business and what you see is sluggish economic growth that also creates pressure. So, in my mind, you stay patient, you stay very fundamental. And that over time, there is plenty of opportunity.

Okay. Great. And then I may have missed it in the opening remarks, but did you split out organic growth in the 15% top line versus M&A?

No, we did not split it up. But, I think we gave you enough color around it to give you a sense and figure that out.

Okay. Okay, great. And the last one is on just your ROE. If I look at the ROE and I sort of normalize or go back to let's say the CAT levels or lows that you had expected back in January or February, you guys are running, if you do the guidance, at about a 10 or an 11. So, solid double digit certainly better than almost all your peers in a very challenging year.

But I'm wondering, how do we think about the ROE trajectory for ACE over time? Is 10 or 11 kind of the goal or is that more or less the trough given where we are at in the underwriting cycle?

You know our goal over a cycle is 15%. And that goal remains. And I think it's far more than aspirational, I think it's realistic.

And when I look at our underlying business, I think it is quite healthy. And I believe that the acquisitions we have made of late was a good use of capital because I think it was accretive to our overall ROE.

While certain underlying portfolios, particularly commercial PNC right now suffer the trough of ROE. And though combined ratios, that's our discipline to stay below 100.

So I believe overall, given our business mix, given where it's both geographic and by product, we're well positioned to capitalize on opportunities that will only help our ROE over time. Though, it's a long race, and you don't just measure it quarter by quarter or year-by-year.

Okay, great. Thanks and nice quarter.

You keep your eye on the fundamentals.

Thank you.

We'll next hear from Vinay Misquith of Evercore Partners.

Good morning. Two questions. The first is pricing and lost cost trends. I see you managed to get some good price increases this quarter. How should we be looking at margins for the future? Would that be flattish, given the small rate increases this quarter?

Vinay, I believe I've answered that already, which said that the price increases that we in the industry are achieving right now in long tail lines, which is where your question really sits, is price does not equal trend.

And trend, in our judgment and you can't predict the future, but if you're taking a reasonably conservative estimate of trend, then price is inadequate to equal trend. And you can go from there in the math about loss ratios. Your second question?

The second question was on the retentions. They have increased in the overseas channel segment. I was just wondering whether that's more sort of Accident and Health in which you keep more business net?

It is. It's a mix of business. It is not a fundamental change in risk capital.

Thank you.

Welcome.

We'll next hear from Jay Cohen with Bank of America Merrill Lynch.

Morning, Jay.

Thank you. Good morning. I think Phil mentioned that the operating cash flow was aided by, I think it was $300 million from a one-off transaction -- a large one-off transaction. And I'm wondering if that played a role in the premium comparison as well?

No, it did not. It was a surety contract with a relatively small amount of premium and the collateral that we collect is counted as operating cash flow.

Got it.

Collateral. Not premium or loss ratio impact.

Right. And the second question, in the overseas general business, it looks like the underlying accident year loss ratio was generally quite a good number relative to the past 6 or 7 quarters. I'm wondering if there is a business mix issue there, or is it some of the pricing in the short tail lines helping that number.

It's a combination. I'd say to you first of all, remember, quarter on quarter, you can have some volatility in short tail large losses. And we were comfortably within our -- within our loss ratio pegs and didn't have large loss volatility outside of it. Number 2, yes, mix of business is helping loss ratio, whether its Accident and Health, whether it is personal lines, whether its Asia, Latin America, it varies. But that's helping the loss ratio. It comes out to mix.

It's line by line. If you go line by line, you'll see the lines you'd expect where loss ratio is arising based on rate and trend. But then you sum it all up, and this is the averages.

Great. Thank you.

You're welcome.

We'll now hear from Matthew Heimermann with JPMorgan.

Hi, good morning, everyone. A couple of questions. First, Phil, on the NII, could you just quantify the FX in private equity?

There's really 3 components to the increase over the run rate that we told you last quarter. The turnover was important. The slower turnover in the portfolio. That was worth about $15 million. Private equity was worth about $15 million. And FX was call it $5 million.

That's helpful. And, Evan, just bigger picture, I mean, given the amount of regulatory and legislative scrutiny that some other silos and financials are facing today, is there anything that you're focused on either regulatorily or legislatively right now, or is the industry just kind of in a period where we might just avoid the spotlight for a while?

No. I'm very active and vocal and quite concerned about a few things. Number 1, international regulation and globally of insurance, particularly the International Association of Insurance Supervisors doing something called Comframe, where they're trying to wrestle, like BASEL III, a sort of a uniform global standard of regulation of insurance.

And they're looking at it in the vision of European Solvency II. And I think that is a mistake. The US system of regulation, put aside 50 states, which is how we administer it, but our fundamental system of regulation is different than Solvency II. The US -- our system is geared to protect policyholders. Policyholders only, and that there is minimum capital and management to protect that and meet the obligations.

Solvency II is fundamentally different. It's designed to protect policyholders, shareholders, bondholders, and employees. Keep a company from ever failing. There is the contrast of the 2 systems.

The US is 40% of the world insurance market. Every jurisdiction is informed by its culture and its history, and what works best for it. There is not one system for the world.

And I am very focused on getting US regulators and treasury together because of what Dodd-Frank creates in the role of treasury and insurance to show the world that there is another way. And it isn't simply one way. And that is very important because if they adopt one system, then I'll tell you what, ultimately that system -- we're going to have a hard time not implementing it here, and that would be a mistake. We'd turn insurance companies into utilities.

And if you don't have an ability to fail, you don't have an ability to succeed. So, you get me going on that one, as you can see, I feel strongly. And that is a big issue for this industry and we should be focused on it.

That's very helpful. Would that then dovetail kind of also just into the continued debate around global accounting standards in the sense that what the IASB is promoting is very much tied to Solvency II?

That's the other one that were very focused on. You all get it. Under FASB, there is an insurance accounting regime right now and it works well for both investors and for the industry. And under this notion to converge, internationally, there is no insurance accounting standard. They're creating one.

And why are we driven to accept that one? They ought to be accepting ours. And otherwise, we don't converge. I think it's a mistake and I think all investors ought to be a lot more vocal than they are about what they think of this -- of the system when you look at what IASB is potentially proposing here.

All right. Nice to hear somebody say FASB is a global standard because I think that's been lacking in the debate. Thanks for the answers.

You're welcome.

We'll now hear from Scott Frost from Bank of America Merrill Lynch. Scott, your line is open. Please go ahead, sir.

I think he got bored and left.

Can you hear me?

Okay, now I can hear you.

Okay, sorry about that. On the investment portfolio I had some questions. I backed into what looks like European sovereigns, AA or below of roughly $2 billion. You said that you have no exposure to troubled European countries. I was wondering which countries you're considering as troubled.

Number 2, it looks like about -- if I back out your non-US corporate portfolio, if I back out the disclosures on European and UK banks and corporates that you've listed as exposures, I come up with about $3 billion split roughly evenly between single-A or better or BBB or below. Could you give a break out on that in terms -- and that's all non-US corporates, how much are in European countries and how much are in --?

All right. All right, we got it. Tim and Phil, you want to dive into that.

I think it would be better to take that off line. I'll gather that.

We'll come back at you. But I think you're misinterpreting how you're looking at the data there. So, we'll help you with that. We'll give you a call.

Okay, thanks.

We'll now hear from Thomas Mitchell with Miller Tabak.

There's been some recent press about the potential for the naive capacity in Florida to come back and bite the taxpayers there. And it raises a somewhat larger question for me, which is -- I suppose it's not really numbers related, as more as a sense of a trend related.

In the US and then around the world, if you were to define the direction of naive capacity, growing, shrinking, growing faster than you'd like, shrinking almost as fast as you'd like; where do you think we are now and what do you think the trends are likely to be over the next year or 2?

First of all, I think -- let's just narrow this down. I think your talking about CAT reinsurance. Is that correct, Tom?

Primarily, yes. Yes. Because that would include the catastrophe bond market and other facilities.

I understand. And I think what you're referring to is naive capacity is -- let's call it opportunistic capital that is coming in to try to make the trade right now. Would that be about right?

Yes.

Okay. I think it's having a modest impact on the overall -- I think while capital has come in, I think it's a modest amount of capital. You know, sub $10 billion.

And do you think that it's growing?

And my sense of trend -- do I think it's growing? It always spikes post an event or a couple of events, but I don't see some freight train of capacity, and big momentum of it coming into the market. No.

Okay. Thank you very much.

You're welcome.

We will now hear from Ian Gutterman with Adage Capital.

Hi. Good morning, Evan. Following up on the organic growth question from earlier, I don't think you spoke too much to life. Can you talk about organic versus reported premium growth in the life insurance segment?

Yes. Our international life --

The acquisitions --

No, separate. He's saying our organic growth, so take away. So, international life had good double-digit growth in the quarter in terms of premium by itself. So, excluding acquisition -- let me break this down for you for a moment.

In the life segment, you have the life RE which is the VA, and you don't have revenue growth there, as you know. The international life is in there, and that grew double-digit organically without the acquisitions. And then you have combined, which is the life company in the US. You have combined A&H business in the life segment. And that did not grow.

Got it. Okay. And to follow up on the crop side, you mentioned the loss ratio been up a couple of points. What about the expense ratio? I assume that was down on crops coming in.

Yes. That's what Phil said in the commentary, that the drop in expense ratio was primarily due to the acquisitions in crop.

Okay. So, it seems like that's about a couple of points. So, net-net combined ratio of crop didn't really bias the combined ration overall, just the shift from loss to expense?

Loaded by about 0.7 of a point.

Got it, okay. And is there seasonality, if I'm trying to figure out how much crop influenced this quarter, isn't Q2 sort of a high quarter for crop, that it may not be as much of the benefit in the second half, is that correct?

Q3.

Q3 is the bigger one. Okay, got it. And moving on. So, I was trying to understand why goodwill went up in the quarter. If I'm guessing right, that was from New York Life, and I thought you bought that, if I recall, at a discount to book.

No, no. We bought it -- so the book value was irrelevant in that calculation. All the increase in goodwill was related to the acquisition of Hong Kong, which closed in the quarter. And the measure isn't relative to historical book value.

The measure is relative to the market value of the entity that you bought. So, it's our price relative to market value. You pay in excess of what's deemed to be the market. Then that turns into goodwill.

Remember when you buy it, when you're buying it, yes, below book. But then you do purchase accounting. The value on your opening balance sheet.

Got it. I'm with you. And Evan, just one more macro question. Let's take a worst-case that Europe destabilizes and that you -- or at least the euro dissolves or whatever, it's some kind of really bad macro scenario there. It sounds like the investment side isn't a big deal.

Are their other places we should be concerned about, maybe on the underwriting as political risk become an issue again? Is there someplace else that could be a concern and sort of what have you done proactively to try to limit that damage?

You really don't provide -- political risk exposure is fundamentally limited to developing markets. It's not developed to market. And isn't that the irony?

And you're seeing -- and all the fiscal problems that we're talking about are developed markets. So, there's not a political risk exposure.

We feel comfortable with our risk management and we gave you a lot of disclosure around it for our European invested assets, which I'll remind you backs European liabilities and currency. So, if the currency takes a big whack, yes, you take it on the asset side. But, you also take it on the liability side. And then our basic underwriting is of commercial business and commercial risks.

And, the world doesn't stop, though commerce can be impacted. And, so, I don't see -- I don't see in a narrow sense an insurance or ACE specific. But, what you do know is that if it's systemic, then the definition of systemic is everybody takes a whack, whether it's foreign exchange related or whether it is mark to market, as we have seen in volatility of financial markets. Those are generally transient, and we would expect them to be transient that we'd amortize our way back out of it because of the quality of our portfolio.

I was thinking -- I was trying to think tertiary effects on say, are there political risk contracts, maybe there for an African country. But, the currency denominated as euros and if something happens to the euro, something could happen to that contract even though -- is there any kind of currency convertibility deals you do, things like that?

Not that would be impacted that way, no. Because it's the currency of the African country. Their inability to where there is a -- where there's a block on the currency and you can't convert. So, it would be the local currency.

That's what I thought; I just wanted to make sure of that. Okay, great.

You got that right, and then remember, there's all kinds of waiting periods, usually 180 days around that and all kinds of workouts.

Great. All set. Thank you, guys.

You're welcome.

We'll now hear from Brian Meredith with UBS.

Good morning. Just a quick couple of numbers questions here. First, I'm wondering if you could actually give us the crop written and earned in the quarter; and then going forward, could you think about maybe giving us that number, given that it's becoming a pretty large part of your business and there is a definitely seasonality to that business?

Were not going to provide that number this quarter. We've given you a lot of information around it, and we'll take that question -- we'll honestly take that question under advisement, whether we start divulging it separately or not.

Great.

We don't do that in those signs. We run a very large D&O book, but we don't show you the excess casualty. It's where do you stop. We'll keep trying to -- we will keep providing color around it but whether we break it out specifically, will --

Understood. It's just the seasonality and how it affects the different quarters. That's why.

You're going to get it over a year, you know that. And I can tell you, I don't mind telling you, the second and third quarter are the biggest quarters. Fourth quarter is very little. And there you go.

Okay. And just quickly, Phil, tax rate seemed a little on the low side in the quarter. Anything unusual there or do you still kind of think this is going to be kind of a 17%, 19% tax rate going forward?

Yes, there's nothing unusual. Our tax rate will bounce around a bit because of where the losses are incurred, what jurisdiction, if we have cash in taxable jurisdictions versus not taxable. So it's just a function of that. And while were on taxes, let me just mention one other thing. We hear a fair amount about the taxes that offshore companies pay or don't pay.

And one thing you should no is that our tax rate in the US is about 29%. So, if you look at our business generated from our US operations, after all the reinsurance to outside offshore to affiliates, our tax rate is relatively high. It's 29%. So, I just thought I'd mention that while you gave me the window.

Great. And then last question, Evan, any thoughts on the M&A pipeline out there right now?

Mum's the word.

All right. Thank you.

You're welcome, Brian. I think -- I gave more color on it a few minutes ago and I don't think I really have more to add.

Great.

We'll take our last question today from Mark Dwelle with RBC Capital Markets.

Good morning. Just a clarification on a couple of numbers points. You'd commented about the $35 million of favorable development from the first quarter catastrophe events. Is that included within the $146 million of overall favorable development or is that not included in that total?

The total was $101 million after-tax. And it's netted in that $101 million.

You're asking about prior period development. The $146 million, I think, is the prior period development. Is that correct?

Yes. I was asking if the $35 million is in the $146 million. It's not in the one of $146 million?

It's netted in the CAT number.

It's netted into the CAT number. So, to clarify further, that $134 million of net CAT losses would have been $169 million pre-tax absent that improvement?

Yes. You'll see it scheduled in the financial supplement. But on a pre-tax basis, the total CAT losses were $133 million, $167 million from that is from the second quarter and $33 million benefit is from the first quarter. That's all pre-tax.

Understood. Okay. Thank you. Actually, that's all my questions. Thank you.

You're welcome.

Ladies and gentlemen, that is all the time we have for questions today. Ms. Wilson, I'll turn it back to you for closing or additional remarks.

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

Once again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.