丘博保險集團 (CB) 2012 Q3 法說會逐字稿

Good day and welcome to the Ace Limited third-quarter 2012 earnings conference call. Today's call is being recorded. (Operator instructions)

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

Thank you. And welcome to the ACE Limited September 30, 2012 third-quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to Company performance, guidance, premium growth, impact of catastrophes and drought, pricing and insurance market conditions, and acquisitions that have yet to close, 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 during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

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

Good morning, as you can see from the numbers, ACE had a very good third quarter, which contributed to an excellent nine month result. In spite of a difficult crop season, we produced strong earnings with excellent contributions from underwriting and very good contributions from investment income. Book value growth was outstanding. Strategically, we closed on one acquisition and announced two others that will strengthen our presence and capabilities in two of the largest economies in the world. And our premium revenue growth continued to benefit from a favorable P&C pricing environment in North America. All in all, a good and exciting quarter for ACE.

After tax operating income for the quarter was $688 million or $2.01 per share. The negative impact on our per share earnings from crop insurance was $0.28. Book value grew 4.7% in the quarter and is up nearly 11% for the year. Our operating ROE for the quarter was 11.5%. We had strong underwriting results, with positive contributions from all divisions except agriculture as demonstrated by a P&C combined ratio of 92%. We benefited from both good current accident year experience and strong positive prior-period reserve development. The current accident year combined ratio was 97.7% and excluding the impact to crop insurance and catastrophe losses, which were light this quarter, was 90.5%. The underlying underwriting strength of our business is simply excellent.

On the subject of crop insurance and the severe drought conditions experienced in the US this year, the worst since 1988, we said last quarter that our estimated worst case loss for the balance of the year was approximately $200 million after tax, in addition to the $68 million we had estimated in the second quarter, for a total potential impact of $268 million. With the '12 crop season moving toward a conclusion we now estimate full-year operating income for this business to be reduced by $195 million. Phil will have more to say on crop insurance in his comments.

All in, on a nine month basis, ACE has performed exceptionally well. Our year to date combined ratio is 90.2%, versus 95.3% prior year. And we've earned $2.13 billion in after tax operating income, compared with $1.68 billion last year, up 27%. In the quarter, we closed on one acquisition and announced two others. First, we completed the acquisition of 80% of Asuransi Jaya Proteksi in Indonesia, one of that country's top 10 general insurers, and a leader in personal lines. We expect to own the balance of the company shortly. Our P&C business in Indonesia was quite small.

This acquisition provides us with a significant brand and physical presence in the country, and expands our capability by adding personal lines and a network of about 30 branches. Our existing business, which is fundamentally commercial lines is Jakarta based. The addition of JaPro also complements our growing life presence of over 3,000 agents and 12 offices.

Last month, we announced that we will acquire Fianzas Monterrey, the second largest surety company in Mexico and the third largest in Latin America, with 25 branch offices and a network of 600 independent agents throughout Mexico, FM is recognized for its technical excellence. These are sophisticated surety writers with a long track record of excellent results, an impressive management team and modern systems. In addition to enhancing our Global franchise in surety, FM adds significantly to ACE Seguros, our existing commercial lines in A&H business in Mexico, which currently writes about $215 million in premiums annually.

And last week, we announced that we will acquire ABA Seguros, Mexico's fourth largest auto insurance company. ABA is a well established, well recognized brand in Mexico with nearly 2,000 independent agents and over 30 branch offices. The company also distributes its products through a network of auto dealerships and banks, as well as a growing direct marketing channel. A premiere personal lines and agency company, ABA further diversifies our presence and capability in Mexico with auto, homeowners and small business coverages. With the addition of FM and ABA, our business in Mexico will be well balanced between commercial and personal lines. They expand our overall presence in Latin America with '12 net premiums in the region growing from approximately $1.5 billion pre-acquisition to over $2 billion.

These three transactions better position ACE for the future by further enhancing our presence and capabilities in two relatively fast growing countries of the world. Both are large democracies with significant natural resources and young populations. For example, Indonesia has a population of 250 million people, with an average age under 30 years, and an economy growing over 6% annually. Mexico, which has a population of 115 million people, about 50% of which is underage 27 is the twelfth largest economy in the world. Both countries have embraced market-oriented principles. While there are no guarantees over the next three, five and ten years, wealth creation in Indonesia and Mexico should be superior, with a strong emerging middle class and a growing large and small business community.

We are spending over $1.25 billion on these transactions, and I believe they will be accretive to our shareholders, particularly our long-term shareholders. They will be accretive to earnings in the first year, and we expect we'll meet or exceed our long-term ROE target of 15% in a reasonably short period of time, about two to three years. In addition, we expect at closing or shortly thereafter, dividends from surplus capital in excess of $320 million, which will reduce our net investment in the two Mexican transactions. Again, we are positioning ourselves for the immediate and long-term future.

Globally, we have the geographic presence, the local management and technical capabilities, the Global product capabilities, and the balance sheet to take advantage of opportunities as they present themselves in the growth regions of the world. These acquisitions are examples of that, as this Company's capabilities continue to evolve, our strategic options are, in fact, accelerating, and I am excited about the future for this Company. I would like to now talk about ACE's premium revenue growth in the quarter and the market environment.

ACE's total Company net premiums in the quarter grew 8.6% or 11.1%, adjusting for the impact of foreign exchange. We had outstanding double-digit revenue growth in North America, and excluding the impact of FX in Asia and Latin America. Let me give you some more details, beginning with North America. In the quarter North America grew 15%, an outstanding result. If we exclude agriculture insurance, North American net premiums were up 20%. We had excellent growth in commercial P&C both retail and wholesale with net premiums growing 27% in our retail business and 8% in our E&S, or wholesale business. Net premiums in our private risk personal lines business were up 17%.

Growth in our retail commercial business was led by primary risk management, up 92%, when we wrote a particularly large new account. Some of the other product lines where we saw our best growth include property, up 30%; energy, up 22%; and retail, general, and specialty casualty lines of business in aggregate, up 12%. Overall, North American pricing was up 3.6% in the quarter. We continued to achieve broad-based price increases in many of our retail commercial classes, led by risk management which was up 5%, excess casualty up 9.5%, property up 5%, and energy up 9.5%.

On the E&S side, the casualty related market needs rate. The combined ratio for the market is simply high. In the quarter we achieved favorable pricing of 12.5% in general casualty, 6% in professional lines, and 7% in property. We expect the pattern of price increases in the US will continue for the foreseeable future, with highly stressed casualty related lines receiving significant but orderly levels of price increases. And less severely stressed casualty lines up modest single-digits or flat, and property pricing flattening out. However, remember, it is a big and messy market, and there are pockets of competition where prices continue to be under pressure. As I have said in previous quarters, in my mind, this is an ROE driven pricing correction, being driven primarily by larger, more sophisticated, and responsible underwriters.

In our international operations, net premiums in our Global retail business, ACE international grew 8% in local currency, while our London-based E&S business ACE Global markets grew 3%. Asia and Latin America were again the stand outs and in constant dollars were up 10% and 18% respectively, with strong contributions from P&C, A&H, and personal lines. In spite of economic conditions on the continent of Europe, we grew 6%. And in the UK, we were essentially flat, due to market conditions.

Globally, pricing was the same as the second quarter with rates up about 1% in retail and up 3% in wholesale. Internationally, we are not seeing the same pattern of pricing improvement as in the US. The international market does not have the same structure as the US, and pricing is driven more by simply supply and demand, and in this case supply outweighs demand, therefore seeing relatively flat rates. John Keogh and John Lupica are with me and can provide further color on market conditions and pricing trends globally.

Turning to other divisions, our international personal lines business was up 17%, with strong double-digit performance in Asia, Latin America, and Europe. Growth in our personal access business continued to improve, with both international and North American A&H net premiums growing 8%. Latin America led the way this quarter with net premiums growing 16%, while Asia, due to a few negative one-time items grew 7%. Growth in our combined insurance operation as I said last quarter would be neutral by year end, and in fact this quarter it was flat. I expect our A&H premium growth to continue to improve as we go through the fourth quarter and beyond into '13.

Our Global Re business had a terrific quarter with net premiums up 22% over last year. The growth came primarily from the US division, which was up 28%, and benefited from a large portfolio transaction. Excluding that transaction, Global Re grew 7%. In summary, we had a strong third quarter and we were optimistic about our growth prospects, despite the macroeconomic and geopolitical challenges facing us globally. We have a clear strategic direction, significant and growing presence and capabilities, and the confidence in our ability to execute. We are taking advantage of the favorable P&C pricing trend in North America, and deploying our capital thoughtfully and prudently, in those parts of the world that hold future promise.

Before I turn the call over to Phil, I want to say a few words about an issue that, frankly, impacts every single one of us, and that we should all be focusing on. There is no greater challenge facing our nation, in my judgment, than our fiscal crisis, and our $16 trillion in debt. This is something that all of us, as Americans, should be concerned about. Whether you are worried about your country, your family, or your company. The math could not be any clearer. The government takes in approximately $2.4 trillion in revenue annually, and spends $3.5 trillion dollars. 40% to 50% annual deficits amounting to $1.1 trillion or more are not sustainable.

The debt is suffocating our economy, sapping confidence and killing jobs because the government is competing for dollars that otherwise would be invested in the economy. The private sector, including business community leadership is fed up with the inability of political leaders to make the tough decisions to address our debt now. What we need is Presidential and congressional leadership and a clear, bipartisan plan that provides certainty about future fiscal discipline. This should be coupled with immediate actions that stimulate and encourage private sector growth. Increased business competitiveness in turn bring down unemployment.

Fiscal consolidation must include spending cuts, and revenue increases. This means tax reform that broadens the base, and encourages economic activity, and yes, raises more revenue. It also means comprehensive reforms of entitlement programs, including Social Security and healthcare that addresses the cost side. A pro growth debt reduction plan that considers both taxes and spending will require politicians to exhibit real leadership and the time for action is now, and you should all be involved. With that, I'll turn the call over to Phil and then we'll come back and take your questions.

Thank you, Evan. We ended the quarter with a very strong balance sheet and capital position. For the quarter, cash and invested assets grew by $2.2 billion to $60.5 billion. Tangible book value per share grew 4.7% in the quarter and is up 11.6% for the year. Total capital now stands at over $32 billion. Operating cash flow was strong at $1.6 billion.

Net realized and unrealized gains were $700 million pre-tax, including a $760 million gain from the investment portfolio, offset by a $60 million realized loss from our variable annuity reinsurance portfolio. Investment income was $533 million for the quarter, and was in line with our expectations. Our current book yield is 3.8%. Current new money rates are 2.2% if we invested in a similar distribution to our existing portfolio. We estimate the current quarterly investment income run rate will be approximately $525 million with some marginal variability up or down. In the quarter, we took a charge of $147 million pre-tax or $97 million after tax related to crop insurance. The charge produces a net combined ratio for crop insurance of 114% for the third quarter, and contemplates combined ratio for the fourth quarter and full year of about 100% and 104% respectively.

The full-year underwriting loss is expected to be approximately $70 million. The after tax operating loss is $50 million. Our net loss reserves were up $1.2 billion in the quarter. During the quarter, we had positive prior-period development of $175 million after tax, primarily from long tail lines and principally from accident years 2007 and prior. After tax cat losses were $40 million for the quarter. Our paid to incurred ratio of 68% is below our normal run rate, primarily due to the impact of crop. Excluding crop and prior periods the paid to incurred ratio was 83%.

Our press release, issued last night, included our updated guidance for 2012. Our range is now $7.73 to $8.03 in after tax operating income per share for the year. We are simply adjusting our original 2012 guidance, the actual nine months results, and fourth quarter crop insurance results. First the update reflects the positive prior-period reserve development and lower than planned cat losses recorded in the first three quarters of $1.60 per share.

Second, the update includes a reduction of $0.57 per share after tax, relating to our crop insurance business increased from our second-quarter guidance estimate of $0.19 per share after tax. As Evan said earlier, the Company now expects full-year operating income to be reduced by $195 million or approximately $73 million less than the estimated worst case scenario of $268 million. No net profit or loss is expected on this business in the fourth quarter.

Finally, the update includes estimated catastrophe losses of $100 million after tax for the fourth quarter. Guidance for the balance of the year is for the current accident year only. We've given several numbers relating to the impact of crop on the quarter and on our guidance. In summary, all on an after tax basis, we had a loss in the quarter of $97 million from crop, and we expect no profit or loss in the fourth quarter. Our first half profit of $47 million brings our estimated, after tax loss for the year to $50 million. Our original guidance for the year included an estimated profit of $145 million. This means we have reduced the estimated profit by $195 million, again bringing our crop loss for the year to an estimated $50 million loss. Of course subject to change as we close out the crop season. With that I'll turn the call back to Helen.

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

(Operator instructions)

Matt Heimermann, JPMorgan.

A couple of questions. First, there are obviously a lot of moving pieces in the underlying combined ratio this quarter. Wondering if you could put those into context relative to maybe first half and then how you are thinking about things perspectively?

Matt, just in general I think the underlying combined ratio, you exclude, if you take out noise of prior period of cat of the crop, and so you are really trying to look at current accident year, I assume, though I think prior period is darn strong and speaks to good reserves, and good, prudent management of the business and the strength of our business from prior years, as it emerges. ¶ But the current accident year, in the quarter the loss ratio was around 59% and change. The expense ratio, even when you adjust for taking out crop was below prior year, by about 1 full point. I think the underlying health of the business is excellent and I think the mix is, is very good. And I think we are, we are booking our loss ratios as we always have. We are conservative underwriters, we write a lot of global business, we write a lot of casualty business. I think we are just, we are not aggressive folks, and I think it, I feel darn good about that current accident year and I think you ought to, as well.

We are receiving pricing. It varies by line. Whether it exceeds trend or not, there isn't just one statement about that. We'll see what trend is over time, no one can predict that with any certainty about inflation, particularly in long curtailed casualty lines, particularly when you think about medical. But obviously, price increases as they earn their way through, have an ameliorating impact. I believe you see some of that in there and I believe it shows up as time goes on.

Okay. Just following up on that, I mean one, you are getting rate in some areas, it seems like you are trying to grow, obviously, areas where you are feeling better about ROEs. Is it fair to think about businesses whether you are talking international, P&C, or A&H where maybe there is not explicit price increases, that the growth there actually will keep, growth is kind of, it is significant enough that even those aren't businesses with pricing leverage per se you might have as much earnings pick up there as you do in some businesses where there is pricing leverage?

Of course. Of course. Different businesses, every business has a different ROE characteristic. And some of our businesses, many of them, have quite good ROEs, that is how you get to that 11.5%. Even with crop and the noise. So yes, it isn't simply about, your first statement was correct, you want to grow more where you see an improving ROE and an acceptable ROE, and I think we have the insight and underwriting to do that, and we are constantly improving ourselves, and we are focused on growing those areas, where, despite pricing, the ROEs are good.

Okay. Thank you much.

Jay Gelb, Barclays.

Good morning. Evan I wanted to focus in on the comment in terms of ACE accelerating its strategic options. Can you drill in a little, in terms of what that means?

Yes, I'll try to add a little more color and just say it another way. Because I think I said it as clearly as I can. As ACE has deepened our geographic presence, as we have deepened our capability in those geographies, in terms of product line, insight, and underwriting capability, in terms of Management and systems, we can take on more and we see more opportunities in those geographies.

And as we have strengthened our global capabilities from head office down in product lines, and are maturing those in different areas, whether it is personal lines, whether it is A&H, whether it is life, whether it's surety, whether it's other areas of commercial P&C to aid our geographies around the globe. And when you add to that the strength of our balance sheet and the flexibility we have to take advantage, whether it's organic or acquisition, I just, I just feel, and from what I see, that our options for growth and opportunity actually are not static. They are simply accelerating.

And an example of that is what you just saw this quarter. We took advantage of insurety. And on the other side we took advantage of personal lines. I have to tell you we are pretty prudent people. We would not have done that if we didn't feel we really have the insight and the expertise from the local to the global to manage that. It is one thing to purchase something. It is another thing to understand it, manage it, make it better. And I feel very confident on the ground about that. And that has just really struck me.

I appreciate that. Then two quick follow ups for Phil. First in the North America P&C, the net to gross premiums level has increased from the mid-60%s year over year and then quarter over quarter now to 76%. Is that the right level going forward? And then I have another follow-up.

That's been affected by the crop adjustment primarily. That was about 5 points of it. Then as we talked about that risk management contract, that contributed another 2 points.

So mid to high 60%s net to gross is probably the right level to think about?

I think that's fair.

High 60%s. Remember that risk management contract is not a one-time contract. So as you go forward, that is going to keep repeating. We have a new large client. Thank you very much for buying ACE.

All right. And then separately on the investment portfolio, ACE has, among the property casualty companies we follow, has one of the highest high-yield fixed income allocation as a portion of the investment portfolio. Given with spreads at record lows and high-yield prices at record highs now, I'm just wondering if ACE should take some profits there.

Look. We established our exposure to high-yield bonds over the last several years at a time when we thought both interest rates and credit spreads were very attractive. As a result the average coupon on our holdings right now is 7%, compared with the current market yields, of about 5.5%. And the portfolio is an unrealized gain position of about 400.

As you know, our strategy has been to target the B-BB or upper tier of the sector. We are maintaining a high degree of diversity and liquidity We have over 700 individual holdings. We are very comfortable with where we are.

While credit spreads have narrowed to maybe their historical averages we expect the credit fundamentals to be pretty positive and the fault rates to be benign. And we have a specific set of guidelines for those asset class and we wouldn't expect any future increase in our exposure.

Your question about harvesting, that's not our play. And we'll continue to receive the coupons that are on that business that, as Phil said, are running in the 7% range in aggregate. And we'll, we will trade individually as we see either credit -- for either credit reasons or as we make some individual market decision. But not on a wholesale portfolio basis.

Understood. Thank you.

Mike Zaremski, Credit Suisse.

Evan, did I catch your pricing remarks correctly in that overall pricing in the US was plus 3.6% which would compare to 4.7% last quarter? If so why are you confident pricing will move higher in the coming quarter?

Well, first of all, I didn't say higher. I said the trend of pricing as I see right now, the kind of pattern of pricing will continue. The 4.7%, 3.6%, two things about that. Where you say it looks like it is down. Yes. But property has been such a large driver on our book. We are getting rate on rate right now in property and property cat pricing is quite robust, quite good. So it is actually rational that property pricing begin to level off that way. And receiving price on price to us, is encouraging and an encouraging sign.

Excluding that, when I kind of look cohort by cohort of the individual lines of business, the price we received in this, in the second quarter and the price we received in the third quarter, the price increases are either the same or are up. And that is across most individual casualty lines. And remember, ACE does not write, is not a player in the risk transfer traditional workers comp business. We have, an excess workers comp business, and on -- that complements our risk management business. That is risk transfer and their prices were up almost 10%.

So when you say those pricing levels are exceeding loss cost trends?

I said no, I didn't. I said they were -- I said it depends on the line of business. And it depends on first of all, what you pick for loss cost trend and how optimistic are you? And secondly, because remember, longer tail business you have got to imagine you are looking out well past the next two to three years, where you might imagine low inflation for the next two years. What percentage of long tail that you write are the claims actually going to be paid. On an awful lot of the claims the vast majority are paid in durations past the two years or three years. And so, and you look at medical inflation. So it varies by line of business, whether in fact, in our judgment, price increases are exceeding loss cost trend. But regardless, price increases are ameliorating some pressure on loss ratios. Period.

Okay. That makes sense. And lastly, hoping to flesh out a couple of things in regards to crop insurance. Expect no profit or lost in 4Q, is that just the multi-peril crop book? Or the entire ag book? And what level of premium volumes are you expecting to book in 4Q?

We are not giving premium estimates for Q4, but it is the crop book that Phil was referring to in the 100% combined ratio. The balance of our ag book it is not very big, and I certainly expect it should earn a profit.

Okay. So lastly then, have ACE's views on the economics of crop insurance changed at all in recent quarters? I guess what I'm getting at is do you have a desire to maintain or grow market share in the 2013 crop season? Thanks.

I'm going to let Brian Dowd answer that question.

Hi Mike. I would say obviously we have been in this business a long time. So we do a lot of long-term averages. We have probably more data in this business than any other business we have. Do we think the long-term business has changed? I would say no. It is a competitive business and every year after big events sometimes the competitive landscape changes and frankly, we don't know how it is going to change next year yet. It is too early to tell. Everyone hasn't finalized results, and the truth is we are a long-term player in this business and I would expect we would put a similar amount of emphasis on it next year than we had this year.

I don't see the economics changing. It is just on the margin from one crop year, you have to remember this is a more technically priced business like a cat they use kind of ten-year average pricing to figure frequency and average severity, though that has a lot to do with crop prices, but to figure yield losses. And so that is going to, we are steady as she goes.

Thank you.

We like the business.

Vinay Misquith, Evercore Partners.

Just wanted to drill down a little bit into the growth. So this quarter gross premiums grew about 2% and net premiums grew significantly higher because of higher retentions. Evan do you see some opportunities because pricing is improving slightly that you can keep more business net and that is how you can grow your premiums?

No. Vinay, I think you are missing it. Because I think if you take out crop, crop impacted the gross premium about 5 points. And so -- the net about 5 points. And but it impacted the gross as well a little bit. And so, I think there is some impact that way. Mix of business has a lot to do, yes we increase retentions to a degree.

But that's not the big impact to me. The big impact across the board is the writing of business that happens to naturally have a higher net retention to it. Our international business has a higher net retention. When I look under the covers within the US businesses, the businesses that grew happened to have a higher net retention. So retention has a 2 point impact on all of this. But the balance of it is growing in lines that happen to have a higher net.

Okay that is fair. Secondly, on the margins, we have seen margins improve year over year, this quarter. And yet pricing as you said, may or may not be higher than lost cost trends. Do you think that even for the future, that your business mix change is helping you to get higher margins because they are growing in business with higher margins?

A combination of things. The street, when you guys ask questions about all this, you really just the only lever really to pull, it's one dimensional thinking is pricing. But what you are missing is risk selection, and the fact is, as prices move, if you are an insightful underwriter, if you are diligent and you have good portfolio management, and you have the data to go along with it, then your risk selection, more risks meet your target pricing.

And that is a big driver in all of this. When you look at some of the classes don't think the 3.6% simply, as I told you property weighs on that et cetera, I gave you a number of classes that are getting priced significantly in excess of that. Within those cohorts, if you can select, the better risk as you imagine it to be as your portfolio underwriting tells you that, then you are going to get greater growth, greater opportunity in that class, and that's the point.

Okay that is helpful. Thank you.

Gregory Locraft, Morgan Stanley.

Evan I was worried you were getting ready to run for congress in your opening comments.

Not a prayer. (laughter)

Look at me. You think I'm electable?

I wanted to, I'm thrilled you guys took some action on the M&A front. But we sort of tested our Spanish skills in going into the things you purchased in Mexico, and from what we can tell, it looks like you are paying about three times book value, for businesses that are earning, in ABA's case an average ROE of 18% the last three years, and in Fianzas' case an average ROE of 35% the last three years. Is our math and directionally are these numbers correct? Or are our translation skills erroneous?

Your translation skills are just fine. But you are looking at statutory filings. And so we actually paid about two times book.

Two times GAAP book.

You have to look at GAAP book, you can't look at stat.

Okay great.

When it comes to the numbers, so, you are right, we paid more, but we paid more like two times book. But to me, in a growth business, in a growth economy, where there is superior short-, medium-, and long-term opportunity, I square the circle that yes, paying that for that presence and for that brand and all of that of two times, I look at the ROEs. And I square that circle with the comments I gave you back about what we expect for the ROEs. In a short period of time.

Okay great. I guess then if we were looking at, if we were to obviously look at take that two times book, that would effectively cut the ROEs that I mentioned by a third, and still obviously puts the deals easily above a 15% blended.

And remember not blended. I didn't say blended. I said each deal.

Oh.

So you don't know. No, no. Each deal. So you don't know the, you don't know where we can create wealth. And bring some benefit of ACE to bear in these that also helps to improve. So while we gave away some of the upside, we will still, on these deals, those numbers I gave you were for each deal.

Okay perfect. And then as we.

And also, I try not to give it to you in some pollyannish way like five or ten years from now it will be. And who knows? No, we are practical guys. So in a short period of time, we are execution oriented about that.

Okay. Okay good. And then as sort of as I look at it you guys have earned about $1.9 billion net income year to date, you have paid $600 million-ish in a dividend year to date, so you have got, the $1.3 billion that you are spending is effectively cash you have earned the last nine months that if it went into your investment portfolio, would earn you next to nothing. And now you have found a 15%-plus rate of return. Is the logic all there exactly how you think about it? Or is there something missing?

I don't think you are missing anything. I think you got the right logic. And remember, this, if it is managed right, these, the return is ultimately infinite. It keeps on giving to you. If we had done a buy back with that, which is the next question that someone will compare it to, that is one-time gratification. And I get that. So at the point of our life we think this was the right way to do it. The one thing which I think Phil could give you a little more color on is you can't translate that the $1.9 billion now all goes to all the sudden net capital generation.

Right. Part of that obviously gets absorbed into additional capital charges for the business that we put on the books right? So our growth absorbs capital, it is not one for one.

Okay great. And just the last one again on the M&A side, it's been a couple of years since you, since your investor day when you laid out your goals, Evan, strategically to grow the business footprint in Asia Lat-Am from 16% to 30% and in personal lines from 4% to 20%. Can you update us? Where are we on that trajectory? And has anything shifted over the last couple of years? Obviously these deals are going to help you get there.

First of all, when I look at the 4% to 20%, when you say 4% to 20% my natural reflex is to look at Juan Andretti, who's sitting right here and he's a great Executive and he's driving our personal lines growth globally in partnership with our general Management in each of the territories. Yes, of course these acquisitions, we are on track, I believe, to achieve our objective of geographic and product mix over time. And I think we are heading right in that right direction.

The only thing I'm going to say to you that I'm going to add to what you said, Greg, is that beyond these acquisitions, remember at the same time our US personal lines grew 14% in the quarter, and our international personal lines grew 17% in the quarter. So organic growth and with the presence we are building out is just is doing quite well. And now this just helps, this now complements it. And we have been building out the infrastructure, as I said earlier of people and capabilities to be able to safely manage this kind of development and growth, be it organic or acquisition.

Okay. Thanks a lot.

Josh Stirling, Sanford Bernstein.

I would just love to follow-up on commentary around acquisitions. Obviously you guys have been made substantial progress on diversifying globally. I think you have done at least nine deals by my count in the past five years. All of them apparently in strategy to basically avoid some of the excesses in the soft market here in the United States by growing diversifying lines globally and other more attractive insulary lines.

The question would be though with the environment shifting, pricing improving and the core US markets improving, should we think about your acquisition appetite rebalancing? Will you be continuing to focus primarily on adding global capabilities, foreign local companies? Or do you think you'll shift back and play the cycle turn and make some acquisitions here in the historic North American core markets?

Josh, stay tuned. We'll see. We are not, we've never shifted away from the United States. We shoot the birds as they go by. We are looking at them all over the world, and we are kind of agnostic about the territory that way. And so if we see something that complements what we are attempting to do organically, and meets our capabilities, and is the right kind of property and the pricing means good returns to our shareholders. Then we will pull that trigger.

That's great. That is very fair. Love to ask one more specific follow-up on acquisition strategy and thinking, over the past deals you have clearly been a cash buyer, pursuing smaller deals. I'm wondering in what scenarios we should consider that you might pursue using stock in order to pursue something much larger?

Oh, it would have to be much larger. And that's -- you think long and hard about doing anything like that. We wouldn't do something simply for the sake of size, that's not our play. And we certainly wouldn't want to do something, anything of size, that would kill our growth trajectory. And it's got to be a great return to shareholders, so boy, you are going to issue stock for it, you had better be, you better be certain of your numbers and your accretion.

Okay. That's fair. Happy hunting.

We are thoughtful and we are cautious and we are not an acquisition machine. Not this Company. We are, we grow our first priority and bias is to grow organically, we are day-to-day operators. Acquisitions just to complement that, that just when they happen though, they show more visibility to everyone. And so it kind of, it's more noticeable. But you look at ACE's growth, and it has been very balanced between organic and acquisition.

Great. Thanks for the color.

Michael Nannizzi, Goldman Sachs.

Thanks. One follow up on the crop. Is your expectation then kind of next year that the economics haven't changed meaningfully and that you are sort of 88% or mid to high 80%s combined ratio in crop will again hold next year? And just one follow-up. Thanks.

Yes, the way it fundamentally works is if you take in a ten-year average, this year will go into that average. And you'll just roll it forward that way. And now, you have got to take crop mix and territory mix. And you have got to take your stop loss costs and all that good stuff. When you mix it all in, that's how you roll forward from what was your original estimate for the current year.

Do you expect the private reinsurers are going to change? That is the piece that's maybe not mandated so specifically, I would assume and that private market reinsurers might should change the price that they expect to get paid for the risk that they are taking? Or is that not really relevant?

It will be interesting and we'll see. But I would tell you one thing. If they look back on anybody who has participated over in this business over a long period of time, these guys have made good money in that business. And I would expect they would take very good notice of that when they come to talk about reinsurance pricing.

Got it. And then just one follow up on --

There is plenty of capital in the reinsurance market today.

Right. Okay and then thank you. And then maybe a Phil question. The expense ratio looked like obviously North America was different and certainly crops seemed to have an impact there. But when I look at the other segments like re and overseas and you had the one big transaction in re, it sounds like as well. The expense ratio looked a bit lower there. Just trying to get an idea. Is there anything that changed there? Is there a seasonal element that I'm just not picking up on? Or did something change as far as the underlying economics?

There is no significant change. As we said in global re, it was the LPT, that Evan mentioned.

Sure.

Crop in North America. If you remove all of those though, our overall P&C expense ratio's down about 1 point.

Okay. Maybe I could sneak one last one in. Investment income you mentioned $525 million run rate. How does that work just given the duration of the portfolio? Are you assuming that new dollars coming into the portfolio at a lower yield will offset the reinvestment risk on the dollars that stay in there? Or is that kind of how you get to your $525 million? Or is there potential as you mix in lower yields that that $525 million, could not be a stairstep or not be flat during the year? And thank you for your answers.

Two things are happening obviously. We have new cash flow that we invest and we have the portfolio rolling over. So both of those will be at a lower new money rate. But the higher cash flow, would produce additional investment income, offset by the lower yield on that cash flow, and the roll over from the portfolio. We go through that exercise to estimate our turn over based on our existing portfolio and our view is that that is about the run rate. I think we've got a pretty good track record of estimating that.

Great. Thank you.

Brian Meredith, UBS.

A couple of quick questions here for you. First Evan, I'm curious with the (inaudible) coming up here, the possibility that dividend tax rate goes up, any thoughts about a special dividend or any thoughts about a potential change in your dividends philosophy?

Brian no.

Okay. Simple answer. The second one, I'm just curious going back to the M&A and just kind of get your thoughts on this. The transactions that we have seen recently in Mexico, are these happening to come at this time because they are opportunistic, a big willing seller? Or do you see out there maybe an increase in activity and willingness of companies to actually sell? I know that was an issue for a long time.

I think it's opportunistic. I think we are, it starts with, I think we have a knowledge, a pretty good knowledge of geographies around the world, and our view of each country. And Mexico is of particular interest to us. I think most are obsessed with Brazil. And we have been there quite awhile, and were there earlier and expanding earlier, and as everyone has come in, I don't think they have focused to the degree, most are lagging not leading in how they see things.

Our bet is Mexico over the next decade is going to produce superior economic results to most others. And in Latin America or south of the US border, may be superior in the region. And so, we have had our attention and our focus on Mexico. I can tell that you ABA, while it was opportunistic that ally came to sell it I have been knocking on their door for three to four years to talk about it. So it's been on my radar screen for a long time. I have been talking to New York life about FM for about two to three years now. And would they be interested in selling it?

So that they came to sell these things now and make their minds up about it that is just timing. But guess what? Both of them have been on our radar screen a long time.

Great. Just one question about the Mexican acquisition. Do you view that as a kind of plan now to potentially move down further into Central America with that platform? Is that possible?

We are already active in Central America and these acquisitions will only help further that presence.

Thank you.

Paul Newsome, Sandler O'Neil.

Back to the acquisitions. How important is cross selling new products into these distributions to making the financial results work for you guys?

It is not. It is important to us to do it but it is not a big driver in our ROE projections. But we think, and that is harder to do and takes time, and I think a lot of guys overestimate that. From our own experience, it's very realistic, very doable, but it takes time. And in the projections I gave, I'm not including them. Very modest.

Terrific. Should we be thinking of these units as places where you are going to be putting capital, over time? Or is it you make the acquisition and it moves on from there?

Well, it depends on their growth. And I hope to have to put some capital. Depending on the growth trajectory you pick, they may require more capital. And we understand that, of course.

Okay. So there is no explicit thought that the growth is going to require capital from other sources?

Anything we just gave as our ROE numbers contemplate all of that.

Okay terrific. Thank you.

Thomas Mitchell, Miller Tabak.

Over time, I was sort of struck by the comment about the populations and age cohorts in Indonesia and Mexico. There has occasionally been a really high correlation between having a young population and having political instability. And I'm wondering how many, if you have an opinion, what other markets around the world have that combination of let's say a rising labor force that looks forward to being able to do more and more that also has political framework that you can see as being stable for the length of time that you might want to invest. That is for 20 or 30 years.

Well first of all, I'm not getting into a 20 to 30 year discussion. I think that's not practical. But secondly, and we won't dwell on this Tom, on this call. I'll be happy to talk about this over a drink sometime.

But you know what, Mexico and Indonesia are both democracies, with young populations. And I think your comment is really referring to dictatorships or totalitarian regimes, repressive regimes with young populations, and that because of globalization and their access to technology and information, that they learn that they don't, young people learn that they don't have the same opportunities as young people in other parts of the world and they want them. That's hardly true of Mexico and Indonesia today.

That is a good answer. Thank you.

Ian Gutterman, Adage Capital.

I might write you in for President, we'll see.

Lyndon LaRoche ran for president if you remember. So what the hell.

First just to clarify Brian's question on ABA's platform potential, I mean, when you bought this, did you buy it solely on your view of what you could do with the existing property in Mexico and improve it? Or was there some consideration that Juan could expand this further? And I don't know enough about their brand. Is this a strong enough brand that you could expand further south?

We didn't imagine ABA expanding further south. Though there is optionality of what else we could do with ABA's capabilities, whether it is ABA or other entities of ACE taking advantage of ABA's capabilities. It is really what we can do to support ABA that is already a very good company, and brand in Mexico. To keep doing what they are doing, because we have a lot of respect for them, and to improve what they are doing by bringing to them capabilities that they just don't have access to, or knowledge of, because they are only in the Mexican marketplace, and we can bring that insight and capabilities to help them do better.

Understood, very interesting. My other question, back to pricing, can you talk about is there a difference, it feels a lot of times we talk about pricing in wholesale or pricing in casualty. I assume it is a lot more, there is a lot more underneath, there's finer distinctions than that right? What kind of differences are there in price when we talk about wholesale for things that are Bermuda, subscription markets where everyone gets a piece and there is tons of capacity versus lines where you have more control and you are facing more limited players like in large global placements or some of the niche type businesses? Are there distinctions there? Or was it really kind of wholesale is all going up the same for property no matter what the channel is?

No, it is very market specific difference. But so interesting. I'm going to ask John Lupica to comment on it. But one thing I'm just going to put in your mind before he does and set that stage for that is to understand this that the casualty pricing that we have gotten, we've gotten some of our most robust pricing in ACE Bermuda. The nature of the risk they are writing and the kind of risks they are writing and the limits of capacity we are putting out. And the appetite of that client of that client for limit of capacity and then the E&S gets more stressed stuff than the retail does. John you want to?

Sure. When we look at our retail business, we are absolutely getting a positive rate of about 3%. As you pointed when we look at our risk management business where our platform really makes a difference we are seeing more stability and pretty good pricing. And as Evan reported that was up 4.9%, which was a big increase for that book. On the (inaudible) side, there is a difference between retail and wholesale. Our casualty book was getting about a 6% rate increase. And our wholesale, our E&S Westchester company was getting about 12%.

That varies between primary, high access, and umbrella. But there is absolutely a spread (inaudible) and even when you get down to our Bermuda where capacity is a differentiator for ACE and we do have some of the bigger energy we are seeing the casualty market get about 9.5 points down there. There is no question there is a spread in terms of our ability to get rates based on the platform and the trading environment that we are in. We are even seeing it on the D&L lines where retail is plus 2% and wholesale is plus 6%. Perdido pieces of business are running through that market.

You take where we might write more primary, professional D&O, where we are more lead, and there, there is far more, we are getting a much better rate of 7%. Whereas the excess layers in that might be getting 2%.

Right.

Then you've got to triage into stuff further and say are you talking about side A only or are you talking about ABC?

Okay. I guess where I'm going with this it sounds like then that there is evidence that your platform is able to get more pricing than what we call a generic wholesale platform for a Company ABC in Bermuda that is doing more generic subscription business and it's finding a lot more capacity. What you -- how you differentiate yourself is starting to pay off more than it has maybe in recent times. Is that fair?

I would say within each of the markets, whether it is US E&S, versus Bermuda E&S versus US retail. We are a differentiated brand, and market in each one of those. We're a major market player in each of those. We have been around a long time and we have broader capabilities than many do. You come into Bermuda, we have had those clients for years and years and years. We swing a pretty big stick in capacity, but we are not the only ones swing that sized stick.

But we've got a balance sheet. And we have a knowledge of those industries those guys are in and they also want some continuity, so we are well established in that. When you come into Bermuda, we are writing casualty, as well as professional lines as well as property. And a number of players, they might be simply a casualty player or simply a property player. And they may not have the depth in experience and knowledge and they write excess behind a player like us.

Great, very helpful Evan. Thank you.

Josh Shanker, Deutsche Bank.

Apologies I did join the call late, but I looked through the transcript. I don't think you talked about expense ratio at all, it looked very good during the quarter. I'm wondering if you have any comments on that.

We did talk about it on --

I apologize. I'll read it, thank you very much.

No it's okay. Phil's ready, he'll answer your question.

It is principally improved as a result of crop. Even without crop our expense ratio is down year on year.

Josh, our expense ratio ex-crop is down 1 point. We consider it a really great improvement so far, when you take away crop.

It is. I appreciate it. Thank you.

That does conclude today's question and answer session. I'll turn the conference back over to Management for any closing remarks.

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

That does conclude today's conference. Again, thank you for your participation.