丘博保險集團 (CB) 2012 Q4 法說會逐字稿

Good day and welcome to the ACE Limited fourth-quarter year-end 2012 earnings conference call. Today's call is being recorded. There will be a question and answer session after the presentation.

(Operator Instructions)

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

Thank you. And welcome to the ACE Limited December 31, 2012 fourth-quarter and year-end earnings conference call. Our report today will contain forward-looking statements. This includes statements relating to Company performance, guidance, premium growth and product mix, 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 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 developments. Now I'd like to introduce our speakers. First we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft, our Chief Financial Officer. Then we'll take your questions. Also with us to you assist with your questions are several members of our Management team. Now it's my pleasure to turn the floor over to Evan.

Good morning. ACE had a strong fourth quarter which contributed to a very good year for the Company. After-tax operating income for the year was $2.6 billion. It was up 13% from 2011 and per share book value grew 12% to almost $81. We finished the year with a very strong balance sheet with total capital at $32.6 billion at December 31 and shareholder equity of $27.5 billion, both up over $3 billion for the year.

I'm going to return to the full year in a moment, but let's first talk about the quarter. Even with the impact of Superstorm Sandy, the underlying strength and vitality of our business was evident in the quarter as we produced good earnings, good premium revenue growth, and an increase in book value per share. After-tax operating income was $492 million or $1.43 per share. The combined ratio for the quarter was 105.5%, which included $400 million in after-tax catastrophe losses, essentially all from Sandy, and a reserve charge for Brandywine.

The ex-Cat accident year combined ratio was 91.4%, about 0.5 point improvement over prior year, and if you exclude crop insurance which broke even in the quarter as expected, the ex-Cat current accident year combined ratio was a 2 point improvement over prior year.

Net premiums in the quarter on a constant dollar basis grew only 1%. Excluding crop, net premiums grew over 7%, with growth once again coming predominantly from the US, Asia, and Latin America. For example, net premiums in the quarter in our retail insurance business in the US and internationally grew 9% and 11% respectively, while on the wholesale E&S side, North America was up 7.5% while ACE Global markets in London was essentially flat.

Book value per share grew about 2% and our operating ROE for the quarter was 8%, not bad all considered. As I said, we took a reserve charge related to A&E and other runoff business of $140 million pretax, which netted against our positive prior-period reserve development. In the quarter, we also had a reduction to our tax liability reserve, which reduced a positive impact to operating income of $120 million. Phil will provide more details on these items.

Returning to our full-year performance which I think is more meaningful than one quarter's results, net operating income for the year included strong contributions from both underwriting and investment income. For the year, we produced $1.2 billion in underwriting income, an increase of 11% over prior year and a very strong underwriting performance. The combined ratio was 93.9%, down almost 1 point from prior year and yet this included the worst drought conditions in the US in 25 years and Superstorm Sandy.

Our ex-Cat current accident year combined ratio was 92.7%. The excellent underlying underwriting performance of the Company reflects an improved price environment in the US, our large and growing business around the globe in Asia, Latin America, and Europe, our unique and balanced product spread between commercial P&C, specialty P&C, A&H, personal lines and life, and finally, a continuing focus on improved portfolio management and data analytics that complement a strong underwriting culture.

For the year, all of these dynamics contributed to a constant dollar premium growth rate of 6%. We took advantage of growth opportunities globally, where we found them.

We also produced $2.2 billion of investment income for the year, down less than 3% from prior year. While clearly under pressure, considering the interest rate environment in which we operate, it was a good result, reflecting thoughtful portfolio construction that is balanced between yield and risk.

Finally, our operating ROE for the year was 11%, a very good return on capital in my judgment, given the events of the year. And at the same time, we continued deploying capital accretively to acquisitions that improve our capabilities and growth prospects for the future. I'll come back to that subject in a moment.

Concerning premium growth, our commercial and specialty P&C business globally grew 6% in constant dollars during the year. With net premiums up 9% in US commercial and double-digit in Asia and Latin America, while Europe was up modest single-digit and crop was down 15%. Our A&H insurance business grew over 3.5% globally in constant dollars and I fully expect that growth to continue to pick up throughout '13. International A&H was up over 8% led by double-digit results in Asia and Latin America while the combined was down 2%, but flat in the fourth quarter as projected and I expect this business will return to published growth towards the latter part of '13. Overall A&H earnings were up over 10% for the year.

Personal lines globally was up almost 15% in constant dollars with gross premiums now approaching $2 billion, including our recent acquisitions in Mexico and Indonesia. Our international life insurance business was up 14% and passed a major milestone in '12 by contributing positively, though modestly to earnings for the first time.

Finally, our Global Re division again produced exceptional results with a combined ratio of 77.5%, reflecting superior underwriting discipline and risk selection, even with the impact of Sandy.

Let me say a few words about the current market environment. Our commercial P&C business in the US continued to benefit in the quarter from an improving price environment where we are now achieving rate-on-rate increases for the second quarter in a row and I firmly expect this to continue.

Overall, North American pricing was up almost 4% in the quarter, with retail up 3.6% and wholesale up 6.4%. Price increases were more broad-based than past quarters with more lines of business achieving positive rate. Some examples include property up 6%, D&O up 7%, casualty risk management up almost 4.5%, our strongest quarter in a number of years, and excess casualty up over 5%. US retail at almost 8% in our Bermuda high excess book.

As I said last quarter, we expect the pattern of price increases in the US, which were being driven by the larger and more sophisticated underwriters to continue in a reasonably, orderly fashion for the foreseeable future. More stressed casualty related lines which are still well underpriced overall will continue to receive larger levels of price increases, while less severely stressed lines should continue to move up more modestly. Property pricing will likely flatten out as the year progresses. That's natural.

As with any large market, we still have areas of business where prices continue to be under pressure as companies chase market share using inadequate rates.

Internationally, pricing was about the same as the third quarter, with rates flat in retail and up single-digit in selected wholesale lines, such as property, financial lines, and energy. International markets are competitive as many companies chase share without regard to adequate returns.

Our premium renewal retention rate for the quarter in the US retail business was over 97%. That's on a premium basis. With account retention at 83.5%. New business writings in US retail were up 10% in the quarter and 44% for the year. We are taking advantage of the opportunity from an improved market. Both our retention rates and new business activity are benefiting from our sustained emphasis on portfolio management and data analytics, which are continuously improving our decision making insights into risk selection and ultimately our underwriting profitability.

From what I see today, I am more bullish about the pricing environment in the US than I have been for some time. In fact, property aside, the level of rate increases we received in the fourth quarter, which has continued into the first quarter, is the best we have seen in a number of years. My colleagues and I can provide further color on market conditions and pricing.

Finally, during the year we committed or deployed $1.25 billion in capital to acquisitions in growth regions of the world that enhance our growth and diversification strategies. Our two Mexican acquisitions are on track to close between the first and second quarters. In fact, I recently returned from a trip to Mexico and I can say that we are more excited about the quality and potential of these two fine companies today than at the time we announced our intent to acquire them. Their income generation potential is likely even greater than we had first imagined.

In summary, ACE had an excellent '12. Our operating income, book value, and premium revenue growth and ROE are all top tier. Today, we are more diversified, more capable insurer, in a small class of truly global insurers with a clear strategy of people, the balance sheet, the product, expertise, and geography to execute. I am frankly more optimistic today about our prospects for growth in revenue and underwriting income as we enter '13 than I have been at this point in time in a number of years. All things being equal, and remember, we're in the risk business. With that, I'll turn the call over to Phil.

Thank you, Evan. Our balance sheet continued to grow stronger in the fourth quarter and we finished the year with a strong capital position. Tangible book value grew by 2.7% for the quarter and 15.5% for the year. Our cash and invested assets grew $4.6 billion or 8% this year to over $60 billion. Excluding unrealized gains, the growth was $3.7 billion. Operating cash flow for the quarter was $1 billion, and was $4 billion for the year.

Net realized and unrealized gains for the quarter were $200 million, and included $170 million realized gain from our variable annuity reinsurance portfolio. Investment income for the quarter was $567 million, which included $42 million of higher-than-expected private equity and other distributions, as well as the income benefit of an insurance contract classified as a deposit. Current new money rates are 2.3% if we invested in a similar distribution to our existing portfolio and our current book yield is 3.7%. We estimate that the current quarterly investment income fund rate is approximately $520 million, which is subject to variability in portfolio rates, private equity distributions, and FX.

Our net loss reserves were up $780 million, or 3.1% for the year. Our paid to incurred ratio was 119% for the fourth quarter. When we normalized the fourth-quarter ratio for crop loss payments and Cat loss activity, the ratio is 86%. Cat losses were $400 million after-tax in the quarter, and included $390 million related to Sandy. This comprised losses of $290 million from commercial insurance lines, and $100 million from personal lines. Approximately $300 million of the loss was from our insurance business and $90 million was from our reinsurance business.

Evan mentioned the reserve strengthening during the quarter related to A&E and other run-off [business] totaled $140 million pretax or $90 million after-tax. This included $91 million for asbestos, $27 million for environmental, and $22 million for other pre-'99 legacy runoff liabilities. This was offset by favorable development of $177 million on other lines of business resulting in net positive prior-period reserve development of $37 million. About 60% of the positive development was from short tail lines with 40% coming from long tail lines, primarily from accident years 2007 and prior.

Our crop insurance results for the fourth quarter included no net profit or loss, in line with our guidance last quarter. Crop net written premiums for the quarter were down $200 million versus last year, principally due to an increase in our premium sessions to the US government as a result of the government's crop insurance profit and loss calculation formula. Our unusually low tax rate for the quarter was favorably impacted, predominantly by $120 million benefit resulting from the resolution of various prior-year tax matters with the IRS.

In December we issued updated 2012 guidance in connection with our release on preliminary Sandy estimates. Our actual results were better than indicated, principally due to an improvement in investment income, our current accident year underwriting result, and the net difference between the A&E charge and the tax benefit we realized.

Our press release issued last night included our guidance for 2013. Our range is $6.60 to $7 in after-tax operating income per share for the 2013 accident year. This includes Cat losses of $395 million after-tax. Guidance is for the current accident year only and includes no assumption for prior-period development.

While we're not going to give a full worksheet on our guidance, we've given Cats and an investment income run rate, I'll talk about some themes in the 2013 guidance compared to our 2012 guidance and our 2012 actual results.

First, we expect substantially higher underwriting income. We expect lower investment income as we have already told you, and a higher year, current accident year tax rate due to higher underwriting in the US. Obviously, compared to actual 2012, we don't expect a tax settlement.

And finally, a couple of smaller items. While we expect our recent acquisitions to be accretive in the first year, in 2013 we only have a partial year depending on when they close and we have higher purchase accounting intangible amortization. Also, we expect a negative FX impact relative to the 2012 guidance. I'll turn it back to Helen.

Thank you. And now we'll take your questions.

(Operator Instructions)

Jay Gelb, Barclays.

Evan, with the rate increases lapping each other, now getting P&C rate increases on top of prior rate increases, to what extent do you think underlying underwriting margins could improve?

Yes. Good morning, Jay. I think they can improve is the short answer. But let me expand on it a little. First of all, we have a very good current accident year combined ratio, as you know. Take away crop. I think it's its own market. It's a separate business when you're looking at commercial retail, wholesale business, you're better off without that. We have a very good current accident year ex-crop relative to most of the industry.

Pricing and underwriting selection has contributed to date to a modest expansion in margin. And the trend is increasing towards margin -- further margin expansion, and I think that will happen. As important, or more important, pricing has contributed to our ability to write a substantial amount of new business across a broad set of products at relatively higher rates than our renewals, about 109%-plus adequacy versus renewals.

And so, I do see some margin expansion, but I also see how it is contributing to growth. And from what we see, looking at the first quarter right now, pricing is as good. It's very early days, but in January pricing was as good or better than we saw even in December, which was the best month of the quarter, and that's contributing to us writing substantial amount of new business. I think growth rates going forward are going to look pretty good, too.

That's instructive. Thanks, Evan. I just had a couple quick follow-ups for Phil. You said that the investment income run rate is around $520 million. That would be down pretty meaningfully from $567 million in the fourth quarter. I didn't know if that included some one-time investment gains or an FX benefit. What's the difference?

As we said in our press release, we had additional private equity distributions in excess of what we would have expected, and we also had a one-time benefit from a contract, an insurance contract that is considered a deposit. So, the development on that contract was included in investment income. So, as we said in the press release, we had about $42 million of income beyond what we would have expected, which gave the run rate last quarter of about $525 million.

The investment income decline in 2013 probably could be more than being down 3% in 2012, right?

Yes. Well, yes. What I've said is, I think our investment income for the year was $2.180 billion, and I think if you multiply that $520 million out as a run rate you come down about $100 million pretax.

Okay. And then on the tax rate, Phil, I mean, in the past you've sort of looked at the 18% range as a baseline. Given what happened (multiple speakers)

It was lower in this quarter obviously because of the $121 million. But also, if you even back out the $121 million, as you know, it's lower than that run rate, and it's principally because of where the prior-period development and the cat losses fell.

So, for 2013, what should we plug in initially for (multiple speakers)

We really haven't given you a worksheet on that. But it has been running in the 16%, 17% range.

In your commentary, you said it could be higher. I'm just thinking, is that 16%, 17% (multiple speakers) the right starting point?

Just to be specific, I was talking about higher than we had actual in 2012.

Okay. So, we'll start with 16% or 17%.

Okay. I would (multiple speakers)

Thank you.

Mike Zaremski, Credit Suisse.

So, if I think about the 2013 versus 2012 guidance and if we strip out reserve changes, the 2013 guidance doesn't seem to imply any earnings growth on a year-over-year basis. And Phil, I know you mentioned a bunch of negative items -- higher tax rate, higher amortization expense, negative FX impact. So, if we add up all those items, how much impact do you expect them to have in 2013 versus the old guidance?

Well, I've given you -- we've given you our guidance that has a midpoint of 6.8%. So, I mean, that's the implied -- that's our implied estimate.

Okay. And so -- but you're not able to kind of quantify all those items that you mentioned? Do those have a 5%, 6%, 7% impact versus -- I know last year's guidance was 6.85% at the midpoint, I believe. I'm kind of thinking, if we're bullish on -- we're clearly bullish on rate increases in the US, Europe is a question mark we could talk about. So, you're expecting higher underwriting margins. I'm just trying to figure out what I'm missing in terms of why the midpoint isn't going higher.

Okay. So, this is Evan. First of all, yes, we have -- I'm going to say a few things about it. We have -- we don't give a worksheet, so we're giving you thematic color around it. We only give guidance on a per-share basis. And we're not going down that rabbit hole that's going to give you more than we gave you on investment income or talking about tax rate or any of that.

What we've also done, though, is we've talked a bit about how we see pricing and revenue and margin. And we've told you that we expect underwriting income to grow substantially, and that's going to happen predominantly growth and some margin. And so, then the rest is an offsetting.

But then let me add a little more color to the guidance. Because, frankly, at the end of the day, it's your results that count, and we've produced pretty good results. Guidance is created so I give you a little more window into it, because you're not the only one who's imagining this question. Guidance is created in December as part of our budget process that we go through. Most of the data, particularly around pricing and that, is third quarter, and maybe a very early fourth-quarter based, but it's really fundamentally third-quarter-based data.

From what I know now, we're biasing towards the upper end of the guidance range. That's what I see. Pricing is better. Growth looks good. And the acquisitions -- the acquisitions may produce -- it will be modest -- may produce modestly better results. And so, when I add all that up, I think we bias towards the upper end of it.

Now, it's early days. It's early in the year. And we'll see how the actual turns out. But I am more bullish than I have been in some time.

Okay. That's helpful. And as a final follow-up -- as we all know, crop is a unique business line. From what I've been kind of seeing, I guess drought conditions -- I know it's winter -- have persisted, and the soil conditions are somewhat poor in the US currently. So, does that kind of change your expectations or positioning for the 2013 crop year? Thanks.

I will tell you this. In our guidance, we used a normal -- we use what we consider to be a normal crop year. We've talked in the past about how we think about our selected when we look forward in a year, which is based on a 10-year average. It would include, therefore, '12's poor year, and in that average we did the same thing.

And you know, say soil conditions, I want to remind you of something, that up until mid-June last year it looked like, based on soil conditions and moisture and temperature, it looked like we were going to have the best crop year in many, many years. So, if anyone has figured out a way of predicting future growing conditions, I'm all ears and listening. And by the way, you're in the wrong business.

I hear you. Thank you.

Mike Nannizzi, Goldman Sachs.

One question I had is -- just internally, how much opportunity do you have for capital deployment, whether it's in international, on the personal line side? And is there some information you can share with us in terms of what you expect to see from that sort of organic growth in terms of investing internally? And just one follow-up. Thanks.

We don't give growth guidance. We do see -- I think we have been delivering -- we told you that '12, you take away crop, and so you really look at the intrinsic business globally beyond that, and we grew over 7%. So, we're deploying capital in growth organically.

And I expect that that kind of trend of growth rate from what I see right now and how the year is starting, it's starting that strong or stronger. And so, we see a lot of opportunity, which we have talked about quite a bit, in the US and Asia and Latin America, and in more secondary parts of the world, to continue to grow our business. And we have the capital, and more importantly, we have the capability and the people and the presence to manage that capital, we think, in a profitable growth way.

Got it. Great. And then, what sort of loss trend are you assuming? You said that you're seeing rate kind of 4%-ish now. In terms of the impact that that rate will have on margins as you look out, what are you assuming on the loss side and what sort of trends are you seeing there that get you comfortable that that 4%, or wherever that ends up, will translate to further margin expansion?

I'm going to ask Sean Ringsted, our Chief Actuary, and I can guarantee you the smartest guy in the room we're all sitting in, to answer that question.

Mike, it's Sean. It really depends on the type of class that you're looking at, whether you're writing international primary through to US excess.

So, while you might want to think about an average loss trend, for the more risky, higher-volatile type casualty layer, we could be using loss trends of anywhere up to 9%, 10%, 11%. So, you really want to think about it in a -- by class. Obviously where we've seen the margin expansion, and to Evan's comments earlier, have been predominantly on the primary casualty type classes where you've got that lower loss trend.

Would you say that you're seeing -- so, if you look at a granular level, Sean, are you seeing rate on a written basis or an earned basis in excess of loss trend more often than not or -- ?

That's right. On a written basis.

On a written basis. Okay. And you said you're seeing that more often than not at the granular level at this point?

I took your comment on the more often than not to be -- we're seeing it more often on the written basis than on the earned basis.

Got it.

So if you continue to see the acceleration, that will obviously grow into the -- and on an earned basis.

Great. Thank you, Sean. Thank you.

To say it in one sentence, as I said before, we are seeing what has come through so far is a modest expansion to margin from rate. I add in underwriting selection, and that improves margin expansion. And the substantial dividend of being able to write a lot more new business and at better pricing. We see pricing accelerating. The rate of increases is increasing and has been, and so we're seeing better pricing now, and that should bode -- all things being equal, that should bode well for future margin.

One last one. I know you spent a lot of time in this release talking about crop. At some point, would you consider breaking out crop? I know we talk about this all the time. Last year being obviously a big divergence between that and your non-crop business. Just would love it if you would take that into consideration at some point.

We are. We're thinking about that.

Okay.

We're mulling that over as to whether it's just not better to break crop out completely, and we're thinking about that.

Great. Thank you.

Greg Locraft, Morgan Stanley.

Just wanted to again pursue the guidance discussion. I think you mentioned you feel better at the upper end, so I'll take sort of the upper half of the guidance and call it 6.90%, just because that's the upper -- midpoint of the upper half of the guidance. If I look at the five-year reserve development, historically you've added $1 or more to earnings, so we're up high 7%'s or 8%. But still the starting point is the lowest ROE of the corporation in -- since before you got there.

So, I'm sort of wondering -- and I think we all are -- is what's breaking so hard to the negative that's causing the base case to be so conservative? I just can't -- I view I guess '12 as kind of a trough year in ROE, based on what occurred in the year, and I can't see how this year's going to be worse.

Okay. So, look, here's what you're -- let's just -- I don't think it's that complicated, but let me add a little color. First of all, when you say ROE, frankly, from our work, and with all due respect, I think we have probably the best insight into our numbers. We'd see the current accident-year ROE closer to 10%, in the mid -- 9.5%-plus range to begin with. I'd start with that, number one.

Number two, revenue growth and pricing and mix of business globally will contribute to substantially more underwriting income. And so, when you think of trough year, we see real growth in our business [that way].

Offsetting that, you do have a decline in investment income because you have a decline in interest rates on a portfolio basis that comes in -- you can hardly call '12 trough year for that for the industry, let alone ACE. ACE is not -- I don't single ACE out in that.

And then, as Phil said to you, there is fundamentally -- there is a tax rate benefit on the current accident-year rate, there is a tax benefit. There's a rate differential between '12 and '13 that we imagine, and that's offsetting. Both of those things are offsetting. There's a little bit -- it's not really FX. There's a little bit from and on a second order of magnitude from purchase accounting, so Other income becomes a little more negative because of purchase accounting on the acquisitions. That was all imagined when we did the acquisitions and said they'll be accretive to begin with. So, that's really how we get there.

Now, you say ROE. We have published a double-digit ROE for quite some time. And based on what I know now, if things develop as they are currently, and no one knows with certainty, I believe we will continue that record of double-digit ROE in 2013.

Okay. That's very clear. Thank you. And on the amortization side, have you given an exact figure there, like you do with cats, in terms of just what you're anticipating the year to be?

We haven't done that, but what we have said is that you would expect in the early 12 to 18 months of an acquisition, the amortization would be much higher. So, we have said in the acquisitions that, while they're certainly accretive initially, they become more accretive as that amortization occurs and goes away.

And the much higher is relative to those acquisitions.

Yes.

And that's a second order of magnitude impact, again. Really, investment income and tax is the --

Okay. And then finally, just on the capital structure, debt to cap is the lowest it's ever been, or as low as it's been in a long time. Will you be financing the deals with debt? How do you think about that, given that obviously it's a drag on the investment income side, so interest rates are very, very low.

I'm going to let Phil answer that.

I wouldn't expect that we would add any additional capital to finance acquisitions. We have been thinking about pre-funding some of our debt, and so we'll consider that, but I wouldn't expect us to increase our leverage at the present time.

Okay. Thank you very much.

Josh Shanker, Deutsche Bank.

I'm going to try and avoid mentioning the word guidance. Too many questions. I do want to talk about the idea of investment income going down and underwriting income going up, and does that mean that the -- given that your outlook so far is sort of where it was a year ago, that those two items are in equilibrium? And then the question would be -- when do you see that the pace of underwriting gains starts offsetting the pace of investment income decline?

Josh, I think, based on the way we just answered the question before, we did not see investment income decline or underwriting income growth offset by simply investment income decline. I think we just went through the (multiple speakers)

I understand there's taxes involved, although taxes are part of the basis pricing in there I would assume as well.

We talked about -- we just talked about tax and other items, so I think we've answered that question.

Well, then, more or less I'm thinking to 2014, is there an inflection point where all these items, where you see underwriting becoming a more dominant source of income versus these offsets that you would expect, given the trends right now because you've written given that it happens a year before premiums earned. Would you expect one year from today a substantially different situation given that maybe taxes and investment income are more predictable than underwriting results are, per se?

Josh, we gave guidance for '13. We're not giving any guidance or any indications about '14. We'll see how it plays out.

Okay. Thank you.

Meyer Shields, Stifel Nicolaus.

Evan, you talked about how the improving rate environment is going to provide opportunities for new business. How should we think about that impacting the ratio of net-to-gross written premiums?

Not much change in net to gross. I think you ought to imagine that -- look, it's steady. We do the best we can estimating in our budgets what net to gross will do. But it bounces around within 1 point or 2, generally, from year to year. And when we -- it's a big organization, and when you add it all up, though any one line that has a higher net to gross, you might be writing a lot more of that. Relative -- when you throw it into the pot with everything else, it bounces around within 1 point or 2.

Okay. And I think this is probably a question for Phil. If we look -- if we calculate the corporate administrative expenses, it was up pretty significantly from the year-to-date run rate. Was there anything unique in the fourth quarter for that?

(Multiple speakers). If I look at overall P&C expense ratio, and we adjusted for crop, it would actually be down about 1.3 points.

Okay.

You're talking about just the corporate expense? I'm sorry.

Yes, I'm just looking on the corporate side.

We just have some share compensation increases that are just a timing issue.

Okay. Thank you very much.

We wouldn't expect that to be recurring.

Great.

Matthew Heimermann, JPMorgan.

First question, just -- can you talk a little bit about the Life segment at this point? And in particular, there's been a business shift ongoing obviously on a new-business basis since '07. And you've rolled in some acquisitions the last couple years. I'd just be curious how we should think about that part of your business progressing over the next couple years. And in particular, just curious how that kind of change in mix kind of affects the differences in margin structures, things like that, as well as growth rates.

So, what we saw in this quarter, for example, is that the overall Life operating income was down about $5 billion. That was affected by a decline in the Life Reinsurance book that's partially because of runoff, and partially because of a small reserve strengthening in the Life runoff book. Excluding the runoff, our income is up $5 million. I think Evan mentioned there was a breakthrough to contribution. So, we would expect that as the runoff slows and the International Life grows, that we would see an improvement.

Let me add to that. The Life Insurance -- there's three pieces in there, in that division. There's combined North America. There is -- where margins are steady, and it's about growth. And that business, I think on a published basis in the latter part of '13 begins to show growth, and that ought to then, as you go forward, when you're thinking out the next few years, that will contribute to growth in that division.

Number two, the Life Insurance business, which is the International Life business, Asia predominantly, and Latin America, that produced modest income this year in '12. It was running negative up until then. So, we're now -- it's now starting to contribute. It takes years to build it. And I think in '13 it's going to produce modest income. I think in '14 and on is when it should begin to produce more steady growth and income. So, those are two positives.

Offsetting that we will have for -- and it will happen for a period of time, number of years, the Life Re will run off. And as the Life Re runs off, year by year it will produce less income than it produced. So, when I look out over the next couple of years -- and thank you for not asking it on a quarter basis. When I look out for the next couple of years, I see a pattern of the combined in North America growing in income. I see the Life Insurance growing in income. And I see the Life Re declining in income, which, frankly, for the Company over a longer term, that's a good thing.

Are we starting to hit -- I guess based on the way you laid that out, it's probably -- are we hitting an inflection point where the combined, if it starts growing and the International piece start to -- are starting to offset the runoff piece? Or is that -- that's a transitioning that's happening over the next year or two?

That's a transitioning that's happening, and I wouldn't look for that right away. The way I think of it, because Life is such a long-term business, I think of it in my own mind that '13, '14, I'm seeing those more as inflection point, and then it begins to -- then it begins to emerge.

Okay. That's very helpful.

In a more substantial way.

Yes.

Because I expect Life Insurance earnings to actually accelerate.

That makes sense.

Over time. When I look at five years of this, I see an acceleration in Life that begins to occur in Life Insurance. Okay?

Yes, that's very helpful. And then, Phil, just on the A&E increase, does any of that count towards the excess of loss agreement with Century, and was curious if there's any impact on the surplus requirement of that arrangement, too?

Sure. Actually, this is Brian Dowd.

Hi, Brian.

For sure, any time we increase the reserves and change the structure, it has an impact to the XOL. No change to the capital. We're at the capital requirement for the run-off [operation], so no change to capital. The current XOL usage, I think it will be estimated around $421 million after the charge, and the change with the exhaustion of the NICO contract.

Okay. That's very helpful. Thank you.

Paul Newsome, Sandler O'Neill.

I wanted to ask what I think may end up being an accounting question, on these acquisitions you're making, you're saying the amortization sort of hits first, and I hear that. I'm curious as to what exactly the amortization is. It's not goodwill, is it DAC that we're talking about that sort of comes in earlier than the revenues? So, I'm just curious. Is it a little bit different given the components of the acquisitions that you made recently versus stuff that we've seen in the past?

It depends on the nature of the acquisition, but for the P&C acquisitions that we've done, it's generally intangibles that we're required to establish that relate to aspects of the business, the in-force business that get amortized over a relatively short period of time. That's in contrast to some of the other businesses like the combined that had much longer-tail amortization on the longer-term intangibles.

Paul, the accounting is -- the accounting is prescriptive. You don't really have a choice of it, so some intangibles are goodwill, and they don't get amortized. That's what it is. And then the balance of them you must amortize them as prescribed.

And the bulk of them get amortized pretty quickly. That's why we say the first 12 to 18 months have more amortization built in than the subsequent periods.

What would be an example of that -- of those intangible assets? Customer lists or stuff like that?

On our premium customer lists, those types of things.

Customer lists, sales force, they attribute a value to all those assets. You've got a sales force, they attribute a value to that. You've got to amortize it over a period of time. They tell you it's got a shelf life.

Okay. Thank you.

Jay Cohen, Bank of America Merrill Lynch.

Two questions. The first is -- you had talked about, in the fourth quarter, having the investment income benefit by about $42 million because of the issues that you cited. Is there a similar number for the year? Were there other issues during the year that inflated or deflated the investment income relative to what you might expect normally?

There really haven't been. If you look at the PE distributions, for example, the private equity distributions in the fourth quarter, they were substantially more than the combination of the first three quarters. So, we had been expecting, call it, $7 million a quarter for the first three quarters, and that's about what we had. And then in the fourth quarter, we had $29 million. It was just an acceleration that we didn't anticipate.

Jay, we estimate reasonably conservatively about PE distributions. You can't --

They're lumpy, right.

They're lumpy. You can't guess them with any certainty. We don't try to game it. We just come up with what we think conservatively, as you can imagine, and then past that, it is what it is. In this environment right now, as equity markets have risen, and with the specter of tax rates going up, there was an acceleration, there was more activity.

Got it. That's helpful. And then the second question -- on this call last year, you guys talked about the drag on your ROE that excess capital, in your view, was having. And I'm wondering if you could update us on your thinking on that number.

It's roughly the -- it's in the same range. It's about 1.7 points on the ROE.

Got it. That's helpful, Evan. Thank you.

Thomas Mitchell, Miller and Tabak.

My first question really is asking you to put on the same hat that we wear, not with respect to ACE in particular, but if you're thinking about investing in a business, a property and casualty insurance business. The question I have is -- would you pay more for a business that has more underwriting income and less investment income on average as a multiple of, say, book or of earnings? And would you pay more for a business that has increased franchise growth as opposed to increased non-organic growth? And just as a concept in how you would look at evaluation if you were evaluating a potential acquisition, say.

Yes. No problem. Here's how I would look at it. I would look at it and say -- now, let's see. You're bringing me a company that produces a double-digit ROE and has compounded its wealth growth to shareholders at 12%. So, I'm going to look at its track record first, and when I look at that, and then I say -- now, tell me what the company's trading at. The company is trading at just over book value, and producing that kind of ROE, and that kind of book value growth, and you got my attention immediately.

Then what I look at is, I look at -- now, tell me about how the earnings -- how does that company make its money and what's the growth potential of that company? Is it a franchise or was it just a flash in the pan? Do I think it has an enduring quality? And do I believe, over a reasonable period of time, that it has a growth trajectory to it, and that it continues to? I don't look at, by the way, acquisitions on a quarter basis or a half-year basis or even a one-year basis. I look at them over a period of time because it's permanent.

And then -- and so I would look at that franchise growth value. And then I'd look at its quality of earnings as well. I'd say -- wow, does the company -- the company has two sources of income if it's an insurance company, and that's all we buy. So, I'd be looking at -- does it have good underwriting income generation and a margin on its basic business? Does it know its basic business, and can I trust it knows how to navigate its market? And so, a good combined ratio, very important to me.

And then I look at the balance between investment income and underwriting income. Well, I'll use ACE as an example. I look at the balance between underwriting income and investment income, and I look at that combined ratio and I say it's pretty darn good. Then I look at its current franchise, and what is the capability within that franchise, where's the opportunities? And so, that's how I think about its future growth potential then.

And finally, I look at its people. So, when I add all that up, I don't know, that's how I think about an acquisition. And if I was in your shoes, that smells pretty good about ACE.

That's a very good answer. Thank you. My second question is less up in the air, but one of the things -- it really doesn't have that much to do with guidance as it has to do with trends, especially in the US, it strikes me that between risk selection and rate there may or may not be some exposure growth going on. And I was wondering if you could give us an idea of how you see exposure growth developing in the US and North America generally.

There is exposure growth going on. You got it. And we've always said it. And you actually hit the most important point in, frankly, how we manage the Company. We think less about premium growth, and to manage a P&C Company, you're thinking about exposure growth and price to exposure. And accumulations of exposure so that you don't -- you have the right balance on your balance sheet that you're exposing.

We are growing exposure. We're growing exposure, and that reflects itself in the new business we're writing. It also reflects in the clients that we have who are expanding their business. And as their business grows, we get premium because we've got a price increase, and we got a price increase against their current exposure and their projected exposure that grows.

But new business -- our new business is up 44% for the year in North America. That right there is exposure growth. And that is offset by exposure reduction, which is on your renewal ratio, and then the two together, minus price, is the revenue growth you got, and that's pretty good proxy for exposure. So, exposure's growing.

Okay.

Just what you want. Just what you want from an underwriting company when they see pricing is going to produce a positive underwriting margin.

Thank you very much.

Brian Meredith, UBS.

Just a couple quick questions here for you. First one, Evan, with pricing that we're seeing in the US, any firming in terms and conditions as well there?

I'm going to let John Lupica answer that question.

Thank you, Evan. No real dramatic change in terms and conditions. It's been modest and on the fringes. We are seeing a little bit of higher deductible and rate in coastal and wind-exposed areas as a result of the super storm. Early days, end of the quarter and the beginning of the year, thinly traded for the property market. Time will tell as we get into the meat of the property trading arena, which is around the late first quarter, middle of second quarter.

Great. And then, Evan, second question is -- given the current interest rate environment, looking at the North American casualty business, what's an appropriate return on capital for that business?

It's the right question. It's what can you earn right now.

Right.

And the way I think about it is this -- and we've said this many times, but it's a good time to think about it again. For us, our natural governor is on an underwriting profit. Okay? If you can't earn an underwriting profit in the basic business for all the reasons we could talk about, but that's our red line, then you have to walk away. So, then we say to ourselves -- what kind of return is that producing? We actually aren't saying -- you got to get this ROE at this moment in time. We say -- over the cycle, we intend to earn 15%. And we've been pretty good at doing that.

But at a moment like this, if you put -- if you take the current interest rates and you take an underwriting profit and you say in the casualty lines you're running in the 95% or the 96% range all-in, maybe a little lower, but bouncing around that, I'm just picking a number, you're going to produce a single-digit ROE at the current interest rates. But you're producing a positive underwriting return, and that's the way we think about it.

That's how you then blend with all lines of business to this sort of 9.5%-plus ROE for current accident year only, and we generally -- because we think it's the right way to run. We're prudent and conservative of how we think about reserving, and which, generally, at least to date, has resulted in future years the current accident year has produced more margin, which you then add to your 9.5% and that's how you get at that double-digit. And that is adequate to us.

Great. Thank you.

Vinay Misquith, Evercore Partners.

Two quick questions. The first one for Phil. Phil, now, the amortization of intangibles, could you help us understand what the impact is on this year, that's on '13, and what the impact will be on '14?

So, we're not going to talk about the specific results from the acquisitions, but what I can tell you is, as Evan said, and as I said earlier, the acquisitions are accretive in the first year. But first of all, because the acquisitions are occurring during the year, we're not going to have a full year worth of income, and we're going to have that result that I talked about where we're going to have high amortization in that first 12 to 18 months. So, you're not going to see as high accretion in the first year as we are in subsequent periods. But we haven't disclosed separately what the accretion's going to be for any of the acquisitions.

Okay. Just putting some numbers around this year versus next year, would be helpful just because we know how much of a drag that would have. The second -- (multiple speakers)

It's of a second order of magnitude.

Right. Fair enough. The second question for Evan -- you mentioned double-digit ROE, 9.5% ROE. Is that ex-AOCI, or are you talking about all-in book?

It's ex-AOCI.

Okay, all right, that's fair. The last question, if I may. On the crop insurance, last year was negatively impacted by around $0.57 per share. Evan, I think you mentioned that you average all the years including last year, so would it be fair to assume that you've not taken back the entire $0.57 per share for this year's guidance?

Go ahead, Brian.

I would say, Vinay, our loss ratio, because it's a one year added to the 10, modestly went up. If you just did a complete year over year, it would be modestly lower than the run rate from the prior year, but only it's really at a 1, 1 average -- (multiple speakers)

It's modest.

It's a modest change.

It's a modest change.

Change down, obviously.

Thank you.

Ian Gutterman, Adage Capital.

I have a couple follow-ups. But first, I thought, if I can, offer a comment on guidance, which is -- I kind of wonder if guidance has outlived its usefulness for you guys. It seems every year at this time it causes confusion, or at least more years than not it does, and --

We love you, Ian. Everyone here is cheering because we've said that to ourselves, too. My god, why are we doing guidance?

I'm happy to have a further conversation offline if you want to get into it. But I would just offer that as advice. It just -- I can pick it 10 different ways, too. It seems the theme of the call today should have been your optimism on the operating environment, and instead all the questions are about guidance and the stock reaction, which is frustrating.

So, my quick questions, because I know we're getting late, is just -- can you clarify I guess, when you were talking about the Life business earlier, can you give us a sense of how much of the operating income percentage-wise is Life Reinsurance, even ballpark, just so we can try to model that a little bit better.

I don't have that in my head.

Ian, we'll take it offline; I'll get it for you.

Okay, perfect. The other one, Phil, the crop adjustment, the crop being down year over year due to the adjusted sessions to the government. Was that in relation to the main planting season, or was that just for the winter wheat sessions being different?

Yes, it really doesn't have anything to do with the winter wheat. It's adjusting to the gain/loss formulas with the government. So, in years where you make money or lose money on a state-by-state basis, you change the sessions of the premium to the government. So, it's entirely related to the 2012 accident-year crop result.

It's a retrospective adjustment.

Doesn't impact earnings. It's just how the loss/gain mechanism relates to the premium.

Got it. Great. My last one real quick. Given all the questions about the amortization, is it possible you can put a little schedule in the K? I know a lot of other companies, when they do acquisitions, will put like a three- or five-year look forward on amortization schedule.

It's in there already. It's in there. We won't look forward. But the actual results are included.

Yes, you get that.

Perfect. Okay. Great. Thanks.

Operator, we'll just have time for one more person to ask questions, please.

Larry Greenberg, Langen McAlenney.

And just to represent the sell side on the guidance issue, I would concur with Ian's thought on that.

My question is on international property casualty. You mentioned it continues to lag North America in terms of pricing, and you mentioned that there's still some players chasing business. Can you just give us some thoughts on your outlook for that? I mean, is there any hope that that might turn the corner and follow the path of the US a bit?

The only place I see that is really in the UK right now. The continent is languishing relatively flat. I'm going to let -- and I don't see it in Latin America or in Asia. I'm going to let John talk about -- maybe give you a little more color on UK.

Larry, it's John Keogh. Just pick up on what Evan said. The UK, we did start to see in the back half of last year some price improvement on casualty business. We had been seeing some stabilization of property. But towards the second half of last year in the UK, I think similar to what we're seeing here in the US where the market's recognizing an interest rate environment there, and the lack of rate over the last few years, that there are markets, particularly the bigger, more sophisticated markets, that are recognizing that in their pricing, and (inaudible). So, starting to see some [movement] there.

Otherwise, the pricing for international markets around the globe, I would characterize throughout 2012, certainly in fourth quarter and January this year, has been relatively stable. Our regions and our products, rates have been up or down 2 points consistently over the last four quarters, the exception being property. Last year in property internationally on the back of the [cats] in Asia and Japan. We certainly saw rate increases on our property business, in our retail property. Continue to get those rate increases first and second quarter. And then again during the fourth quarter we got rate [on rate]. So, property I would say is the exception in terms of the rate environment internationally.

But in terms of a catalyst or something I see in the year ahead or anything we're planning, maybe more importantly in our plans for international, we don't see a market change in the rating environment [in our] international markets for the year ahead.

Great, thanks.

All right. 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.

And that will conclude today's call. We thank you for your participation.