丘博保險集團 (CB) 2012 Q1 法說會逐字稿

Good day and welcome to ACE Limited first quarter 2012 earnings conference call. Today's call is being recorded. At this time all lines are in listen-only mode. There will be a question-and-answer session at the end of the presentation. (Operator Instructions) For opening remarks and introductions, it is my pleasure to turn the call over to Helen Wilson, Investor Relations. Please go ahead.

Thank you. Welcome to the ACE Limited, March 31, 2012 first quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to Company performance and guidance, premium growth, ACE's business mix 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 the webcast replay will be available 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's developments. Now, I would like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft, our Chief Financial Officer. Then we'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 a good first quarter. Our results both revenue and current accident year income were right on plan. We then benefited additionally from positive prior period reserve development and light catastrophe losses. Pricing continued to improve and was in line with or a little better than our expectations. All in all, a strong start to the year. After-tax operating income, as you've seen for the quarter was $701 million or $2.05 per share and our operating ROE exceeded 12%. A very good return.

Book value grew 4.5% and now it stands at $25.4 billion. Book value growth benefited from both strong operating income, as well as investment portfolio gains resulting from a narrowing of interest rate spreads and favorable equity markets during the quarter. In addition to the portfolio gains, we had also had an improvement to the Variable Annuity mark on the order of about $230 million. Phil will have more to say about the market's impact on our investment portfolio and the VA mark.

Our underwriting results were simply excellent. We had a combined ratio for the quarter of 89.2% and benefited from both positive prior period reserve development that was flat with last year's first quarter and, of course, low cat losses. What is noteworthy is that our ex-cat current accident year operating income was up over prior year. That included current accident year underwriting that was flat with prior year. This is a reflection of the excellent health of our current business due to our underwriting discipline and our balance of business between various lines and geographies.

Total Company net premiums in the quarter grew 3.7%. Our growth rate was right in line with our plan. Foreign exchange had approximately a 1% adverse impact on our premium growth rate. For the balance of the year, we expect premium growth to pick up continuously quarter-by-quarter and average mid to upper single-digits in constant dollars, excluding agriculture insurance. Crop premiums as you know are impacted by commodity prices. Therefore agriculture will likely be down year-over-year about $250 million. Crop premium volume is concentrated in the second and third quarters.

Returning to the quarter, in North America, growth was impacted by our continued action to shed risk transfer workers' comp business. Even with the current price increases being achieved in the market, this class runs at combined ratios significantly over 100% and simply doesn't meet our standards. We have been exiting this business for three years and by the end of the year our volume will be negligible. Adjusting for this reduction, our underlying growth in North America was around 3% with retail insurance up 3.5% and our wholesale and specialty business about flat.

For our US retail commercial P&C book, our new business writings grew 20% year on year, albeit from a relatively low base. The renewal retention ratio as measured by premium in our US retail was 94% in the quarter, up from 92% prior year. On a policy count basis, our renewal retention rate is also up 2 points to 83%. Our increased retention rates are a consequence of some better pricing and the fact that we began more rigorous portfolio management a couple of years ago.

In the quarter, some of the areas where we saw our best growth were property and inland marine, risk-management casualty, our US brokerage generated A&H business, and certain specialty casualty lines such as life sciences and foreign casualty. In addition, ACE Westchester our E&S business grew for the second consecutive quarter on the strength of property and inland marine in particular. In our international business, growth in the quarter was quite strong and up about 11% in constant dollars. Retail business through our ACE International division was up 12% while our wholesale business through our London-based ACE Global Markets franchise was essentially flat.

We benefited from double-digit growth in both commercial P&C and A&H in Asia Pacific and Latin America. Our business on the continent was up about 3%, while our retail business in the UK was down due to competitive market conditions. A&H globally started the year a little slow in terms of growth, due to a few one-time items, but, again, right on plan. We expect our A&H growth rate to pick up and average mid to upper single-digits for the balance of the year. Operating income for A&H globally was up about 10% for the quarter.

Our international life business is doing well, growing double-digit in Asia and Latin America, operating income for our life division was up 28% for the quarter. Global RE premiums for the quarter were down about 15%. We wrote more property cat business where we found pricing reasonable, particularly in North America. Pricing for other classes to reinsurance business, general casualty and professional lines in particular, remained soft and not in line with our standards to earn an underwriting profit. So, we shed more business. Looking ahead to April, we wrote more property cat in Japan where pricing improved. Overall we expect global REs growth rate will improve relative to quarter one as the year goes on.

To put all of these revenue growth numbers in context, I want to make a few comments about pricing and the market environment generally. In the quarter, as I said in my opening, insurance prices globally were in line with expectations. In the US were sequentially better month by month than what we experienced in the fourth quarter in many classes. Overall for the quarter, pricing in North America was up over 3% and we achieved better rates on new business than renewal.

Let me provide a bit of detail. The average rate increase for our retail business went from 1.8% in January, to 2.9% in February, to 4.6% in March, averaging 2.6% for the quarter. Similarly in our US wholesale business, the average rate increase went from 5.1% in January, to 8% in February, to about 8.5% in March. Again, averaging 6.6% for the quarter.

To break that down further, property prices benefited from cat driven pricing increases and were up an average of 11.5% for our retail book, 10% for wholesale, and 17% for energy related risks. For excess workers' comp business prices were up an average of 14%. For marine classes, prices were up an average of 2% to 3% and for casualty classes, excluding professional lines, prices also clustered around the 2% to 3% level. The rate of decline for professional lines business slowed to 1% for the quarter but rates turned positive 1% in March. Our best quarter in quite a while.

For our wholesale business, we saw prices increase of about 5% in casualty and in environmental and 4% in professional lines. Internationally, prices are up for cat exposed property, particularly in territories that have suffered significant losses. Rates are also up in certain classes of business that have suffered large attritional loss such as energy and power generation. The balance of international markets remained soft with rates flat to down modestly. Frankly, the same as I told you last quarter.

In the US and internationally, most insurers are still underwriting for market share. There is plenty of capacity available, both insurance and reinsurance. A number of companies, particularly larger and more sophisticated ones are pressing for rate more broadly. I believe they want to earn a more reasonable return for the risk and are willing to show some discipline. Some are shrinking line sizes or beginning to exit certain businesses altogether.

However, there are plenty of competitors around ready to take advantage of more responsible underwriter's actions. I believe what we are seeing is an income statement and not a balance sheet driven market pricing correction. This is a pricing correction that beyond comp and cat related property and a handful of highly stressed lines, is still rather modest, inconsistent, and is not yet keeping pace with loss cost trends in many areas.

In my judgment, prices generally are still inadequate in most classes to earn a reasonable risk-adjusted return; however, with that said, pricing is slowly improving. For the smart and capable underwriter, any level of pricing relief does create some opportunity for growth. I can assure you, we at ACE aren't missing that. My colleagues and I can provide further color on market conditions and pricing trends. In summary, we are off to a very good start to the year. Our income statement and balance sheet are in great shape. Book value growth was excellent.

Again, we are on plan and expect revenue growth to pick up as the year progresses. The pricing environment is incrementally better in the US and this is creating some opportunity for growth. Additionally, our business in those areas of the world with more robust economic growth continues to perform well. With that I'll turn the call over to Phil and then we'll be back to take your questions.

Thank you, Evan. Our balance sheet reached two new milestones this quarter. Capital now exceeds $30 billion and shareholders' equity exceeds $25 billion. Tangible book value per share grew 5% and cash and invested assets grew by $1.2 billion. Net realized and unrealized gains were $570 million pretax including a $390 million gain from the investment portfolio and a $230 million gain from our Variable Annuity reinsurance portfolio, offset by a few minor items.

The gain from the investment portfolio resulted primarily from declining yields on corporate bonds while the VA gain resulted primarily from increases in worldwide equity values and an increase in interest rates on long-term treasuries. The gross realized gain from the mark-to-market accounting treatment for VA was $460 million, offset by the change in the value of the equity hedges of $230 million.

Our investment portfolio is in very good shape. We have no exposure to sovereign debt of distressed European countries and our exposure to Eurozone financial institutions totals $1.2 billion or less than 2% of the portfolio and is concentrated in Northern Europe. The overall credit quality of our Eurozone financial institution securities is AA with over $700 million rated AAA.

Investment income was $544 million for the quarter. This was approximately 4% lower than the previous quarter resulting from private equity distributions which vary from quarter-to-quarter. Our current book yield is 4%. Current new money rates are 3% if we invested in a similar distribution to our existing portfolio. We estimate the current quarterly investment income run rate is approximately $535 million to $540 million on average, again with some marginal variability up or down.

Operating cash flow of $570 million was lower than our normal quarterly run rate, primarily due to higher cat loss payments and the repayment of cash collateral we've received on a large one-off transaction we discussed in the second quarter of last year. These items reduced our cash flow by $200 million. Our net loss reserves were up about $100 million for the quarter and our paid to incurred ratio was 108%. Adjusting for cat activity and prior period development, our paid to incurred ratio would have been 96%.

During the quarter we had positive prior period development of about $80 million after-tax, split about evenly between short and long tail lines. The casualty release was concentrated primarily in the years 2004 to 2006. We also had $25 million of operating income related to the adjusted for crop results for 2011. The expense ratio was 32.3%, up from 31.5% last year. In all, principle segments had a lower expense ratio. The rise was due primarily to a higher share of premium from the overseas general segment which has a higher expense ratio.

Our effective tax rate fluctuates based on where our earnings emerge. In Q1, the operating income effective tax rate is low relative to other quarters, primarily because we had a greater percentage of our income emerge in lower tax jurisdictions than we would expect. For example, our favorable prior period development was in lower tax jurisdictions. We retroactively adopted the new guidance issued by the FASB related to DAC. As expected our book value was reduced by about $180 million and there was no significant impact to our income.

In the quarter, we accrued $200 million for the payment of common stock dividends. This amount is larger than normal because it includes two quarters of the dividend increase that was approved by shareholders in January. As a result, the accrual includes $40 million for the increase to the fourth quarter dividend and $160 million for the full first quarter dividend.

Our press release issued last night included our updated guidance for 2012 simply to account for the positive first quarter prior period reserve development and the lower-than-expected cat losses realized in the quarter. Our range is $7.03 to $7.43 in after-tax operating income per share for the year. This includes cat losses of $325 million after-tax for the second through fourth quarters. Guidance for the balance of the year is for the current accident year only. I will turn the call back over to Helen.

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

(Operator Instructions) Keith Walsh, Citi.

First question, you mentioned in your commentary, rate's up, retention's up and new business is up. That is just a very different story than we're hearing from others. I want to know why is that? Then why with new business pricing, why would that be better than renewal? I would think customers would leave for a lower price than they currently have. If you could just talk around that, then I've got a follow-up.

Well, I'm not sure exactly what you mean by all of that. But I will add the color I can add to it. First, new business pricing was better than renewal pricing on a line for line basis where we match like for like. We achieved better pricing on new than renewal. And you ought to because it is the customer that you -- it is the new customer to you versus the customer that you know, Number One. Number Two, ACE has been engaged in, I think, probably ahead of others more rigorous portfolio management and risk selection. For the last two years, we have been telling you retention rate is down because of portfolio management where we have been shedding business that we understood within a cohort, there is that risk which is better and that risk which is more substandard.

And in more finally tuning portfolio management we could differentiate between that and we were shedding that business that just could not achieve an underwriting profit. Therefore, when we are looking at price increases and better informed by selection, our retention rate is therefore -- we've already run that gauntlet and our retention rate is therefore improving as a result of that. And that is also helping inform us on the new business that we select. Now it varies quite a bit by class and as pricing has varied by class and I gave you that information -- that you have a better spread, a better understanding of where we are seeing greater rate increases versus where it is more modest and tepid.

Okay. Then switching gears. The big three brokers, Aon, Marsh, Willis all have data services they're selling to underwriters these days. How much do you pay for this and do you view this as the post Spitzer pay-to-play 2.0? Thanks.

No, I don't view it as a post Spitzer pay-to-play 2.0. Brokers have begun to -- particularly the big two, have begun to monetize some of their services as they see them in terms of data that can better inform underwriters on their portfolio and their customers so that they can be more efficient in their targeting of that. And a number of companies do participate in that. ACE does participate in that and I'm not going to discuss bilateral transactions between us and any customer or any broker, that's proprietary.

Michael Zaremski, Credit Suisse.

I'm curious if you seeing a broad pricing momentum continuing in the US? I know there has been no momentum in Europe. I asked because last quarter I recall you saying that pricing in December was up about 4% in the US. I believe it was up only about 3.6% in 1Q as a whole. So I was just curious if there was any pricing deceleration?

Well, January, the pricing as I gave you month by month, January the pricing fell back, overall. Then it improved as the quarter went along, Number One. Number Two, you have got to be careful in looking at any one month and the credibility of that. The cohort gets smaller and there is always a change of mix of business between one month and the next month. So was there more property or more casualty as an example in a current month? But it is right, that in the fourth quarter -- you see some bit of erratic behavior to it and so, can you really discern a pattern? As I have looked at it, it looks pretty good that what we have seen of the pricing firming as the quarter went along, seemed to be a pattern. Is it anomalous? Will it fall back a bit and be up and down a bit? I'm not sure. I don't think there is a way of telling with certainty. What I do believe which is what I said earlier in my commentary, is that it is more of an income statement driven and not balance sheet driven.

So I see it as a mark -- as a pricing correction more than I see, I don't use the term hard market. And I don't in my own judgment believe we are going towards a hard market. There is a lot -- a hard market means there is not capacity. And there is a lot of supply around and capacity around. So I see a market correction that is rational, line by line. And in where loss ratios and combined ratios are more acute, are a more acute issue, you are seeing greater pricing. And where it is less acute or it's still a problem but there is lots of capacity, then you are seeing less of a pricing correction. Whether this continues to march along and you're going to get rate on rate as the year progresses, remains to be seen.

Okay. Then lastly, that's helpful. And I noticed, in terms of the investment portfolio, I noticed the allocation to A and below rated investments increased roughly 200 basis points sequentially and the duration of the portfolio ticked up a little as well. Were those purposeful actions or more due to rating agency actions or interest rate movements?

Well, let's take the shift first. The shift was really a result of an increase in the value of our securities that are below A -- A and below rated. We just had an increase in the mark that increased our portfolio. We also had reinvestment of investment income into that portfolio. So those were the major drivers of the increase in that. The increase in the duration was just a tactical move to -- we moved more into municipals that had a higher duration and that had a slight impact in our overall duration.

Very slight movement on those.

Okay, so can you just lastly comment on the new money rate?

The new money rate, we said was about 3%. If we invested in the distribution of our existing portfolio.

Vinay Misquith, Evercore Partners.

The first question is on political risks insurance. Have there been any repercussions from the YPF nationalization in Argentina?

What do you mean by repercussions? You mean -- what? Can you be more specific?

So forces your exposure. And second, are there any knock on effects from some suppliers or from some business partners that you see?

Are you talking about losses or demand for coverage? I'm sorry, Vinay.

The losses I'm talking about.

No.

Okay. The second question is on loss cost trends. I believe last quarter you said that loss costs were about 5% for some lines. Some peers have mentioned 4% recently. For the actual loss cost trends you've seen over the last couple of years and do you see those trends continuing in the future?

I'm going to ask Sean Ringsted, our Chief Actuary to make a few comments about loss cost trends.

Good morning, Vinay. I think I'd start off with the statement that across all lines in general we see loss cost trend that is consistent with our 2012 plan expectations. It does vary though by the component pieces of frequency and severity by class of business. If you're looking at frequency, I think we would say that is flat with a variation by class. As Evan mentioned on the comp side, we are out of the risk transfer and in the risk management and now we have seen a bit of an uptick in frequency. But that could be a shift in to loss time claims for medical and/or the impact of order premiums. So it is modest and offset by severity. So I think in general on the comp side we think we are in line with our plan expectations. For casualty it's choppy. We see classes where frequency is down. We see it flat when you adjust the mix and some classes have an uptick.

But again, in general we think that is on track with the plan. And some of the casualty professional, we see some classes that had a higher frequency in the recession impacted years, now starting to show a decline in frequency while for a few smaller specialty classes we've seen an uptick in frequency which we're watching. So I think, the general thing again is that we're in line with our 2012 plan expectations. One comment on the 5% that you mentioned. You want to think about that as having a range around that. I think we have given it in prior calls that for some of the higher excess classes we are picking a trend higher than that. And that is consistent with prior years and we have not moved around that.

Vinay, the other thing, when somebody says 4% or 5%, first of all, what line of business are we talking about? And are we talking about primary? Or are we talking about excess? So you've got to get very granular, very specific. And if they add their whole book up, and added up and averaged it to 4%, everybody's book is going to be different.

Amit Kumar, Macquarie.

My first question relates to the current European economic pressures. I'm wondering what sort of impact are you seeing in terms of demand and your premiums as we move towards a recession in many of the countries?

We are seeing demand on our European book is quite flat or in certain areas, economic activity is declining. So that means exposures necessarily decline. Our European book grew modestly in the first quarter a couple of points. And that was, really exposure growth from writing new business and expanding our business and also getting a little bit of price on property cat related. Other than that Europe was flat to down.

Okay that's helpful. The other question I had was on the discussion in the crop book. I think you mentioned that premiums will be down by $250 million or so. I am looking at the corn and soybean prices and I'm just wondering if you can sort of expand on that. Because soybean prices obviously have recovered. Maybe it's a bit premature, but expand on that comment please?

Everybody is a farmer now and nobody who's an urbanite seems to have a real agriculture thought these days. First of all, it doesn't matter what commodity prices do through the rest of the year as far as revenue is concerned. That is now. Revenue is already in the can. It is about loss cost now. Because the US Department of Agriculture declares a revenue price, picks a crop price for soybeans and corn that is used to price the insurance product and that is declared in February sometime or March. And that is what you are locked into. Now where fluctuation in prices matters is at the time in November or December when you get to losses and how you adjust losses and the differential between the February, March price and the price at year-end comes to play. But as far as revenue is concerned, that was locked.

Got it. Okay thanks.

Now you're a little smarter urban farmer.

(laughter) I think I want to go and try and become a farmer now.

Good luck, Amit. Stay with analytic.

Thomas Mitchell, Miller Tabak.

This is just a sort of theoretical question. But we have seen several underwriters, yourselves included who have had in various classes of business, shown -- anecdotally have given indications that rates are at 3% or 4% or 5%, where the underlying premium growth in those lines has been more like 1% or 2%. Even if we are not in a hard market, it would seem to me that you would need underlying exposure growth to get to total premium growth that would be more than whatever the rate increases are and I'm wondering if you anticipate that happening anytime soon?

Well Tom, I understood your question. And exposure growth comes two ways, it comes from economic activity growing. And by the way let's just take that we gave you a some odd 80%, I think it was 83% renewal retention rate in terms of policy count and 94% renewal retention rates in terms of premium. 2.5 points of that was due to economic activity exposure growth. So you do need exposure growth to help along with that. That's right. And then after that it is how much new business exposure growth, so actual units of growth you take on. And we wrote 20% more new business and not enough that it equals the rate increases we are getting yet, the rate increases. Not enough that it equals the amount of business exactly that we are losing. And then rate increases kind of made up the difference. If you take out workers' comp, risk transfer, worker's comp, I'm normalizing for that. So if our new business growth continues to pick up, then that plus rate will overwhelm what you are shedding or losing on the renewal side. I think I got and answered your question.

Yes you did. Thank you very much.

And you realized that I said that I expect premium growth to pick up as the year progresses.

Yes, without referring to that, that's what I had in mind.

Yes, but I answered that in my commentary already to you. I said mid to upper single-digit in the P&C businesses. And I said the same in A&H.

And the other question is, whether you see any areas where there really is for want of a better term, whether there are underwriting classes where things have gotten so bad that you see opportunity either in the form of making acquisitions, or in the form of doing significant new business that you haven't already started with? Japan might be an example.

I'm sorry.

I'm sorry, when I say so bad I mean Japan might turn out to offer some of those opportunities for instance, is the idea.

Yes, not on the acquisition side, but on new business where we have an operation in Japan and we are on the hunt there. But it's -- so far the Japanese have circled the wagons on the business that they have but we are seeing some opportunity begin to emerge there and more may. Particularly with the overseas interests exposure of major Japanese corporations. Where Japanese insurance companies were in essence kind of taking one for the team and were naive in their underwriting. There we may be seeing -- we're seeing some opportunity and that may accelerate, time will tell. As far as more broadly, we are not seeing -- we are seeing around the margin, around the edges in certain specialty lines in targeted areas, but nothing of great significance, yet. Not a hard market. As far as whether we are seeing that on companies themselves who might have pressure, well nothing I would care to comment about.

Greg Locraft, Morgan Stanley.

I wanted to just pursue the guidance. It is very hard to get to the guidance that you guys outlined unless I don't assume much improvement in the combined ratio year-over-year. So I'm trying to reconcile what is clearly an improving top line scenario, given your commentary. The actuarial commentary that loss trend is in line with expectation and then run that through my model and get to your guidance. And the only way I can do that is -- something doesn't connect in the model. So just kind of curious, how you're thinking about margin progression as the year plays through?

Well we can't comment on your model and I'm going to turn it over to Phil in a second. Your model is your model. We give you a range though of our current accident year expectation, a range around that in the beginning of the year. We did as to what we thought our EPS would be on an operating income, on a current accident year basis. We told you what the cat loss expectation is within that. We have now updated that simply to add in the prior period development we had and simply to add back in to income, the difference between what we originally expected for first quarter cat losses and what actually occurred. And other than that, we left the year exactly the same on a current accident year basis. Now how it is made up of investment income or underwriting income, we did not give you those pieces.

Okay, I guess by way of follow-up, did you when you set out the guidance back then, did you think pricing would be as good as it was right now and that loss costs would be in line with what you thought? Is any loss cost what you thought?

As I said, I think as I said in the very beginning, Greg that pricing is in the first quarter was basically in line with what we expected in our planning. And our revenue was in line with our planning. We were right on plan in the first quarter.

Got it. Okay. And the numbers are great, I'm just curious.

In terms of current accident year, in terms of underwriting and in terms of revenue, we were right where we were. And by the way, I believe in the previous quarter, Phil had given you at that moment what we understood that moment about investment income and the first quarter was right in line with that as well.

Great. Thank you very much.

Okay. You're welcome. And remember new business has to earn -- and the premium you write this year has to earn its way in.

Yes, that's what -- I was wondering if there was a lag. And that is just what we are dealing with which sets up really nicely into next year.

Yes sure. Then we have -- well, I didn't mean yes, sure that we're set up nicely for next year. But remember, you have got to be careful with us when you think about current accident year on mix of business. Remember, we shed high combined ratio business that doesn't meet our standards. So you look at a workers' comp, a risk transfer comp. It's down to almost nothing. And last year, it was more. And we have been shedding business like that. The heck with market share in that. It is not just a matter of rate increase and then that A&H business keeps growing and international and other areas keep growing. So the mix of business has an impact that you can't exactly see completely. You have to work here to see it. But that is another ingredient, you have got to keep in mind.

Josh Shanker, Deutsche Bank.

Evan, I want to talk a little bit more about the risk transfer workers' comp. You guys have been downsizing, you said for three years but that really accelerated at the end of last year. Given that it's read to the same time that pricing picked up, the industry was reporting somewhere maybe north of 110% combined. What did you see in it that just as pricing is picking up you guys wanted to go cold turkey on it?

First of all, yes, north of 110%. I would say north of 115% or 120% an interest rate environment that is -- what does the yield curve show you over the 10 year yield curve? And there is just no percentage in it. Not for us. And ACE was never a major writer of that business. It was X hundreds of millions dollars at its high point. And it didn't accelerate in the fourth quarter, I don't agree with that. We have been shedding it almost ratably -- almost on a pro rata basis starting around 2.5 years ago, I suppose. And we're almost completely done with it. And down nickels and dimes. To give you -- to put a number on it, we shed about $25 million -- because I gave you the difference in growth rates without it. So if you did the math, you would see that we shed about $25 million in the first quarter. Not that big --

Then your appetite -- I'm sorry I interrupted you. What did you say?

I said you can see that it's not a -- in percentage terms on North America it added a couple points, but $25 million is just not a lot of premium for ACE.

Understood. And you still think there is room for profitability in the excess orders comp space?

We have been in that business for a long time. We have a pretty seasoned book of that business. And we write it two ways. Mostly we write it where we write the underlying risk management contract. So it is different how that business behaves when you are handling all the primary underlying or self-insured. And that is what we are doing, primarily. And then we write a modest book of standalone or comp excess which is for larger accounts which we have also been doing for a long time.

And just to complete that thought, 2010 versus 2011 loss cost trend in workers' comp, how quickly was that accelerating for industry, for you and any color you can give there?

Well the industry acceleration, I'm not going to be the expert. I talk to guys who write big bucket loads of that. But you certainly have been seeing the data recently emerge on California, which is a very large percentage as you know of the overall industry's risk transfer comp business. And you see how California is behaving 2010 to 2011. And there you're seeing both frequency and severity issues emerge. On the balance of our book of business, for our book of business, ex the risk transfer comp, will we write risk management business and that is where we'd write excess. We have seen a good deal of stability between 2011 and 2010. It has been pretty flat.

Michael Nannizzi, Goldman Sachs.

I do have a question. I'm looking at your retention. It is obviously high and it is growing. Pricing commentary may be below some peers that we've seen just here recently. Just trying to understand, does that reflect more mix of your business or how do you look at the trade-off between retention and pricing? Just one follow-up. Thanks.

Are you talking about net to growth retention versus --

No, I'm sorry. I mean your comment about 94% on $1 --- on dollars and 83% on policy count, both kind of up a couple points it sounded like.

Yes, and the question is, I'm sorry around --

The question is, how you think about retention. So is there a point where retention is too high and where may be you're able to kind of push for more rate in efficient frontier I guess if you will of kind of retention and pricing.

I see where you are. I focus more on that 83% when I think about that question than I do the 94%. That has revenue tied to it. Obviously is the difference between the two. It is exposure, it is rate increase. And then it is a question of did you keep your -- the bigger risks and shed smaller risks? Okay. You get what I'm -- that's the difference between the two.

Sure.

Those few elements. So I focus on that 83%. And that 83%, that could go to 85%, 87%. I have seen it in that range before. In a hard market I've seen it up at around 89%. So it depends on where we see the market environment. But there can be some elasticity -- there is still some more elasticity in that potentially. Then yes, of course, we are always studying each line of business as to -- and each office and down to underwriters as to where do you want -- where are the anomalies and are we somehow trading market discipline or underwriting discipline in any area? So we're constantly surveying it on a granular basis.

I guess the question is would you be willing to see that fall into the 70%s if you could get a point or two of rate?

I have. I was reporting those kinds of numbers to you last year and the year before where we were talking 80%. 81% and I was talking 78% or 79% two years ago. Especially as we were beginning to be engaged in more refined portfolio management.

All right understood. Just one follow-up, I guess you mentioned an income statement driven pricing change this time around as what it feels like. Does that reduce the need or desire, the approach to accumulate capital? You are running about $3.5 billion a year, it looks like just from a cash flow perspective. If big chunky opportunities don't arise, if that is the flavor of this inflection point that we're seeing right now, does that mean that we can expect you to warm up to other deployment actions?

Well I do think it is more income statement than balance sheet driven. We are constantly assessing opportunities and deploying capital. Be careful with your $3.5 billion number. I don't know really where you get that number. Be careful, cash flow is first of all not earnings. Then secondly, we have capital needs that also grow and that is based on exposures and mix of business and jurisdictions and rating agencies and regulators who are all constantly changing. So you have got a needs side on one hand and you have got an earnings generation side on the other hand. Then you have got increased dividends that we pay to our shareholders. So you've got to consider the whole picture when you start thinking of how we might be accumulating more capital flexibility. Secondly, opportunity comes a little lumpy and the money is not burning a hole in our pocket as I tell you continuously. We have a long-term strategy. We are clear and focused and very disciplined about it. But if ultimately, we can't. We don't believe that we can deploy that capital at a rate that meets our hurdle rate of return to shareholders, then we will find other ways to return that money to shareholders and we know that.

Got it. I understand. Yes, I'm just wondering, just if this is --

Remember, I look at a 12% -- I look at an excess of 12% ROE and I say, yes, that's pretty good in this environment. And I think our ROE has continued to be quite good. We have used money to grow the Company and have still gone toe to toe in ROE fundamentally with those who have been increasing their ROE by buying back stock. So we have kept faith with shareholders. And yes, ROE does scrub -- the surplus capital does scrub a few points off of ROE and we know that and we think that is a price that is worth paying for long-term shareholder value creation.

All right. But it sounds like, you look at it -- seasons change, things change. You're kind of looking at everything with same picture, maybe a different lens but as this environment changes.

All the time, constantly. We are risk dynamic. We are not religious about this.

Ian Gutterman, Adage Capital.

First I wanted to follow-up on the question about new business versus renewal. Just to clarify, are you saying the rate increases are greater on new business versus renewal? Or the technical ratio or ROE or however you want to think about it are higher on new business than renewal.

No, the rate increase. The rate.

So, you're getting -- so you're actually getting better --

The adequacy of the rate. So that is how you measure cohort to cohort. It is better adequacy on the new than it is on the renewal.

Can you help me understand why that is? Because I guess that seems a bit surprising. Your competitors, I would think if that business is priced so well wouldn't let it get to market. Why is the business hitting the market better than the business that is on your books when what's on your books is probably better than what is on other people's books because you have been more diligent about re-underwriting in the past few years?

I'm going to give you a general comment. Then I'm going to ask John Lupica to give you a little color on that also. I want to be careful in this statement. Different underwriters handle their issues differently than each other. And some take a blunt instrument approach and they will simply say, listen, I want x percentage on the entire class of business and that is all there is to it. And they do less distinction between risks. There is one flash to you as to a reason why you will get better adequacy on some business than you might otherwise expect. Do you understand how I --

I think so. But is that -- would you say that's --

I'm going to ask John to add a little color. Would I what?

Would you say that is normally the case for you that new business pricing is better than renewal or is that something that's flipped?

No. No, it depends. It is so dynamic. It depends on where you are in the market cycle. I could tell you that generally in a soft market, why we're we writing less and less and less new business? Our new business rates have declined. They are up 20%. One of the questions to ask me is, where was your new business three years ago? How does it relate today to what you did three years ago? Probably half of what we wrote three years ago or less. So now it starts increasing. Why didn't it happen then? Because new business was coming at relativities and we were telling you at the time, it is 90% -- new is 90% of or 95% of the renewal business. You're getting old Ian, you've got to remember back to that, you were asking that question.

(laughter)

You get what I mean? I'm going to ask John to add a little color to that.

Thanks, Evan. Just add on that, to Evan's point, our new business base is relatively small compared to the entire portfolio. On a year-over-year basis, we have seen it up a little bit as Evan was reporting. One example is really property where we can get new pricing adequacy that is well in excess of 100% of our renewal base, really because of the portfolio optimization that we have done as an organization. We can look to charge more for the capacity that was allocated to that line of business on the capital that we have within the organization. So as we look at the price movements, it's really a matter of looking at what we have in the portfolio, how we are able to reallocate and how we're able to see the deployment at a little higher and better rate. In property we have seen it up. In our H-risk management business we've seen the adequacy up. As again, we're selective about the new business. We're seeing more opportunity. We get to pick where we can deploy the capacity.

Okay. That makes sense. I'm with you now. Just a transition from there to follow-up on, I think the other topic about what does this mean? Some of your peers talking about how pricing is x versus loss cost y and therefore we are going to see x in your improvement and so on and so on. I know that is a hard question to answer because of some of the things you already discussed on the mix and these other issues. But based on your comments, is it fair to say at least on a written basis for now that you think the business you have written year to date, let's say, on a written basis has a priced ROE better than the business you were writing a year ago?

I would say in aggregate, yes. Modestly better.

But that's on a written, not yet on an earned?

For the United States, I would say that is true. But then I have got to tell you, I quickly after that general statement, I then go line by line. Because you have got to distinguish long tail versus short tail. And if I took away and just looked at the long tail by itself, I am more circumspect about giving that as an answer. I would say rate of deterioration slowed -- has slowed. But I wouldn't say that it has leaped ahead.

Got it. But as your mix shift is moving --

I'm not there.

Okay, but on a total portfolio because your mix shift is moving away from those lines and more towards the former lines, there is probably a positive mix?

I'd say between selection and pricing, it's -- and with all business together, yes.

Matthew Heimermann, JPMorgan.

I guess the first question is you had a line in your annual I liked a lot which was talking about the industry getting -- having excellence in managing mediocrity but obviously this isn't a hard, traditional hard market. The tide isn't going to lift all boats. But I'm wondering if that is a better environment for you to further differentiate yourself and your performance given some of the investments you made in underwriting. Given what you have highlighted in parts of the call this morning.

I don't know if I would consider it better or worse or any of that. I don't really think in those terms. Maybe I'm warped. For me, I just think about it -- just tell us the ball game we're playing. Whatever game we're playing we're fine. We're going to do just fine and we are happy. We will outperform. And in my mind if it is going to be a market like this that has this kind of stability to it -- this characteristic of stability, it obviously on one hand prolongs any notion of a hard market. On the other hand, it does create as you would say, more opportunity given our parts and pieces. And in this business, there is always a deviation around the mean. Everybody does not perform the same and there is great opportunity to distinguish yourself one side or the other of the mean. And this does give us opportunity and I believe that we will always perform better. And it's better than the market it was a year ago. So we will take advantage. Obviously if you had a real hard market, I'm confident ACE would double or triple its size. In this case, we're going to grind out singles and doubles and you know what? No problem. Let's play ball.

Thanks for that. The other question I had, just could you talk about some of the things in the A&H segment that just led to this being a little bit lower growth quarter? I'm just curious, the past dynamic has been international growing, domestic pretty stagnant. You mentioned a pickup in US brokered business. But on the international side, I'd be curious to whether or not some of the, let's say, some of the emerging markets are still posting healthy growth but not seeing as much momentum in some of the economic activities as seen in the past. I'm just curious of whether or not that is something we should worry about correlating to your own business growth?

Sure. No, I don't see that. The areas where we have been getting growth in A&H internationally where they have been double-digits continue to be double-digits and I see that for the balance of the year. If anything I have seen it improve, overall. Europe is a soft, flattish. But that has been that way. The US brokerage business is a relatively small book. But I say relatively small, it is still hundreds and hundreds of millions of dollars, the brokerage business and it is a good business. And that has grown fairly nicely. We had a couple of one-off items this quarter, particularly in Europe and Japan that just depressed the growth rate and that is why I see it returning to mid to upper single-digit as the year goes along. Combined, itself -- combined is starting to show some signs to me and to the management of, where it is leaving aside the UK, Ireland, where just the regulatory environment. That aside, but where I look at the major portfolios which is the US, Canada, Australia. That business we are seeing that stabilize and we are seeing the early signs right now of what we think is pickup in growth. And we think that will start to show in those numbers by year-end or the first quarter of next year. Actually, I am pretty bullish about it.

Meyer Shields, Stifel Nicolaus.

I just wanted to throw in two small questions if I can. One, does the shift more towards property away from casualty that we saw in the quarter, does that imply any constraint on further portfolio duration lengthening?

In the investment portfolio? No. But I'm going to let Phil on.

No, we don't expect that. We manage our duration slightly lower than the duration of our overall liability anyway. So we don't see any significant shift caused by a shift in the business.

Okay. Fantastic. Can you talk about whether or how casualty reserves from accident years 2010 and 2011 have played out so far?

Casualty reserves from 2010, 2011. It's way too early. It is way too early. Look, good news comes early, bad news comes late. And it is so immature but we don't see anything negative emerging on those years to us. From what we expect.

Josh Stirling, Sanford Bernstein.

A very brief question. Obviously you have been positioning, using a lot of leveraging mix to avoid workers' comp and some casualty lines. What sort of benchmarks should we be looking for when we think about sort of other competitors and broadly the industry getting maybe 8% of rate? How much rate do you think that line needs before it starts to get to be attractive returns that would then-- which would allow us to be more constructive and I think allow you think about getting more active there or in other sort of similarly long tailed casualty lines?

Well I think, Josh what you have to do, you can do it pretty easily, I think yourself. Take workers' comp, take what you -- look at NCCI and other data, which you can get pretty easily. And see what they tell you about combined ratios right now, which are, let's call them in the 120% range. And then imagine the yield curve, which is going to take you from 2% to 3% to 3.5% over a 10-year period approximately. Don't hold me to that, you'll see the yield curve. And then apply rate on that. And imagine that paid claims if you are going to finish this, imagine paid claims that you pay out half roughly in the first five years and then you pay out the balance over the duration after that which is between year five and call it year 15. Most all of it is gone. You still have some left at the tail. So if you run all of that out and apply what you think is a loss costs, which we'll tell you is in our judgment on that business is 5% or 6%. Medical doesn't -- medical just moves along. I think you'd see that you've probably have got to run it in the 90%s to get any kind of return on capital that starts to make you interested. And I'm not sure that an 8% or 10% rate increase on that does that for you.

Yes, I think the math used out went probably 30 or 40 points of rate maybe.

You've got the calculator.

Yes, that's right. I guess the final question is related to this is, when we -- what we see you guys improving your accident year loss ratios year-over-year and quarter-over-quarter, should we think about that, just because we don't have line of business detail, should we think about that primarily as driven by mix shift away from casualty lines or is that underlying improvements in -- across the various businesses?

I don't think you see improving quarter on quarter on quarter. It bounces around. And mix shifts kind of by quarter, because they are seasonality to some of our business, to much of the business. And some businesses aren't so seasonal, like A&H isn't as seasonal. But other businesses have a seasonality to them. And you've got foreign exchange. So you can't exactly -- it is not symmetrical on a quarter by quarter.

Brian Meredith, UBS.

Two quick questions here for you. First one, Evan, it sounds like the wholesale market right now is getting a little bit more rate and maybe business is moving that way. Can you just remind us kind of what your breakdown of wholesale versus retail is in the US? When we look at your commercial business?

First of all, I don't see the business moving that way. I do see improved pricing in wholesale versus retail. But as far as classic hard market where you'd see a tremendous amount of business move out of the retail into the wholesale business, we do not see that. You see it more in property cat related area, as for instance a line of business because they are searching capacity out. But beyond that, we don't see it. It is very much on the margin right now, Number One. Number Two, the mix. ACE Bermuda we throw in and we throw in Westchester. Those two are what we consider our wholesale and E&S related North America business. The balance USA and the other businesses like our personal lines business, that all forms part of retail. And we also -- just that. We are seeing growth on the Westchester side. The ACE Bermuda side which as you know is high access, we are not seeing growth there, we're seeing the business flat.

Okay, great. Just a follow-on, your comment on, you said personal lines. I'm curious your thoughts on kind of personal lines market right now, opportunities there for you. You had mentioned in your Investor Day, you would like that to be ultimately 20% of your mix. Where do we stand there?

Remember, I said that globally. So our personal lines business in the US and internationally is right on plan. When I look at their first quarter, their revenue growth, and what we expect from them as far as expense ratio and loss ratio. We're fundamentally right on plan. And the US is continuing to move and just focus on that high net worth market and I think in a disciplined way in terms of pricing and risk selection and concentration management and product and the most important service to customers and distribution management. That is right on track for us. So I'm feeling pretty good about that. I think year-end, you saw we were roughly I think about $1.5 billion of personal lines business in total, so it is growing.

Jay Cohen, BofA Merrill Lynch.

Most of my questions have been answered. I did have one question. I would not mind hearing more about the life insurance segment and specifically underwriting income. Where the top line is growing but you have seen the margins on that business get worse. And I know there's a lot of changes in there. So I'm wondering if you could give a bit more clarity to what is happening in that business?

A few things happen in the quarter. If you look at the benefit ratio, it is up and I would say artificially. Because we have those separate accounts -- the separate account growth is split between other income and benefits. So you will see in the table that is in the supplement, the benefits are up but we also have a reduction in the expense for the benefit that we take on the other side of the separate accounts. So that washes out. We did have a slight increase in the benefit ratio net of that. Because we had a little bit of an increase in the VA benefit ratio. The other thing you will see is that the impact of the DAC in this quarter increased the expense ratio.

Which we have the debate in here. The real measure of life insurance, the more we are growing the traditional life insurance business, the real measure is operating income. Loss ratio is right for the P&C business. Benefit ratio is a better measure for life insurance. And then as Phil said, when you write separate account business you're earning your income between the underwriting line and the other income line.

(multiple speakers) Then it just washes out to zero. Because it all belongs to the policy holders.

Yes so be careful with that line.

Absolutely. I guess while we are on the topic, can you talk about the acquisitions in that business that you've made over the past several years? And how those are playing out?

Yes, the acquisitions we made were Hong Kong and Korea of New York Life's business. They're both playing out as we expected them to. Hong Kong is on plan and is in fact growing agents and growing business. Korea we knew would take longer. We knew that it would actually as we acquired it, it was in a more unstable -- as it came to us in more unstable condition. It has stabilized, roughly a quarter later than we expected it to. So fundamentally, that works for me. And it's beginning to pick up and grow its agents. And right behind that it will start growing its business. So it is where we expect both of them to be.

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.

Ladies and gentlemen, that does conclude today's call. Once again, thank you for your participation.