丘博保險集團 (CB) 2013 Q1 法說會逐字稿

Good day, and welcome to the ACE Limited First-Quarter 2013 Earnings Conference Call. Today's call is being recorded.

(Operator Instructions)

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

Thank you, and welcome to the ACE Limited March 31, 2013 First-Quarter Earnings Conference Call. Our report today will contain forward-looking statements. These include statements relating to Company performance, guidance, premium growth and product pricing and insurance market conditions, and acquisitions that have yet to close and be integrated, all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filings as well as our earnings press release and financial supplement which are available on our website for more information on factors that could affect these matters. This call is being webcast live, and the webcast replay will be available for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

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

And now it's my pleasure to turn the call over to Evan.

Good morning. As you saw from the numbers, ACE had a very good first quarter and a strong start to the year. The quality and balance of earnings were excellent with solid contributions from both underwriting and investments. Every division had strong revenue growth. After-tax operating income for the quarter was $746 million, up 6.5% or $2.17 per share, and our operating return on equity was 12%. Book value per share grew 1.6% and now stands at $82.17.

Our underwriting results were simply excellent. We produced over $360 million of P&C underwriting income, up 16% and a P&C combined ratio of 88.2%. This strong calendar year underwriting performance was driven principally by current accident year underwriting income, excluding catastrophes, that was up 37% from prior year and generated a combined ratio of 89.4%. That's almost 2.5 points better than the first quarter last year. Our current accident year results reflect the excellent underlying health of our current business, including overall growth in earned premium and a lower expense ratio, as well as margin improvement in North America as a result of better pricing and mix of business, and margin improvement internationally as a result of product and geographic mix.

We produced $531 million in investment income in the quarter, down less than 2.5%, as we benefited from an increase in partnership income. This is a good result given the historically low interest rate environment in which we operate today and which will continue to pressure investment income results for the entire industry for the foreseeable future. As I pointed out in our shareholder letter, this challenging rate environment is a direct consequence of the fed's quantitative easing efforts to stimulate economic growth and bring down unemployment. While these efforts are well-intentioned, they penalize long-term savers, including insurance companies, and encourage greater risk taking as investors feel pressure and reach for yield, something we will not do. Phil will have more to say about our investment portfolio and results.

Total Company net premiums in the quarter grew 6.3%, with growth coming primarily from the US, Asia-Pacific, and Latin America. In North America, with the exception of agriculture, net premiums were up across the board, with retail commercial P&C up 8.5%, wholesale P&C up over 13.5%, and our high-net-worth personal lines business up 12.5%. Net premiums for our agriculture business, which we now break out for you as a reporting segment, were down about 5% due to a modest amount of additional proportional reinsurance protection we purchased for the '13 crop year, which means we had to true-up back to the fourth quarter. If you recall, crop premium volume is concentrated in the second and third quarters.

Internationally, net premiums for ACE International were up 8% in constant dollars. We had good growth in almost every territory. The UK was up 7%, Asia was up 14%, and Latin America was up 12%, while the continent of Europe was relatively flat at 2%. By major product area, commercial P&C overseas was up 7%, personal lines were up 21%, and A&H was up 6.5%, all in constant dollars. We fully expect international A&H growth to accelerate as the year progresses. Premiums in our London-based excess and surplus lines business were up 5% with strong gains in energy in particular. Premiums at combined insurance were essentially flat, and fundamentals there are improving, as predicted, including number of active agents, which were well ahead of last year and resulting, in annualized new business sales in our large US-core agent book of business that are up nearly 14%. For our Global re-business, premiums for the quarter were up about 6%, and net sales for our international life business grew 26% in Asia and Latin America, again, on a constant dollar basis.

I want to say a few words about the current market environment. Our commercial P&C business in the US continued to benefit from an improving price environment with another quarter of rate-on-rate increases. Overall, North America pricing was up 3.5%, with retail rates up 3%. By way of example, retail property rates were up 6%, and commercial D&O rates were up 3% and trending higher during the quarter on a month-by-month. For risk management business, rates were up 3.6%, and excess casualty rates were up about 4.5%. For our retail business, new business writings grew 27% year on year, and our premium renewal retention rate, as measured by premium, was over 96% in the quarter, with account retention at 86%.

On the US wholesale side of our business, ACE Westchester rates were up over 7% overall, with property rates up 7%, professional lines rates up 6.3,% and casualty rates up about 9%. The retail commercial P&C rate environment internationally remains competitive but reasonably stable, with retail rates up 1% overall. Loss-making accounts are getting rate. Otherwise, when business comes to market, it is competitive. In the UK retail market, we're seeing modest firming in the primary casualty area. International wholesale lines were up modest single digits in the first quarter, but we're seeing signs of greater competition in London wholesale that may not bode well for future growth in that business. My colleagues and I can provide further color on market conditions and pricing trends.

Earlier this month, we completed our acquisition of Mexican surety company Fianzas Monterrey, and we just received regulatory approval for our acquisition of ABA Seguros, Mexico's fourth-largest personal lines company, which we now expect will close in very early May. With the addition of ABA and FM, ACE becomes a top-five P&C insurer in Mexico.

In summary, we are off to a strong start to the year. Our underwriting results were distinguished, and from a top-line perspective, we are taking full advantage of the improved commercial P&C pricing environment in the US and our broad product capability and geographic presence internationally.

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

Thanks, Evan. Tangible book value grew 2.1% for the quarter, and our cash and invested assets grew $1.3 billion to $62.2 billion. Operating cash flow for the quarter was $913 million. Net realized and unrealized gains for the quarter were $112 million after tax, and included $121 million realized gain from our variable annuity reinsurance portfolio. Investment income for the quarter included $14 million of higher-than-expected private equity and other distributions. 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 run rate is approximately $515 million, which is subject to variability in portfolio rates, private equity distributions, and FX.

Our net loss reserves were down $60 million in the quarter on a constant dollar basis due to payments related to Sandy and last year's crop losses. Our paid-to-incurred ratio was 107% for the quarter. When we normalize the first quarter ratio for Sandy and crop loss payments, the ratio is 88%. Cat losses were $28 million after tax in the quarter, and we had positive prior-period development of $62 million after tax. The prior period development was split, with 60% coming from short-tail lines and 40% from long-tail. The long-tail development related principally to accident years 2007 and prior.

Our underwriting income in the quarter included two partially-offsetting one-time items which netted to a positive $14 million benefit to underwriting. There was a pre-tax benefit of $29 million relating to a settlement of a workers' compensation class action lawsuit in which ACE was a plaintiff and a $15-million expense adjustment going the other way. Our unusually low tax rate in the quarter was impacted by favorable adjustments to prior-year tax accruals. Our tax rate also fluctuates based on where our earnings emerge. During the quarter, we issued $950 million of 10 and 30 year senior debt at an average cost of 3.4%. The proceeds will be used to redeem debt maturities in 2014 and 2015. During the quarter we also repurchased $150 million of our shares.

As you will see on our supplement, we plan to show North America in two segments; P&C and agriculture. Our 10-Q presentation will be changed to reflect the new segments. Our press release issued last night included our updated guidance for 2013 to account for the positive first-quarter prior-period reserve development, lower-than-expected cat losses, and also better-than-expected ex-cat current accident year results. Our range is $7.10 to $7.50, in after-tax operating income per share for the year. This includes cat losses of $330 million after tax for the second through fourth quarters. Guidance is for the balance of the year and is for the current accident year only.

Before I turn it of over to Helen, I'd like to address the subject of annual earnings guidance. Over the years, we've provided two components to our guidance, operating earnings per share and an estimate for catastrophe losses. More recently, we've also provided you with an investment income run rate. After giving considerable thought to this subject, including a number of discussions with analysts and shareholders, we've decided that we will stop providing explicit operating EPS and catastrophe loss guidance after 2013. We believe that our disclosures are sufficiently detailed and clear. We will, however, continue to provide an investment income run rate that a sustained low-interest-rate environment in which we have strong positive cash flows offset by an investment portfolio that is rolling into lower new-money rates. We will continue to evaluate our disclosures as we go forward. Of course, we will remain open and accessible to you when you have questions or need clarifications.

With that, I'll turn it over to Helen.

Thank you. At this point, we'd be happy to take your questions, please.

Thank you.

(Operator Instructions)

And we'll take our first question from Michael Nannizzi of Goldman Sachs.

Hi, thank you. I had just one question here, Evan, on the relationship between retention and rate gains. If I look at you guys over the last few quarters and some US peers, it looks like retention is for you much higher. The rate gains coming through seem to be a bit lower. I'm just trying to understand, is there a relationship there that we should understand, or is there something else that's somewhat obscuring that comparison? And just one followup, thanks.

I think you're making a -- you're drawing a compare -- you're drawing two facts together that aren't directly linked.

Okay.

There is not -- whatever we're achieving in rate gains is not driving our net retention increases or not. Our mix of business will drive it, number one. And secondly, in North America in the quarter, the gross is not up as much as the net is, and that drives it a little bit. There is a large transaction that will get reflected in the second quarter, wasn't reflected in the first quarter. It's a timing question. That drives a little bit of that. But overall, I don't see that rate change and net retention, except on the margin, are linked together.

I might have -- I should have been a little bit clearer. You mentioned account retention was 89% and retention in North America was 96%. Is that net retention, or are you talking about account?

Oh, no, that's retention of business. That's retention of business, and that is directly related, sure.

Okay.

More business -- number one, you see growth in new business, and retention, more business is priced at a place that will earn a reasonable return to us, and we're retaining it, and the market is more disciplined in competing for it.

Got it. And then just one follow-up. As far as if we were to look at old-fashioned primary agent-placed business or the more broker-involved primary excess markets, is there a difference in terms of whether the competitiveness or the rate that you're able to take on in either of those markets, specifically about North American P&C?

You mean is there a difference between the broker market and the agent market?

Just in terms of the -- is there a differential in terms of your ability to extract rate gains? Obviously the markets are very different. That's not my question.

Yes, it really -- I think it's by size of account, type of account, and type of coverage that's being purchased where you're going to see more variability than it is necessarily related to the distribution.

Fair enough. Thank you very much.

And we'll take our next question from Mike Zaremski of Credit Suisse.

Hi, good morning. Thank you. First, in regards to margins, so if I strip out the one-time expense ratio benefit, I'm seeing accident year ex-cat loss ratio and expense ratio improvement of over 100 basis points year over year on a combined basis. So I'm curious if there are any one-time items such as maybe benign non-cat weather which we should take into consideration when thinking about a run rate?

No, it's 200 points -- basis points better, and when you take out the one-time items and you strip out cats and prior period, so the current accident year on that 200-basis-point improvement was the mix of business that we had in the quarter that earned its way in, and it was our growth in earned premium both, and that mix is product line and geography related.

Okay. Got it. And then lastly, Evan, I appreciate the comments in the annual report addressing your thoughts on the tradeoff between acquisitions versus share repurchases. You point out the IRR on acquisitions has been 17% versus 11% versus buying back shares, so clearly the math has been superior using M&A. So that said, it's my understanding that ACE has been operating with a material level of excess capital for quite a while now. So if I'm thinking about this correctly, wouldn't it have been better if ACE had been employing a dual M&A and repurchase strategy over the recent years?

I don't think so. When I look at our ROE of over the period of time, frankly our ROE was excellent. There's no such thing as just-in-time capital management, as we say, and opportunity, you can't -- it's opportunistic by its nature, opportunity. And so it comes at times in a lumpy way, and so part of strategy is being ready for what you don't know, good and bad.

Okay. That's fair. And would you be able to give us an update on what you think if there is an ROE drag from excess capital currently? Thank you.

Sure. You're welcome. On an ROE drag, I don't have an exact number in my head. The last time we were about 1.7 points on the ROE. Right now, I think we're bouncing around 1.5 points.

1.5 points is what I would say, Evan.

And we'll take our next question from Jay Gelb of Barclays.

Good morning. Just wanted -- how are you? I just wanted to touch base first on the share buyback, the $154 million in the quarter. It's really the first time ACE has bought back stock in meaningful size since 2011. My sense is it's related to Management compensation, but just wanted you to clarify that and also get a sense of what we should expect on that going forward.

Yes, Jay, it's -- it is related to dilution that we say we buy back. We don't buy it back -- we don't match the periods exactly of when we experience dilution and when we buy back. We thought from an intrinsic value point of view it was a good time to buy back stock, and that's why we did it. As we go forward, we will periodically come into the market and buy back shares when we think it's attractive, but we don't have a set plan and a set amount that we're going to do on any quarterly basis.

Understood. Okay. And then on the underlying combined ratio, based on going back in my model, it looks like this is the best overall underlying combined ratio for ACE in four years. My sense is, as you touched on previously, business mix shift is having an effect on that. Can you discuss that in a bit more detail?

Yes. And then I'm going to -- I might ask one of my colleagues to also pitch in. We've talked to you a long time about portfolio management, and as we have really worked on it for quite a long time and we think in advance of others, we were really taking action, and you'll know before the market turned, we were shedding business because we had pretty good insight into within any given line of business, the cohorts that were producing reasonable returns and those that weren't, just more granular portfolio management. That just continues to improve. It's an iterative process. Continues to improve, and in a pricing environment like this, it has positioned us well because we can distinguish that which is better cohorts, better priced, from that which is more marginal even at the same or higher rates. And so our selection becomes better, more insightful, and the business we're writing is, therefore, producing a better margin within -- and that's where we're getting the growth. More of our growth is coming from the higher-margin business.

Was there anything to add on that or can I --

I'll ask John Lupica if he's -- he's out at RIMS, and so it's very early for him, but I'll see if he wants to embellish on that.

Hi, good morning, Jay. And just to support the comments that Evan had made, it certainly is showing itself in North America. When I say it, the portfolio management strategy, margin strategy over the last several years. We really have focused on ensuring that we grow our high-margin business, we de-emphasize our lower-margin business, and we look at our new business selectively in terms of where we're able to get it. That addition to differential and rate between our high-performing business and our lower-performing business, really has helped us on not only mix, but on the earned basis as the growth has come in the right spots. It really has been our targeted strategy over the last year, and it's really shown itself in a better current accident year number this year.

Thanks, John, appreciate that.

John Keogh, you want to add anything?

No, I -- that same approach we've been taking internationally as well and implementing portfolio management in our markets abroad, and you look at the current accident results for our international business and the improvement year over year. There, too, we're identifying the portfolios, whether it's in Asia or Europe or Latin America, that have performed best, emphasizing those opportunities and growing those businesses at a rate that is showing through now in terms of our earned premium on those better-performing businesses. At the same time, I've been talking to you guys for, gosh, quarter after quarter for the past few years about the wholesale business in London and how certain lines of that business just wasn't meeting our underwriting threshold and have been shutting that business, and as that business runs off, you've seen improvement in our current accident years on our wholesale business as well.

Excellent. Thanks. And then just a last one on North American agriculture. First, thanks for breaking that out. The premium volume for 2013 versus 2012, I know it's early to determine how that will shake out, but any initial thoughts?

Yes, it will -- it is early. It'll be lower. It'll be lower by a $200 million. It's both a combination of commodity price driven, because that's what goes into the base of determining premium performer per crop, and we bought around -- we brought a modest amount of quota share reinsurance, and that will impact the net premium as well.

So a few hundred million dollars less --

With very little impact to our projected earnings.

So a few hundred million dollars less on gross and net, or more of an impact on net since there's more --

More of an impact on net, and the number I'm speaking about is net.

Thanks very much.

You're welcome.

And we'll take our next question from Greg Locraft of Morgan Stanley.

Hi, good morning. Great start to the year. Just wanted to ask -- or get color on the international pricing environment. One of the things I'm wrestling with is just why it's lagging North America so much. And your data is similar to what we're seeing market-wide.

It's very curious to me to a degree. I haven't seen a global market behave this way before, but every period is different. In the US, with investment income pressure and combined ratios rising, there's more ROE -- the insurers respond to ROE pressure and lower ROEs with greater underwriting discipline. And the structure of the market is such that the larger players who have greater insight are one at a time. They know that they've got two sources of income, and they are practicing greater underwriting -- they've determined to practice greater underwriting discipline to address that.

Internationally, there is a tremendous amount of surplus capital. The reinsurance market, by the way, is not following the insurance market. The reinsurance market is more competitive in my judgment. There is a tremendous amount of capital internationally and more capital that enters, whether it is in London or it is in the emerging markets as they grow wealth, more local companies are being formed that compete, and you're not seeing the same reaction to a lower interest rate environment of greater underwriting discipline. And that's -- it's as simple as that, and they're maintaining and more market share driven.

Okay. Is it actually -- is the ROE internationally just higher as a starting point and therefore, in a way, the US has to come up more, or is it maybe, as you're alluding to, that the competitive landscape internationally, competitors are willing to accept a lower ROE?

There's always a great distribution around the mean, and if you couldn't outperform the mean, I could tell you I wouldn't have interest in being in this business. But when I look at it from the point of view of just that, it varies by territory, but I wouldn't -- you look at the UK, you look at the continent, I would hardly be proud of overall market ROEs in those markets. When I look at Latin America and Asia, those are tough territories. You've got to really know what you're doing, and when you look at market returns in those territories, ROEs on underwriting results are not that much better, and in some markets they're worse.

Okay.

And then investment income -- investment income can vary, portfolio rates, by territory.

Right. Okay. Last from me is just I think that taking away the guidance beginning of next year, I think it's going to make all our lives a lot easier just given the nature of how you all have done it. Maybe it's a good time, then, to just revisit how you think about ROE. Right now, rates are low. You're doing a low double digits. If rates were to go up -- well, how do you think about the ROE goal, and then what's the sensitivity of that to rates improving from here? And I'm talking interest rates, not pricing.

Understood. We're -- we have not changed our objective and target, which is a 15% ROE over cycle. That is exactly where we are, whether it is pricing or interest rate cycle, our governor is always to earn on the underwriting side a combined ratio in lines of business of under 100, and depending on the product and the territory, we set goals that are substantially below that. And then the investment income, we're not going to take undue risk, and it is mostly going to be in our invested asset in fixed income portfolio with repeatable income, and when you add all that up, the ROE will be what it will be, and we think ACE will continue to produce a superior ROE to the industry. And our goal is to achieve that 15%, and we think in more normal times we will. You might have seen in the shareholder letter, every 100 basis points of investment income is 2.5 points of ROE for us, and -- as things stand at the moment, and so if interest rates were up another -- you get it. If they were up 100 or 200 basis points, we're behind -- we're ahead of that 15% number.

Excellent. Thanks. And good start to the year.

And we'll take our next he question from Vinay Misquith of Evercore Partners.

Good morning, Vinay.

Hi, good morning. The first question is on the gap between large commercial and small commercial. Would you say that that's starting to narrow now?

The gap in what? I'm sorry, in pricing?

Pricing, sorry, yes, yes, pricing.

Well, you know-- I'm not sure that you're seeing it the same as we're seeing it. I think you have to think more of a byline-of-business basis. The greatest rate increases through '12, and then when you look at '13 first quarter, the greatest rate increases come in workers' comp and in guaranteed cost workers' comp, which is a line of business that we're not really engaged in to any great degree, and that casts a big shadow over the smaller and medium-size business. The second area that was getting substantial rate was property. And then commercial auto, particularly in that medium-sized, smaller account arena. Property is beginning -- got some rate in beginning quarter. It's beginning to flatten out, which given the rate on rate that you've seen for a while on property, is not irrational to me. So that's maybe more how I see it than simply a large account, small account construction. Make sense to you?

Yes. Just because the large surveys out there show that small commercial pricing seems to be stronger than large commercial -- than large commercial, so I'm just trying to square that.

Right, and you have to -- and I'm trying to give you the reasons to look behind that and understand what's driving it. And I think that's the -- at least in my judgment, those are the -- those are more the markers to look at.

Okay. That's fair. The second question is on the insurance North American side. Your net premiums are up 9%. That's great. The gross premiums were roughly flat. Just curious why that's happening, and if you're seeing price improvement, how are you changing your reinsurance purchases to grow the net premiums.

Yes, reinsurance purchases on the margin, the change in reinsurance purchase, the net grows faster than the gross for two reasons. One, as I mentioned, there was a quite a large transaction that it's a timing question that'll get booked in the second quarter, wasn't booked in the first quarter. That has an impact, a substantial impact on the difference between gross and net. And the balance is really in mix of business where we grew businesses that just had a higher net retention to them than the year before, and they are attractive classes to us. Our reinsurance purchases changed on the margin.

Okay. That's helpful. And then one last thing, if I may. Just on the ag reinsurance, you said you bought some more pro rata reinsurance, but you said the impact on the bottom line would be negligible. So would that be because you had better pricing in terms and conditions?

The protection that we purchased, the additional protection from a balance of exposure and terms, we consider to be favorable -- a favorable buy for ACE, and that's why we executed the transaction.

Okay. Thank you.

You're welcome, Vinay.

We'll take our next question from Brian Meredith of UBS.

Yes, good morning. Couple questions here for you, Evan. One, could you talk a little about loss trend and what's happening with loss trend, and how much is that contributing to the improvement in the underlying combineds, particularly North America?

I'm going to ask John to talk about loss trend. But more mix of business in growth and earned premium contributed to the increase in underwriting income, and to margin, more of the mix to lines of business and within lines, cohorts, that had a better combined profile than it is that we actually cohort by cohort lowered our pegs materially at all.

Are those lines shorter tail lines?

No, no, short and long, both.

Okay.

Want to hear about overall loss, then?

Yes, please. Sorry.

John.

Well, Brian, Evan said it well, so I'll just add a couple quick comments of color on that. As far as Q1 goes, it's obviously early in the year, but as we look across the portfolios at frequency, we see most of -- well, all the lines there pretty much within our expectations that we set during the planning process, so don't see anything unusual there. Obviously, you've got some noise bouncing around, but the overall theme is nothing unusual there. And the second, in our planning process, we do remain vigilant on the loss trend. So while inflation has been relatively benign and loss trend has been relatively benign, we remain relatively conservative in (inaudible) or pegs, particularly for the higher excess casualty line.

Okay. And then Evan, just quickly here on, in the North American P&C business given where your combined ratios are right now, you got, what, 3.5% rating you said in North America? Do you think your returns and allocated capital in that business are acceptable right now given the current interest rate environment, and is that why we're not seeing any more acceleration in the rate activity there?

Well, acceptable. The current accident year is hardly running a 15% ROE, and that's where I'd like to see us, somewhere between that, maybe a little less than that would be rational given interest rates. But I think that the ROE is still a little under pressure, but the combined ratio -- but that's because of investment income. I think the combined ratios on the business are pretty good. And that's why if you added -- as I say, if you looked at the illustration of what 100 basis points does, on the investment side, that adds 2.5 points to your ROE. So you just take that with the combineds we're running right now, and you're at approximately 15%, which is a good number.

I think that the rate environment right now is with that in mind. I do see property flattening out because of where pricing is right now. I do see casualty bumping along at this level of increase. It's nothing overly exciting. It's hardly a hard market, but it's a rational response to the pressure that insurers are feeling, and I don't think it's going to be enough for the industry in aggregate to, at these levels of increase of rate, to ameliorate the impact of investment income declines. So I think you're in a place for the industry overall where ROE may improve a little bit but it's hardly double-digit.

Great. Thank you.

You're welcome.

And we'll take our next question from Paul Newsome of Sandler O'Neill.

Good morning, and thank you. One quick one and then a follow-up. The increased use of proportional reinsurance on the agricultural business, did that have an impact on the underwriting results as well as the premium line?

No. It did not.

So the decline in underwriting was the real decline. There wasn't any --

No, the decline in underwriting -- sorry, Paul. Last year in the first quarter you'll recall the '11 crop year was a bumper crop year, and so the true-up of profit and loss from the '11 year in the first quarter produced that very good income last year. This year, the true-up in the first quarter from the '12 crop year is the result you see.

Okay. Great.

You're not getting benefit of -- you're not seeing like winter wheat or corn or soybeans from this year yet. That's all in front of you.

Right. And then a bigger picture question. There's been a lot of talk this last quarter or so about the reinsurance business being heavily impacted by the capital markets, and it didn't seem to impact your business any more, but do you have any general thoughts as to if that's going to impact your business in the future?

Look, we're of the market, too, but we're highly rated. We don't write and outsized cat book as you know. We are highly rated. We have years of reputation and experience in the business and with clients and [cedents], so I see a direct impact in terms of crowding us out of line size as minor. I see -- more capital coming into the market impacts the rate environment, and whether that means that we'll find business -- more business unacceptably priced or not in the future, we'll see as we go forward in the year. Right now, I see it more on the margin.

Great. Terrific. Thank you very much.

You're welcome.

And we turn next to Jay Cohen of Bank of America-Merrill Lynch.

Good morning, Jay.

Good morning. Just a couple questions. The first is, you issued some debt in the quarter. It looked like interest expense went down versus the fourth quarter. I'm wondering what's behind that.

Well, first, the debt was issued in the last two weeks of March, so we had very little debt expense relating to that in the quarter. We also had a reduction in some of the collateral that we hold and pay interest on with respect to our fund-to-deductible programs, so that dropped the interest a little bit. And then we had a deposit insurance contract that had an adjustment to interest and lowered interest expense a bit. So net-net, it was down a little bit.

Should we look at the fourth quarter as more of a normal run rate, ex the new debt you issued?

I would say the fourth quarter plus the new debt that was issued, offset, of course, by the investment income on the proceeds for the debt that we've retained to repay the debt, redeem the debt when it comes due in '14 and '15.

Exactly. Okay. The second question, it's very helpful that you broke out the agricultural-related business. I'm just looking at some of the numbers that you showed for last year, and just from a modeling standpoint, can you give us any sense what administrative and acquisition expenses look like because the numbers on the administrative side were negative last year, and the acquisition side, they kind of go all over the place. Any sort of rough guidance you can give?

I'm going to let Brian talk about it. But good luck figuring that out precisely because you have a couple of things going. You have a government reimbursement of expense and the timing of that, and then a lot of the profit and loss true-ups and formula, at the end of the day, whether it's government or agents or any of that stuff, it comes through that line. And Brian, do you want to --

The only thing I would say is a negative expense ratio isn't normal. It was a function of the year, crop year and calendar years coming together with a big profit from the '11 year. So don't think of normal run rate as a negative expense rate. Our normal run rate is a modest positive expense cost, both administrative and acquisition.

Got it. I guess as time goes on, we'll see a more hopefully normal run rate, assuming the weather doesn't get too crazy.

Yes.

You got it.

Okay, thanks.

But remember, abnormal could actually be a very good thing for us, too.

True.

[Wondering what we're looking at stuff.]

Good point. Thanks a lot.

You're welcome.

We'll take our next question from Josh Shanker of Deutsche Bank.

Yes, thank you. I was wondering if you have any thoughts regarding the balance sheet and strong dollar economics or a bear market for bonds and whether it you affects your business, how you write it, whether you'd be buying any hedges to protect from that, realizing capital gains, whatnot?

We wouldn't expect to do that. We've said for a long time that we take our risk on the liability side and we've got a conservative investment portfolio. We don't expect to take any significant additional risk. We would on the margin, changes that we make to the portfolio, but we don't see any significant changes to our investment profile.

Let me just add this to what you just asked, and that is that it's a buy-and-hold portfolio mostly. So any accretion that comes in the beginning from a realized gain -- an unrealized gain or the other way, an unrealized loss will amortize its way over a couple years. So it's an accounting versus an economic, and we don't hedge that.

And in terms of the currency, does a strong dollar change your view of the ROE of business written in non-US domiciles?

No, assets and liabilities are matched.

Okay. Thank you very much.

You're welcome.

And we'll take our next question from Thomas Mitchell of Miller Tabak.

Just two short questions. The first is, does the incident that took place in Boston last week drive any change in the dynamics of underwriting the kinds of risks that are associated with events like that?

No, it does not. We measure terrorism-related risk, man-made events no differently than natural events. We are thoughtful about aggregations. We're thoughtful about pricing and the kinds of exposures. This is a risk that is real, and what an unfortunate event, and it just reminds us all that that risk doesn't go away. And we've been underwriting it for the last -- since 2001, consistently and with that in mind, that there is a real risk. And so we, again, manage accumulations, pricing, type of risk with that in mind and with -- it reminds us, again, while this was a terribly unfortunate event, the destruction to property and the magnitude of the event overall was relatively modest compared to what you could imagine and particularly in settings of great concentration of values. And it reminds you again of the importance of TRIA and the government back stop that comes up for renewal next year because that tail, that the government provides cover for that tail that allows insurers to more widely offer and underwrite terrorism-related exposures.

Okay. Thank you. That's a good answer. I was also wondering about, shifting to other government pictures, that there at least has been a proposal put on the table in Congress to reduce the amount of reinsurance available from the federal crop insurance program, and I'm wondering if that were to take place, whether it would be more of an opportunity or make the business less attractive for you.

Well, Tom, from what I've looked at, the government -- the budget for the most part has been talking about -- that was put on the table -- and by the way, isn't really different than the proposal the administration put on the table last year, which didn't gain any traction in Congress. But it really -- the two broad elements were that the farmers, themselves, the buyers of insurance, crop insurance, pay a greater share themselves. Right now, it's subsidized by the government 60%. And then the other part of the proposal as it relates to insurance was to cut back the amount insurers are reimbursed for administrative expense. Those are the two main -- those are really the two main elements in the administration's proposal that, again, didn't gain a lot of traction with either party in Congress.

That's good. Great. Thank you very much.

You're welcome.

And we'll take our next question from Charles Sebaski of BMO Capital Markets.

Good morning. Thank you for taking my question. Had a question about the growth and strategy perspective. I was wondering if you're seeing any regions or countries that you think at this time are particularly attractive from a growth or regulatory perspective for next moves for you guys?

Well, you see the growth -- well, I don't want to get too specific. You see our growth in Asia and Latin America in particular, those regions. That's where we see the most attractive environments from both an economic and an underwriting point of view across a broad swath of product and a broad range of customer. You see that we grew double-digits in Asia and double-digit in Latin America, and that's both in non-life and in life.

I would say at this time, the world is a dynamic place. Those are the most attractive regions of the world for us, and we just concluded two acquisitions that we're -- we pretty much -- we haven't closed on the second one. It will take a couple of weeks. But two in Mexico that really significantly increase our exposure both in Latin America and Mexico in particular, and we view that as a quite attractive country today, and what we see, the government's actions in Mexico to improve economic growth and regulation, will have -- should have a great benefit to the insurance marketplace in that country, and ACE has now positioned itself quite well to take advantage of that.

With that leadership position that you're going to have in personal lines business in Mexico, is there any intent or thought about expanding the personal lines business outside of that country?

It already is. We already have presence in a number of countries in Latin America in personal lines, and that is a -- that is a focus of ours, though you have to be -- that's a glib statement. You have to be very careful. It's country by country, and it's kind of personal lines varies by country.

Any US personal lines interest?

We're already in the US personal lines business, in the high-net-worth market, which our profile as a Company is -- fits that segment of the market, and that's where we will remain.

Okay. Great. I appreciate your time.

You're welcome.

Next question, please.

And we'll take our next question from Ian Gutterman of Adage capital.

Hi, thanks. I had a couple follow ups. But first, just on the life insurance business, it seems that the results were a little weaker than -- at least weaker than they have been. They seem to be trending down over the last year. Can you just give us a little update? Is that the VA runoff? Is there FX? Or is there some pressure on the ongoing businesses?

Yes, Ian, there were two items this quarter that don't really bode towards trend. Last year, we had some one-time items in the life insurance business internationally that was a benefit that didn't repeat this year. And secondly, combined is in two places. Combined had very good earnings, but combined is in two places. It's in ACE International -- or AOG. It's in ACE Overseas General for the international part of combined, and the US part of combined, which is on life company paper, is in the life segment. While the international portion grew in income, the US portion went down in income. It's not a run rate question or any of that. Some of the prior period development last year was in the US combined. Those two together is most of it. The underlying trend that does continue quarter on quarter is a decrease in the VA exposure as that runs off. That was a modest amount of the income difference this quarter.

Got it. Perfect. And then just a follow-up on Paul's question on alternative cat capacity. I was actually thinking about it from the other side, which is as a buyer of reinsurance, it would seem, to the extent that it's getting cheaper than traditional paper. Is that an attractive option to you, or are you a little wary of essentially the collateral versus traditional paper?

Well, you've got to be careful about it. First of all, is it on an indemnity basis, or is it on a parametric basis, and so are you getting the same protection? When it's collateralized, that's not a bad thing because you're holding the money; you're not chasing it. And -- but the biggest issue, it does have a place and has a place in a -- particularly for a company like ACE -- against traditional reinsurance. Traditional reinsurance, though, gives you reinstatements, and generally capital market solutions do not provide you a reinstatement. So there are differences. And so it's one shot and you're done, and where that fits within your program, it has an important place, but it doesn't simply replace traditional reinsurance.

Got it. And then just my last one, I think it was Tom's question about TRIA. I think before last week, it seemed like that was facing long odds of renewal. Do you have any changed expectation, or is it too early to tell?

I didn't subscribe. I haven't subscribed to that it has long odds of renewal.

Okay.

I -- it's hard to imagine that based on a standard of rationality that things get done in Washington. However, I think from any rational point of view, TRIA is really a no-brainer to renew. It provides a backstop of certainty that allows businesses to continue on. It's not a benefit to the insurance industry. It's a benefit to business overall because if there wasn't TRIA, you wouldn't see much terrorism insurance sold.

Got it. That's was going to be my follow-up is to what extent we might see disruption a year from now if this thing ends up being like flood insurance where it always gets extended six months after it should get done.

Well, what you'd see -- look, and I hate to forecast, but the rational response would be you'll only take risk to the extent you're comfortable with the net exposure on your balance sheet or the limited amount of reinsurance you can buy in the traditional reinsurance market, and that'll be based on what they're comfortable just simply holding on their balance sheet. And that tail grows very quickly when you think of concentrations of economic exposure in a geographic area.

Understood. Thanks. Appreciate the answer. I'll let you guys wrap up.

Thank you.

That's all the time we have this morning. So thank you, everyone, for joining us, and we look forward to speaking with you again at the end of next quarter. Thank you, and good day.

And this does conclude today's presentation. Thank you for joining, and have a nice day.