丘博保險集團 (CB) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the ACE Limited fourth quarter 2011 earnings conference call. Today's call is being recorded. We'll take questions at the end of today's remarks. (Operator Instructions) For opening remarks and introductions I'd like to turn the conference to Helen Wilson, Investor Relations. Please go ahead, ma'am.

Thank you and welcome to the Ace Limited December 31, 2011 fourth quarter year-end earnings conference call. Our report today will contain forward-looking statements. These include statements relating to Company performance and guidance, recent corporate developments and acquisitions, ACE's business mix, economic outlook, and pricing 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 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'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. ACE had very good fourth quarter and full-year results. Particularly considering the environment, euro crisis, slow economic growth in developed markets, challenging insurance market conditions, and of course, the costliest catastrophe year on record for the industries.

After-tax operating income for the quarter was $663 million or $1.94 per share. Combined ratio for the quarter was 92.9% and this includes $155 million pretax catastrophe losses, the overwhelming majority of which came from the Thailand floods. The ex-CAT accident year combined ratio was 92, a very good current underwriting year result.

Net premiums in the quarter grew 6% and our operating ROE was nearly 12%. Growth came predominantly from A&H, crop, personal lines, and P&C commercial lines, particularly in Asia and Latin America. Insurance prices in the US continued to firm through the quarter and into January, particularly in classes where industry underwriting results are suffering the most. The balance of classes was flat to up modest single digits, with the exception of professional lines, where rates declined but at the slowest pace we've seen in a long time. I'll come back to market conditions later.

Earlier this month shareholders approved a 34% increase in the common stock dividend. Raising the dividend this amount was in our judgment a good use of capital, while signaling our confidence in the Company's strong balance sheet and earnings generation power. This did not compromise or change our view of strategy in any way.

We made a small acquisition at the end of December, Rio Guayas, the fourth largest non-life insurer in Ecuador. The addition will complement our existing business in that country in terms of geographic presence, product and distribution. By the way, we also closed on Penn Millers in the fourth quarter, a quarter earlier than we had estimated.

Let me talk about the full year and put ACE's performance for the year in perspective. Full-year net operating income was nearly $2.4 billion, down 11% from 2010. The composition of our operating income was quite good, with about one-third coming from underwriting income and two-thirds from investment income. Our results included almost $500 million more in pretax catastrophe losses or twice as much as we experienced in 2010.

Excluding the impact of CATs from both years, operating income was actually up 5% over prior year. Both years included roughly the same amount of prior period reserve development, so that underlying growth in income came from current accident year results, predominantly from the acquisitions we made, as well as our A&H business and improved P&C portfolio management in the US.

In 2011 the expense ratio declined over 2 points year-over-year and we finished with a P&C combined ratio of 94.6%, a very good result when compared to the industry, which ran well in excess of 100% in the worst CAT year in history globally for the industry. Per-share book value grew 6% for the year bringing three-year growth to almost 19% and five-year growth to over 11.5%.

We concluded the year with a very strong capital position. Total capital at December 31 stands at $29.4 billion and shareholder equity at $24.5 billion, both up about $1.5 billion for the year. Our operating ROE for the year was almost 11%, a good result given the CAT losses we incurred.

Turning to the growth, net premiums grew 12% during the year. You'll recall back in the first quarter we said full year premium growth would range between upper single digit to low double digit. Revenue in earnings during the year benefited from three acquisitions at the end of 2010, the largest being rain and hail. We had a good year in agriculture, including crop insurance, and this contributed $1.4 billion in premium revenue growth and produced a combined ratio of 91%.

Our renewable commercial and specialty P&C insurance businesses globally declined 3%. We experienced double-digit growth in Latin America and Asia, while the US and Europe declined modestly. Our A&H insurance business grew 8% globally, with international up over 16%, our US brokerage generated A&H business up 9% and combined down 4%. A&H earnings overall were up 12% for the year.

Our personal lines business globally was up 17% for the year. While full-year net premiums for our global RE business were down about 9%, the business produced a combined ratio of 85.6, reflecting good underwriting discipline and risk selection, and again, particularly in the highest CAT year in industry history. Given our long-term strategy to pursue product and geographic diversification and invest for growth globally, you can see that our Company is much better balanced today between those areas exposed to the P&C pricing cycle and areas that are not. In fact I'd estimate that over 40% of our business as measured by premium is not exposed to the general P&C pricing cycle.

Our commercial P&C business also benefited during the year from very good portfolio management, the activities of which we have described on previous calls. We continue to refine and focus our data-driven portfolio management process in each class of business we write, domestic and international. And as I said earlier, this contributed to an improved underlying current accident year result. In the latter part of the year, our commercial P&C business also began to benefit from a firming market, particularly in the US. And I'll elaborate on that and make a few comments about the pricing environment globally.

For our North America portfolio, we had our best quarter yet in terms of pricing with overall rates up about 1.6% versus 0.5% in the third quarter. As I said earlier, rates continued to steadily firm as the quarter went along. December was the strongest month and rates were up over 4%.

In reporting rate increases, we separate out exposure growth, which was up over 3.5% in the quarter. Again, the theme is a general firming across most classes of property and casualty, with greater price increases, i.e. high single to double-digit, occurring in classes where industry combined ratios are under significant stress, as well as on trades where larger amounts of capacity are required. For the balance of most classes, rates have flattened or are rising modest single digit. By the way, E&F is one of those areas of emerging and more acute stress for the industry and here too we are beginning to see more rapid firming.

Our premium renewal retention rates in our US retail business were steady in the quarter at [81%]. And again, looking ahead, rates in North America continued to firm going into January 1. Regarding our international commercial P&C, for CAT-exposed properties and areas that have suffered significant losses, such as energy and power generation, prices are trending up and in some regions significantly. And this trend of tightening continued into January 1. The balance of the market, however, internationally remained soft, with rates flat to down modestly.

In our global reinsurance operation, we saw price increases in US property CAT ranging from about 7.5% to 10%, while international property CAT prices were up 0% to 5%, excluding loss impacted lines or regions, which were up more substantially. Price increases were not enough yet for us to consider increasing our overall CAT related exposure. Rates for all other reinsurance related business lines were essentially flat. My colleagues and I can provide further color on market conditions and pricing trends if you like.

In summary, I believe ACE's financial results for the quarter and more importantly for the full year were very good and distinguished our Company. We performed well, as measured by operating income, book value, premium revenue growth and ROE. We finished [the year] more diversified in terms of product and geography, increasing our presence in areas that present opportunities for future growth, while achieving a better balance between cyclical and non-cyclical business. And our balance sheet is simply in excellent shape. We are exceptionally well positioned for the future and optimistic about our opportunities going into '12. With that, I'll turn the call over to Phil and then we'll come back to take your questions.

Thanks, Evan. We ended the year with a very strong balance sheet and capital position. Tangible book value per share grew 7% for the year and 4% in the quarter. Adjusting for the goodwill associated with acquisitions, tangible book value per share grew 8% for the year. Net realized and unrealized gains after-tax for the quarter were $276 million. Our cash and invested assets grew this year by $4 billion to over $56 billion.

Operating cash flow for the year was $3.5 billion, for the fourth quarter cash flow of $470 million was somewhat lower than our recent quarterly run rate due primarily to net crop payments, higher CAT loss payments and the repayment of cash collateral we received on a large one-off transaction we discussed in the second quarter. These items reduced our cash flow by about $350 million.

The crop business had a seasonality to cash flow which generally speaking was positive in the second and third quarters and negative in the fourth. Investment income was $565 million for the quarter, up 6%, and included about $20 million of income from private equity investments. Current new money rates are 3.1% if we invested in a similar distribution to our existing portfolio and our current book yield is 4.2%. We estimate the current quarterly investment income run rate is closer to $545 million, which is subject to variability and portfolio turnover rates, private equity distributions, and FX.

Our investment portfolio continues to be predominantly invested in publicly traded investment grade fixed income securities and is well diversified across geographies, sectors and issuers. The duration of the portfolio is 3.7 years.

As of Monday night, the quarter to date mark on the portfolio was a positive $450 million. We have no exposure to sovereign debt of distressed European countries and our exposure to euro zone banks totals less than $1 billion or 2% of the portfolio. The overall credit quality of our euro zone banks investments is AA, with over $600 million rated AAA.

Our net loss reserves were up 2% for the year, while for the quarter they were down $550 million due primarily to net crop payments and the impact of foreign exchange. Our paid to incurred ratio was 93% for the year and 117% for the fourth quarter. Adjusting for CAT activity in crop, our fourth quarter paid to incurred ratio was 93%. Cat losses were about $140 million after-tax, of which the Thailand floods were $106 million. The floods were 100% related to our insurance business. We also incurred $20 million in development, principally related to the second quarter New Zealand earthquake.

During the quarter we had positive prior period development of about $105 billion after tax, comprising about $155 million from ongoing operations split about evenly between short and long tail lines. This was offset by a charge of about $50 million, also after-tax, related to our annual reserve review of runoff operations including Brandywine. The expense ratio was 29.8%, down from 32.1% last year, due primarily to a changing mix of business, especially crop, while our accident year loss ratio excluding CAT losses was up all due to the impact of crop.

We also had three legal settlements in the quarter. We settled enforcement proceedings concerning combined insurance in the UK and separately Ireland. And we settled a lawsuit brought by the Ohio Attorney General arising out of the antitrust investigations started in 2004. The total amount of these settlements was $13 million.

Our press release issued last night included our guidance for 2012. Our range is $6.65 to $7.05 in after-tax operating income per share for the 2012 accident year. This includes CAT losses of about $385 million after-tax, which is up from last year's CAT loss guidance of $300 million, primarily due to model changes.

Our $6.85 midpoint of guidance compares to our actual 2011 accident year result of $5.68. Guidance is for the current accident year only and includes no assumption for prior period development, which is simply unknowable. The FASB issued new guidance related to DAC. We'll adopt this new guidance retrospectively effective January 1, 2012. The change will reduce our book value by about $185 million and will be immaterial to our income. With that, I'll turn the call back over to Helen.

Thank you, Phil, and now we'll be happy to take your questions.

(Operator Instructions) Keith Walsh, Citigroup.

First thing, just getting back to the guidance. A year ago you give guidance with some modest core deterioration and this year you've got some core improvement, apples to apples. Can you give me some color what's driving this? I assume the bulk of the accretion from the crop and life deals is already in the 2011 numbers. Is this just pure P&C core improvement?

No. It's a number of things and I'm not going to break down pieces to you. We do budgets that are quite granular from the ground up, every single one of our businesses every year, and it is that ground-up analysis that ultimately leads to our guidance and it varies by business.

But it's a combination of some growth that we expect from our various businesses around the world, A&H, Latin America, Asia, certain P&C lines in North America, a little bit in Europe, in Asia and Latin America, our personal lines business growth. It includes improved underwriting margins in certain of our businesses. Not because of the price increases that we've been seeing in the latter part of the year, we're not speculating on a hardening market in the future. But we've had improved portfolio management that we have talked about.

There are lines of business that we took the pain to get out of, such as we got out almost entirely out of risk transfer Workers Comp, and other lines. And in every line of business we have focused very much within the portfolios on the classes within each line where rates are adequate and there we might see opportunity for growth and where pricing where terms are inadequate and there we have been shrinking that business and overall, that contributes to better margins in some of our classes of business. So it's a combination of growth from different areas and coupled with portfolio management.

And then just to follow-up on the accident and health business, it really seemed to find its footing this year, last couple quarters specifically. Can you drill into that? Is that more economic stabilization? And is there more runway here specifically with the combined business in the US? Thanks.

The accident and health growth has predominantly been coming from our international retail accident and health business. It's been both retail travel, it's been direct marketing, it's been group business. We are very deep and have a very broad, very large business in that area, with thousands of employees writing millions of policies. I remember I've said it before, we get that growth predominantly $150 a customer at a time. And the substantial growth is coming from Asia and Latin America, where economic growth as you know did rebound and has continued to provide substantial growth opportunities as that middle class grows. And we think that that will continue.

We also continue to remake ourselves and improve ourselves in our marketing capabilities, in our product delivery, in our underwriting and claims to both get top line and improved margin. It's a business we know well, we have deep knowledge and we focus a lot on.

On the other side of the coin, you have the economic headwinds in Europe and in the United States, where employment is not coming down, where it's the middle-class and lower middle-class that are suffering tremendously and that has -- that along with the regulatory issues in the UK and Ireland have impacted the combined business. And we continue to work on improving our distribution capability in that area, both in terms of face-to-face agent sales in a door-to-door manner, as well as through work site marketing, and we are confident that we will over time bring that business from what is a modest decline in the top line, but a very good and consistent margin in the business. Underwriting margins have not deteriorated. If anything, they've improved some.

But we think that we can return that business, we're still confident, over time to growth. But right now, that's actually weighing the -- and has been weighing the other way on growth.

Thanks a lot, Evan.

Amit Kumar, Macquarie.

Just going back to the comment on global reinsurance, you said price increases were not enough. Can you expand on that as to what level of rate increases would be appropriate?

I'm not going to answer it directly that way, but what I'll say to you is look, a couple of things. The models, you know there is been change of models by some of the modeling agencies and we don't blindly adopt anything, but we study and we use a blend of different models. And those, after we put our own judgments on them, and that produces a product that at the end of the day tells us what the ROEs those models will generate at a risk adjusted return on the capital we allocate at a certain set of rates that the market charges. And our hurdle rate for CAT business is consistent. And when we see pricing, given that -- given both the risk environment and given the model changes, when we see pricing that meets or exceeds those hurdles that we expect to achieve, then we will be willing to allocate modestly more capital towards the business and increase our writings. We have yet to be tempted in that direction.

I guess the only other question I have is on capital. There have been recent news reports regarding European banks looking to sell their non-life units focusing on Asia and Latin American markets. Can you sort of broadly talk about your acquisition pipeline and what sort of expansion opportunities you see for aid in those markets?

ACE is well-positioned to continue to expand in those markets, whether we make another acquisition in those regions of the world, Asia and Latin America, or we don't. We feel very good about our current capabilities and our strategy, more importantly our strategy to continue to improve our capabilities and take advantage of what we've got. So we feel pretty good about that and as we tell you, we've had some continued double-digit growth in those regions.

I've talked about the theme before of financial institutions broadly that in the current stressed environment and the regulatory environment the impetus for them to divest of non-core assets in those institutions, particularly, which would interest us, insurance related. I spoke about that last quarter and that trend and that environment has not changed since then. So we continue to be vigilant and optimistic regarding potential opportunities in that regard in the future. What, where, when, who knows.

Got it. Thanks for your answers.

Mike Zaremski, Credit Suisse.

First I was curious on your outlook for crop insurance in 2012 and I'm curious if there is a pricing cycle we should be thinking about for agriculture or is that less of a dynamic for that line of business?

I'm going to ask Brian Dowd, resident farmer, to speak about that outlook a little bit.

As I look at the 2012 crop year, probably three factors come into play. First, commodity prices, winter wheat commodity price up 21% over the base price from 2011. That helped our premium here in the fourth quarter and it will likely help our premium again in the first quarter.

Second on commodity prices, I look at the two main spring crops, corn and soybeans. They're currently 5% and 11% below the 2011 base prices respectively. If they remain at that level, clearly that will affect both our second and third quarter production.

And the last issue is third is the risk management agency, which administers the crop program, they announced a change in the actuarial methodology for both pricing corn and soybean. So we're currently rerunning all of our models to see how the rate changes will affect our fund designations, the state mixes we use and our distribution strategies to minimize the impact of the rate change. So you don't see the traditional competition in rate, but you have seen a change in rate through the government agency.

Can you quantify the change in rate that they announced?

Not yet, because you have to run it literally state-by-state, territory by territory and we're rerunning all those models as we speak.

We have a number of tools available to us and we're not concerned about the '12 year.

And lastly, Evan, I believe last quarter you mentioned that new business pricing and renewal business pricing were tracking close to each other. We haven't got that sense from other insurers results this quarter. Is that still the case? And you can also comment on retention rates in new business volumes. Thanks.

I did comment on retention rates already. I said that renewal rate 81%, which was steady. New business relativities, so our new business versus our renewal business, they're tracking very, very close to each other in the high 90%s, like 97%, 98%. All my colleagues here are nodding their heads because I'm remembering, I know that statistic. They're very, very close.

Thank you.

Greg Locraft, Morgan Stanley.

Congrats on the double-digit ROE in a tough year. We sort of see your war chest building, so to speak, on the balance sheet. I think we now estimate $7 billion of excess capital, and admittedly that's our number not your number, but it's earning you next to nothing on the balance sheet and if you were to deploy it at a double-digit ROE, which you guys have consistently done, it's probably 200 basis points extra ROE that you could go out and get.

And so, with the world improving organically ahead of you, earlier you discussed some of the European assets that might come up or Asian assets. I'm sort of wondering what's holding you back, because it feels like we're playing for a 10 ROE based on your guidance in '12 and that's not bad given where the stock is at valuation-wise, but I'm sort of wondering how we're going to get it higher. Other than the dividend bump in the quarter, which was excellent, I just can't get my model to move much higher unless you guys pull the trigger. So any kind of thoughts on the math or what I'm throwing at you?

Greg, I love it. First of all, I wanted to tell you, pal, $7 billion from your lips to God's ears. Number one. Number two, I would love to make your model better, but it just doesn't, the world doesn't work in terms of a model. And you don't just say, I've got money, let me go out and deploy it. If you do that, what will you do? You'll buy big and ugly. You'll be sorry what you did. Whatever you do you have to live with for a long time. It doesn't move in a straight-line. You've got to be patient and things happen generally therefore in a lumpier way.

And that patience, what are you looking for? You're looking for quality. You are looking for something that if you're going to buy something, again, you're going to live with it forever. And you've got to wake up the next day and you've got to manage it. So it's quality that is going to make your Company better and it's not size for the sake of size. It is complementing and furthering your strategy that you already have and know, if you're a good Company. And we like to think we are. And we have a good sense of our long-term strategy, we're pursuing it organically. We're builders first.

And when an acquisition comes along that complements that and is the right kind of quality and, by the way, is at a price that will be accretive to shareholders and accretive to our hurdles or in-line with our hurdle rates, because, Christ, it doesn't take a lot to be accretive when you're in 3% money land. So that's a fool's game and we won't do that. But there's got to be something that over the cycle behaves like the balance of our businesses, at least. So that's how we think about it and that's the lift. I wish it was as simple as, you've got some money and, boy, let's just this week look around and there you go. Sorry, pal, I can't just make your model better right now, but double-digit is pretty darn good.

Okay. Good. Thank you.

And surplus capital this year scrubbed about 1.7 points off the ROE. And I think that's a -- I and my colleagues and our board think that's a price worth paying for a patient growth company.

And then on an entirely different topic, in the quarter there was some research written around the VA block and sort of tail risk in that. I sort of figure in this form if you guys could address the tail risk emanating from the VA block and how you think about it at your level?

I'm going to turn it over to Phil, who I think will answer that question and he is waiting for somebody to ask him the question of why wasn't there a huge gain in mark this quarter, so somebody ask it. He may just answer it now for you.

Let's just talk about the quarter for a second. The variable annuity business generated about $45 million of operating income and we had an additional $4 million of realized gains net of the hedges and including FX. You will see in our disclosure it showed a loss of about [$10 million], but that did not include the FX benefit that we got.

The gain was in line with what our expectations were and what we have as disclosed sensitivity. What really happened is the fair value improved by about $200 million, $210 million because of rising equity values, global equity values. I think some focused on US increases, which the US market increased about 11% in the quarter, but international markets increased at a much lower rate, so the average was about 8%.

So we had $200 million benefit there, that was offset by a loss on the hedge of $150 million. That was a little higher than normal in relation to our improvement in fair value from the equities in general, because the hedge is S&P related and, as I said, the US markets improved better than international markets. We also were negatively impacted by decreases in interest rates. Interest rates were down in the neighborhood of 5 to 7 basis points and there's leverage in that. And we also had decreases in our own credit spread.

You've got to remember that the accounting rules make us increase the fair value of our VA liability when our own credit spreads improve. So the net of all that produced our $4 million gain. I think when we think about tail risk, we think of this business as a CAT business and our view is that a CAT would be a very long term low interest-rate environment and a very long term low equity environment.

We give you -- you have published that sheet that shows you if interest rates went down 50 basis points or 100 basis points if market adjusted down what the impact, the mark, could be to us, so you can calculate that pretty easily.

Okay, great. Thanks, guys.

Josh Shanker, Deutsche Bank.

Talking about pricing trends, can you also give us some info on loss trends please?

Sure. Loss trends in what area? Do you want just generally or do you want (multiple speakers)?

Generally, as much as you can give me. How about the lines that are being driven, have strong pricing versus those that are more stable?

Josh, it's not so much that the loss trends are different among lines that are more stable within the casualty area versus those that are suffering more. Because that's more pricing and risk selection driven than it is so much about loss trends. But loss trends generally in the casualty lines we are still looking at the 5% to 6% range in the primary and the 9% to 11% range depending on where you're playing and what line of business in the excess. And that's pretty true in the United States and that's fairly true in the UK and the continent as well.

And --

We see a slight uptick, as others have noted and as you can see, in frequency. And severity has continued -- in most areas you've seen that severity continues to go up and medical inflation and court award is really what drives that. Now, we're not a big risk transfer. We're comp writers, so we write next to nothing. All the noise around that is hardly impacting ACE. We're not really interested in business at 120 combined.

Can you talk about exiting that business a little bit? It's highly regulated, so when you guys got out of it did you reinsure the business going forward or what was that process?

It wasn't highly regulated to get out of it. That was not an issue. It's highly regulated in terms of the form you charge, in terms of the protocol to pay claims, in terms of the rates you charge and the tariffs you use, but renewing or non-renewing the business is not -- it's not like you're thinking about maybe homeowners insurance or a line like that.

And in terms of -- you have no exposure going forward at that point? Virtually none, how about that?

As I've said, we have very little in the risk transfer comp. We write a reasonable amount, modest amount of excess Workers Comp tied to our risk management business. We have for years and years. And actually, the pricing in that line has been -- was pretty good in the fourth quarter, rates up about 8% in the quarter, up about 9% in December.

Well, thank you, I appreciate you taking my questions.

You're welcome.

Michael Nannizzi, Goldman Sachs.

Trying to reconcile a couple numbers. I think you said that in North America prices were up about 1.6% in the fourth quarter, exposures up 3.5% and retention was steady. But then excluding AG, GAAP premiums were up just 1% in North America? So was it a new business phenomenon there, a mix change or is there something else that reconciles those trends? And then just one follow-up? Thanks.

You'll recall that last year in the fourth quarter we described something called NY3, which was done with New York State and that was a settlement that it wasn't ACE specific, other companies the same thing. And it was Workers Comp related and we had a benefit last year from that one transaction in that settlement that was about -- that contributed about $75 million to premium. And if we adjusted for that, our growth was in the 6% range in the fourth quarter in North America, ex-crop.

Now, the only thing I caution about that 6% is don't -- we're not necessarily imagining, we're in fact neutral of whether that is a trend going forward or not. In a sense I hesitate to tell you the 6% because I don't want to create any expectations, because we certainly don't have them in our own minds. We're not willing to trade underwriting discipline for market share and we'd rather have a slow top line and a better margin.

And I guess you talked about the diversification, the diversified profile of your book of business and leverage cycle, sensitive areas are less than 40% of your book. If you do see pricing improve at some point or you see an opportunity, how big are you willing -- would you be willing to let that go? Is there a governor there in your own mind that you want to keep it below a certain level, kind of like you've talked about with property CAT? Just to get some understanding there, I appreciate it, thanks.

There is no limit. We will be voracious.

Great. Thank you.

Paul Newsome, Sandler O'Neill Asset Management.

I wanted to follow-up on the modest asbestos charge. If I recall, there wasn't really a lot of capital left in the Brandywine subsidiary itself. Are we getting close to the point where there is essentially zero capital in that unit?

No. It's capitalize in a fine way.

You have room left in the cover.

It all went through the cover and not through the actual capital?

That's correct.

Okay. Thank you.

Thomas Mitchell, Miller Tabak.

I'm just wondering if you can give us any background on how the insurance markets have responded to this somewhat absurd shipping accident that took place off the coast of Italy and whether or not that's affected haul rates or liability rates and whether you guys are major, minor participants in those markets?

I'm going to ask John Keogh to answer that question.

Sure, Tom. First answer is yes. We're a minor participant in those markets and, frankly, a lesser participant today than we were three or four years ago and that's simply a reflection of pricing in that market over the last few years. We've been walking away from a lot of business. To your other question, are we --.

Has there been an impact on rates, either haul or liability, as a result --.

He's going to answer that question if you just --

Yes, I was just about to answer that, Tom. The answer is simply is no.

So, no impact at all.

Don't expect that that particular loss will drive a change of behavior in that market.

Okay. Great. Thank you very much.

Vinay Misquith, Evercore Partners.

Two questions. The first is on Europe. We've had troubles in Europe and Europe was likely in a recession in the fourth quarter. How do you see your premiums trending this year versus last year and is it more of an impact on the P&C business or the accident in 10 held business?

Vinay, our European writings have been relatively basically flat. We don't see much change to that as we go forward. And it is not -- it's both P&C and A&H.

The second question is on flood losses. Those losses for ACE appear to be low versus peers and just wondering what are the factors in that since you guys are global writers of property business?

Well, I can't speak to others. We don't manage their underwriting and I don't want to speculate about it, but we take risk and we're getting paid for it, when we understand it, and we are conservative about how we approach it in property. So we are conservative about CBI and thoughtful about how we think about it and about BI. We're mindful of concentrations of risks, but you get paid for the concentration and not being overexposed in any one area. And as I say, start with market pricing is important to us. We've been willing to trade exposure and growth when we don't like it. And I think that just is -- comes out ultimately in the wash and reflects itself when you're looking at losses.

Okay. That's great. Thanks for your answers.

You're welcome.

Brian Meredith, UBS.

Two questions here. First, quick one here. Phil, loss ratio in the life insurance business kind of popped year over year. Anything specific that caused that to happen?

We did have some limited amount of prior period development in the quarter in the life book.

And then, Evan, just quickly given your comments on loss trend and given your comments on pricing, it doesn't appear that pricing right now has been running in excess of loss trend for you all. Is that true or am I misreading that?

It's very early days. And the way we think about it, the loss trends that we're using today looking forward to our business, rate increases in most classes that we are achieving right now are not in excess of loss trends. Now, there are some classes that are highly stressed, where industry combined ratios are running significantly higher than ours are. And we've talked about for years how we shrink businesses and we shrink businesses to run a better margin. And so in some of those classes that are highly stressed, rate increases are in fact in excess of loss cost trends. So margins are improving.

But are they improving to a point where it makes it interesting? Getting 8% when you're -- on a line that might be running 120, well, it's better than it was. It's hardly overly exciting yet. Though other underwriters, many cases when they're running that high, they'll throw out good and bad. And that 8%, if you're selecting carefully, that 8% might be above loss cost trend and an improvement and bring it into our sites where we could write it at a reasonable price. So, I'm giving you a little bit of a messy answer, because it's not as straightforward as you might want it to be and fitting into one neat box. Does that make sense to you?

Yes, that makes sense. One other just quick follow-up. Given you've got such a big risk management business, are you seeing any of your large accounts trying to move more towards that rather than accept price increases or is that not happening?

It's not fundamentally happening. If anything, we've had better new business writings in our risk management business in the last quarter. It was a very good quarter for our risk management business relatively. We actually did achieve price increases there and in the quarter on average and in the month of December was the best of the quarter and that trend continued in January. So we were -- that's the first time we've seen that in a number of years in the risk management business.

Thank you.

Matthew Heimermann, JPMorgan Chase & Co.

Couple questions. First maybe for Phil. One of the things I've been struggling with is thinking about the tax rate, because over the last five years there's been a marked improvement in that rate relative to the past and some of that was expected, but I'm just wondering is what we've seen the last maybe three or four years more indicative of what we should expect going forward? And I just ask the question because I think relative to how you've talked about in the past where it's run the last five years might be a little bit better?

I think it depends -- I don't think, it depends on how the profit emerges in a particular quarter. Prior period development if it occurs in taxable jurisdictions versus non-taxable jurisdictions, same thing with CATs, where they emerge is important. And so, you're right, for the last (inaudible) quarters the tax rate has been low. I'd said pre-CAT and pre-PPD I'd use a run rate in the neighborhood of 18% to 20%, but it's going to vary just based on where we have the gains or losses.

And then, I guess, the other question I'd have is just you mentioned the dividend, which on the margin, I guess, maybe helps keep the excess capital from growing all that much, but I guess, could you just talk to maybe the quality of the opportunities you're seeing in the pipeline, because you've talked pretty explicitly in the past about the pipeline having gotten more robust, but I'd just be curious in terms of the quality of the stuff you're seeing.

Well, I've given you -- the quality hasn't changed is the bottom line of it. I've given you some data points in the past to say how many deals we look at in a given year and you know for yourself how often we pull the trigger. So it's a very small percentage. And there has not been any sea change that I've noticed in that. We kiss an awful lot of frogs and quickly, we don't dwell on it. And we're a minor -- a very minor percentage to us meet our criteria and I'm not seeing a sea change in that right now.

And then just --.

It only takes one.

I guess can you just elaborate lastly on your comment about seeing acute stress in the E&S. I wasn't sure if that meant you were seeing margin pressure or competitors, if you -- just a little bit more color there would be great.

Look, we had a casualty book of business in E&S, as an example, that was well over $400 million that we took down $50 million or $70 million over the last few years and that's because of all the dumb underwriting we saw out there. And we know that the economics work the same for the other guy as they do for us and E&S casualty is a stressed line. And there we're seeing all of a sudden in the quarter more robust and very surprise -- it was surprising to us, more robust pricing increases and better opportunity at a little better price to write more business.

We saw the same thing -- of course, we're seeing it in property, but we saw it in inland marine, which is construction related. And we also saw it in the professional lines business we write in the E&S area. So, it's actually across-the-board where we're beginning to see more robust pricing. Now, I'm hardly going to call it hard market pricing. Not at all. But when you're seeing rates go up in the 4% range in those casualty areas and you're seeing inland marine and property ticking up at the 6% to 10%, that's better than it was.

Okay. Thanks so much.

Josh Stirling, Sanford Bernstein.

First, just a numbers question, I think, which is it looks like you had sequential North American casualty growth in the quarter. Looks greater than last year and some peers. I'm wondering if you could talk about if that's a numbers issue, bad comps, seasonality or whether you've actually started growing in that business -- in some of these businesses?

No, we -- and I think, John Lupica, I think, wants to maybe start out with an answer on that, but no, I don't think you are seeing it right.

I'm not certain what you are looking at, Josh, in the numbers that we have. We have the casualty business in aggregate in Ace actually going down quarter on quarter.

We had it down 4% on the quarter and 10% on the year down.

I apologize. If you look at your North American casualty business, I think you were at one point, nearly $1.4 billion in the fourth quarter versus about closer to $1.3 billion in the second.

You can't see our North America. You can't see our North America --.

Oh, pardon me, that's right. So, just the casualty quarter on quarter as opposed to year on year. Obviously, we are all in the business of looking for inflection points.

But that's a global number, not North America.

And quarter on quarter you can look at page 4 of the supplement and quarter on quarter casualty is down 4% and for the year, year on year, it's down 10%.

I'm sorry. When you and I say, I don't mean to get hung up on semantics, when I'm saying quarter on quarter I mean sequential like-linked quarters as opposed to the year over year for the quarter.

Yes. We're not -- we don't look at sequential. It's all so seasonal.

Yes. Okay -- .

We don't even pay attention to that ourselves, because the cohort of business from one quarter to the next quarter is so different.

Right. Okay. So the more, probably the more important question, I take your point that favorable development as unknowable, but obviously, we all have to estimate it going forward and it looks like you guys had more meaningful, favorable flow development, sort of ex-asbestos in North America in the quarter. Given that some other companies seem to be going the other way, I'm wondering if you can give us color on some of the underlying frequency and severity trends you're seeing and walk us through the puts and takes by lines of business and sort of older versus more recent accident years so we can try to get a handle on how this plays out going forward?

No. We've given you -- first of all, we disclose loss triangles that we put out once a year and there's plenty of data, therefore, to judge movement in accident years, movement among lines of business. We give that to you in our 10-Qs. You get more of it in our 10Ks, but the loss triangles that came out in September for those who are following them by the year, you're able to make your own judgments on the strength of our loss reserves, as many analysts have done, and overlay your own judgment as to what you think are the strength of those reserves. We're not. And you can do it by line of business.

So, if you like, we have guys who will be happy to provide you a copy of those loss triangles studies that we've put out and we can provide you copies of what others have done as work that has been published out there and we can help you with some of the worksheets to understand how they read, if you like. But the material's out there for you.

Josh, and we also will publish in the Q details about this quarter's prior period development, where it came from, what years, why it occurred, so you'll be able to see it then.

Okay, great. We look at the Q, thanks so much.

Jay Gelb, Barclays Capital.

I wanted to follow-up on the issue of excess capital. Phil, I think you said, or maybe it was Evan, that the excess capital held at the Company was a drag of around 1.7 points on return on equity in 2011. And if I just look at page 21 in the supplement relative to around $22 billion in average equity as adjusted, it's only like less than $400 million, so am I missing something?

Say that again?

If I take 1.7 points of the average equity for 2011 that you used to calculate ROE of $22 billion, it is less than $400 million --.

What Evan is saying is the drag on ROE is 1.7 points.

Right, but that implied dollar amount is only $400 million of excess capital, which seems low.

I don't think that's correct. I'll take it off-line with you and I'll explain what we mean by that.

And then my follow-up is in the growth outlook for 2012, I believe in the past ACE has given some view on net written premium growth for the year and given that we've got some puts and takes on various lines of business, where do you think that might come out for 2012 overall?

No. We gave it last year, because given all the acquisitions we'd made and I thought it was -- I wanted you to have a little more clarity, but other than that, we don't give premium revenue forecasts for the year. So last year was an exception.

I see.

We're not forecasting premium revenue.

And then just a clarification on investment income. Phil, I think you said the run rate was $545 million, but last quarter you said $555 million to $565 million, so I'm just trying to figure out are you assuming no private equity gains in that run rate number going forward?

We have about $10 million of private equity in the run rate and we also have our best estimates of portfolio turnover. As you heard, our book yield is 4.2%. The new money rate, if you invest it as -- in the same distribution as our portfolio was 3.1%. So we are expecting a decline in investment income as our portfolio moves into lower rates. That's going to be offset to some extent by cash flow, but that's our best guess of the net of all of that.

Thanks for the clarification.

Meyer Shields, Stifel Nicolaus.

Two quick questions, if I can. One, are you expecting to retain a higher percentage of gross written premiums in 2012?

No.

And do you expect, I guess, commissions or acquisition costs to decline a little bit sort of in response to the rate improvement that we've seen so far?

No. Nothing material. No.

Okay. Thank you.

You're welcome.

Jay Cohen, BofA Merrill Lynch.

Thanks for the added disclosure as far as the earnings contribution from various parts of the business. It does highlight the fact that the crop business, say the margin on that crop business was quite a bit lower in 2011 versus 2010. I'm wondering which of those years do you see as a more normalized number? One might have been very good, might have been more challenged. Is there any sort of normalcy in any of those numbers?

First of all, Jay, I just -- so you're not confused, we didn't give you a crop combined ratio. We gave you an agriculture combined ratio, which includes crop, our farm book, and our agriculture related property writings first quarter of Penn Miller, which admittedly is quite modest. So it's a combination of businesses in that that we gave you. We did not break out the crop by itself, but the Agra division. I want you to know that, number one. Number two, ACE had a very good crop year. And the overall Agra book running at a 91, wow, we're pretty proud of that result.

In the industry overall, we outperformed the industry in crop because of our franchise. It's a national franchise. It has very good systems and data analytics and better than the average company out there doing this business, we think by far. And so you're looking at an industry where I think as you look out at the industry, given drought and floods and et cetera, I think you find a lot more stress in that industry.

Is 2010 just a particularly good year then?

Yes. And Brian wants to elaborate on that.

You did point out that 2010 actually was one of the best underwriting margin years for the MPCI book and 2011 was slightly below average. So if you look at the two underwriting gains, they are going different directions and we generally forecast a 10 year average. So, '10 was a little bit below and -- '10 was significantly above and '11 was a little bit below.

The other two things I think you would see in there is we obviously have the amortization of the intangibles in the '11 results. And you also have the farm book itself had a lot of catastrophe loss in the flood in the second quarter that we reported in the second quarter. So, those three things really make up the difference as you look at '10 versus '11.

That's helpful. Thanks a lot.

Ron Bobman, Capital Returns.

Wow, you have a ton of analysts following this Company. Helen deserves a raise. I had two particular questions. You had mentioned the Thai losses were all insurance. I was wondering if you might give us a little more color and description as to the types of accounts and the types of losses that you're seeing.

And then I had a question just about some recent legal development. There was a, I think, a Travelers litigation matter winning sort of a reinsurance recoverable right in general. I think Brandywine was mentioned as a reinsurer. I'm just wondering if that sort of as Ace is concerned and as far as provisions you've made is good and put to bed or if that development poses any sort of change in recognition? Thank you. Best of luck.

Thank you. Three answers. First I'm going to answer one and then I'm going to ask John Keogh to do the Thai and Bob Cusumano, our General Council, will do the Western MacArthur. The first comment I want to make is I think we all deserve raises, not just Helen. (laughter)

I'm not sure what to say after that. Let's just end the call now. No, as respect to Thailand loss, nothing I would point to that's unique in terms of where that loss came from. 80%, as you say, is all insurance, no reinsurance. Of that, 80% of it comes out of AOG, our international business, 20% out of North America. North America business being obviously the foreign operations of US multinationals that have locations in Thailand. And then within AOG it's a combination of local indigenous Thai business, as well as multinational locations of foreign companies. It's a mix of retail, manufacturing, again nothing I would point to is unique about the kind of losses or the kind of insureds who had a loss as a result of the floods during the quarter. Bob?

Would you hazard a guess on the industry loss size? We've got some giant saying as low as $8 billion to $10 billion and some people speculating $20 billion plus. Would you hazard a guess?

No. I think it's one of those -- it's a very unique situation where I think hazarding a guess is dangerous because of all the potential complications of this -- the type of loss that it's created, the fact that water was on the ground for weeks at end, and the ability for people to get in there quickly and adjust the claims I think has presented some challenges in terms of putting a number on this, as well as the potential for CBI losses that traditionally are pretty late developing. So, I think it's a fool's game at this point to put an industry number on that.

The only thing I'd elaborate on is when you look at Ace's losses versus or where we wrote business versus overall exposures to this, we are far less exposed to those classes of manufacturing that have the potential to produce large CBI losses.

Got you.

With regard to Western MacArthur, as you all know, we have a pretty large amount of litigation around all of our exposures, particularly asbestos, environmental. Only very few of those get any kind of public profile. In this case, there were published reports because it's a very large case, but it's a large case not for us, because we have a small share of the exposure in that case.

Nevertheless, it's always disappointing when an intermediate appellate court doesn't go your way. We've already filed our papers seeking leave to appeal. This is a very complicated legal matter. It involves some significant issues about how reinsurance is treated through the financial pipeline. We're hopeful that we will get a fair hearing at the New York Court of Appeals. And you'll hear more about it in the quarters to come.

Thanks and continued good luck.

Thank you.

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.

That does conclude today's conference. Thank you all for your participation.