丘博保險集團 (CB) 2013 Q3 法說會逐字稿

Good day and welcome to the ACE Limited third-quarter 2013 earnings conference call. Today's call is being recorded. (Operator Instructions)

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

Thank you and welcome to the ACE Limited September 30, 2013, third-quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to company and investment performance, guidance, pricing, and insurance market conditions -- all of which are subject to risks and uncertainties. Actual results may differ materially.

Please refer to our most recent SEC filings, as well as our earnings press release and financial supplement, which are available on our website, for more information on factors that could affect these matters.

This call is being webcast live and the webcast replay will be available for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

Now I would like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft, our Chief Financial Officer. Then we will take your questions.

Also with us to assist with your questions are several members of our management team. Now it's my pleasure to turn the call over to Evan.

Good morning. As you saw from the numbers, ACE had another record quarter. Our earnings were driven by exceptional underwriting results and very strong premium revenue growth globally in our P&C and A&H lines of business.

We delivered strong returns for shareholders. After-tax operating income for the quarter was $857 million, up nearly 25%, or $2.49 per share, both records for the Company. Our operating return on equity was 13% for the quarter, while per share book value increased about 3.5%.

Our underwriting results in the quarter were simply excellent. We produced $558 million of total P&C underwriting income, up 67%, and our P&C combined ratio was 86.5%. We benefited, of course, from a quarter with relatively light cats versus what we planned, though losses were modestly higher than last year.

It is interesting to observe that if you back out the income we earned -- because cat losses were lower than planned, our after-tax operating income was $2.21 per share. We aren't relying upon low cats to produce good results. Our business is broad-based and healthy.

Said another way, our current accident year underwriting was a substantial contributor to our overall results in the quarter. Current accident year underwriting income, excluding cats, was up about 180% over prior year with a combined ratio of 89.8%. This was over 6.5 points better than the third quarter last year and was impacted significantly by drought losses in our crop insurance business.

The current accident year results also reflect the growth globally in our P&C and A&H businesses as well as continued 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.

Turning to premium growth, global P&C net premiums in the quarter grew 9%. Global P&C is a term we are introducing for ACE that includes North American P&C, excluding agriculture, overseas general, and global reinsurance.

Crop insurance is a distinct business where revenue is much more affected by such things as commodity prices and how we share premium and loss with the government. And this can be volatile from period to period and have nothing to do with the underlying health of the business.

In the quarter foreign exchange was a factor and impacted global P&C net premiums by 1.7 points. On a constant dollar basis, global P&C net premiums grew over 10.5% with growth coming broadly from all regions of the world -- North America, Asia, Latin America, and Europe.

In North America, retail commercial and specialty P&C net premiums were up over 9%, while our wholesale specialty business was up nearly 15.5%. Net premiums for our agriculture business were down, in line with our expectations.

Internationally, retail commercial P&C premiums were up 10% in constant dollars. We saw growth in every territory with Latin America leading the way up 20%. Asia-Pac was up 8% and Japan was up 11%, while both the UK and the continent were up 4%.

In our global A&H business, net premiums were up close to 5% in the quarter in constant dollar. We had strong results in our international business, which was up 10, led by let Asia and Latin America with growth of 14 and 11.

Our global personal lines business continued its strong growth momentum in the quarter, particularly internationally where net premiums were up 90%. Again, these results reflect the contribution from our acquisitions in Mexico without which we had growth of about 22%, quite strong.

International life insurance revenues were up over 15% on a constant dollar basis with growth coming mainly from our operations in Asia.

And, lastly, net premiums in our global re business were down 2% after adjusting for a one-time large transaction from the prior year. The reinsurance market has an abundance of capacity, as we have discussed on prior calls. As with all our businesses, underwriting discipline is more important than market share.

I want to say a few words about the current market environment. Our commercial P&C business in the US continued to benefit from a better price environment with another quarter of rate-on-rate increases.

Overall, North American commercial P&C pricing was up about 3.5%. While the rate of increase for property-related pricing is flattening out, casualty-related pricing remained favorable this quarter. And let me add some color around retail versus wholesale.

In our US retail business, property and casualty related pricing were each up 3.4%. We saw good results in risk management related lines where pricing was up 6%. Professional lines E&O, D&O were up 4.3%. General casualty and specialty were up about 4.8% while medical professional related risk pricing was down 4%.

Excluding one large risk management transaction we wrote last year, new business grew 6% year on year in US retail. Our renewal retention rate, as measured by premium, was 94%, which is quite strong. On the US wholesale side of our business rates were up 3.6% overall with property up less than 1% and casualty related lines up 6.5%.

Internationally the retail commercial P&C rate environment remains competitive, but reasonably stable with rate growth essentially flat in the quarter overall. Rates internationally varied by class and by territory, but were mostly up or down 1% to 3%. My colleagues and I can provide further color on market conditions and pricing trends.

In summary, again we had all-time record earnings. We are firing on all cylinders and continuing to achieve strong broad-based growth despite the economic and geopolitical headwinds we are confronting in all regions of the world. We have a clear strategy and a strong ability to execute, though rest assured we are impatient with ourselves and striving for constant improvement.

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

Thank you, Evan. As Evan mentioned, we had an excellent quarter with record operating results. Cash flow was strong at $928 million. Cash and invested assets grew by $740 million to $61 billion. Tangible book value per share grew 3.9% and total capital now stands at over $34 billion.

Net realized and unrealized gains were $55 million pretax, which included a $47 million gain from the investment portfolio and a $43 million gain from our variable annuity reinsurance portfolio, partially offset by $30 million of foreign exchange losses. Investment income was $522 million and was in line with our expectation.

Our current book yield is 3.6%. Current new money rates are 2.9% if we invested in a similar distribution to our existing portfolio. We estimate the current quarterly investment income run rate will be approximately $525 million with some marginal variability up or down.

Our net loss reserves were up $500 million. We had positive prior period development of $210 million pretax, principally from long tail lines and from accident years 2008 and prior. This included $60 million of adverse development for legacy environmental liability exposures in our run-off Brandywine operation.

We have changed our review process. We now conduct our environmental review in the third quarter and our asbestos review in the fourth quarter, rather than both at the same time.

After-tax cat losses were $70 million, comprising $24 million from development relating to second-quarter events, primarily the European and Calgary floods, and $46 million of third-quarter cat losses from a range of worldwide weather events.

The combined ratio in our North American agricultural segment was 92.3%. We have increased the full-year loss ratio this quarter for our crop insurance business by approximately 2 points and that revised view is reflected in the third quarter's combined ratio. While yields per acre are projected to be at or above historical averages, commodity prices, mainly for corn, have dropped substantially and that is creating additional loss exposure. We expect a combined ratio consistent with the historical average of just below 90% for the fourth quarter of 2013.

The Company updated its July guidance for full-year 2013 to account for the positive prior period reserve development, lower than planned catastrophe losses, and better current accident year results, excluding catastrophe losses, in the third quarter. The range is $8.65 to $8.90 per share in after-tax operating income for the year. This includes estimated catastrophe losses of $95 million after-tax for the fourth quarter of the year.

Guidance for the balance of the year is for the current accident year only.

Now I will turn the call back over to Helen.

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

(Operator Instructions) Amit Kumar, Macquarie Capital.

Good morning and congrats on another strong quarter. Just two quick questions. First of all, going back to the comment on pricing on the international side, I think you said rates are sort of up or down in the 1% to 3% range. Could you just expand on that comment?

I recall you mentioned that even in the past quarter is it more of a loss cost issue or is it competitive players?

The 1% to 3% is really competitive environment. Frankly, there are plenty of lines and plenty of territory that we think could use more rate. If rates were higher in some of those areas, we would write more business.

So we are discriminating between class of business and territory. And as we do portfolio management between cohorts within that, where we find rate adequacy we will write the business, but other than that we are walking away from plenty of business.

And, by the way, that 1% to 3% is the rate that we observe on our book of business. We are walking away from business where there is just substantially more rate differential than that, and if you want, for just a moment, let me ask John Keogh to add a little color around to you.

Sure. Why don't I maybe give you just a sense of how that would look around the world, because obviously different markets are behaving differently at any point in time?

I think I said last quarter the one place outside of North America where we are seeing some rate improvement is the UK market. And I think there, particularly with the low interest rate environment, you are seeing some discipline, particularly in casualty lines, to push rates up.

On the continent it is pretty stable; has been for a number of quarters in terms of the rate environment there. Where we are seeing the most pressure and the most competition would be Latin America and Asia in general, particularly on property in Asia.

But I would note that as property rates are softening in Asia that is after several quarters of significant rate increases following the catastrophes that took place out there the last couple years. There you are seeing prices start to come off after several quarters of rate increases.

Got it, that is helpful. The only other question I have is sort of a broader discussion on the acquisition pipeline. If you sort of -- Evan, this is for you.

In terms of the pool of acquisition opportunities that you feel would meet your return targets, I guess within the first one to three years, what region would be more likely -- more attractive going forward from here?

It really isn't a region specific. It really is a target specific, a company specific where you are looking at that. I don't notice a trend by region or by country.

Okay. Because the reason I was asking is I think someone recently mentioned the Scandinavian countries and I don't know if you had a view on that or not.

Well, we have a business in Scandinavia that is doing quite well. The Scandinavian market overall is a reasonably closed market. It is not overly big.

It is kind of off by itself and it has a few large competitors who do quite well in the marketplace. It is not an overly dynamic, so it is not like you are going to find a lot of opportunity roaming around Scandinavia.

Got it, okay.

It is not like you are going hunting in Scandinavia.

I've never gone hunting there. (multiple speakers)

It is very company-specific.

Got it. Thanks for the answers. I will stop here.

Mike Zaremski, Credit Suisse.

I guess another question on pricing. Property pricing levels sound like they continue to moderate. Should we expect the same from casualty lines given that investment yields are up from their lows? And if I look at industrywide casualty-related loss ratios, they don't look too bad.

Maybe we could also get some commentary on the reinsurance rate outlook. Thank you.

Your comment on interest rates before Congress and all the congressional antics, shutting down our government, it may have been more applicable. But as you know, a lot of the improvement in interest rate was given back the last two months.

Interest rate levels -- when you got a 10-year Treasury bouncing around the 2.5% mark I think you can hardly call that robust. Our reinvestment rate is about 2.9% on our distribution versus a portfolio rate of 3.5%, and that is pretty -- I say that about ACE because that is pretty reflective of the industry. So hardly are interest rates supporting right now income statements substantially.

The casualty rate environment; casualty rates, in my judgment, in many classes are still not adequate to produce a decent ROE on the business. When you look at combined ratios and you translate it to an ROE they are not decent enough.

At the same time, trying to project loss cost trends and believe that the past, the recent past is an indication of the future. For ACE, we don't believe that is a prudent way to view the business. So all that together says to me, if you are responsible underwriter you are going to continue pressing for rate, because on an overall basis portfolio needs it.

Now that is not every class; that is not every cohort within class. The better your underwriting insight and ability to portfolio underwrite the more advantage you can take of the current rate environment as rates are rising.

So in short, I don't expect casualty rates to follow property at this moment. I don't see it in the trades I observe. Secondly, even with that said, as you can see, ACE is growing well within many lines and I think that is because we can find more opportunity within the current environment.

Got it. Lastly, for Phil, a quick numbers question. The cat load guidance for the rest of the year $95 million, is that a full quarter fourth quarter or is that reflective of experience through this time in October? Thanks.

It is the fourth quarter. It is the full fourth quarter.

Thank you.

Michal Nannizzi, Goldman Sachs.

Thanks. I guess in North America what are the competitive dynamics or the strategy you are employing that has led to the recent run of growth? I mean is one particular class of business much more attractive than it has been in the past, or is it more of a broad-based experience?

It is very broad-based. It is among -- the way we think about things, we write almost 200 lines of business. We subclass our business and respect each individually and really focus on it. And we are seeing growth across a broad array of casualty and physical lines related business.

At the same time were -- is years and years of practicing it. Our marketing and sales strategy, and I distinguish the two, are so focused on different cohorts of the business population -- from very large account called risk management, to upper middle market, to the middle market, to the lower end of middle market, to micro.

And whether it is ACE USA; whether it is what we call commercial risk, a separate division of the Company, to focus on the middle and lower middle market; whether it is the Westchester that focuses on middle or upper middle, you take portfolio management and the insight that we continue to work on to gain on each line of business. You focus that line of business on different customer cohorts, both by size, as I was just explaining, and within that, the occupancies or the classes we like, and then you spread that on a sales strategy across geography, because you got to dig deep within each geographic zone.

And that is the -- we know our minds and we have a clarity about it. We think we are generally right and that is what is producing that.

Got it. I guess to follow up on that; so we have been near double-digit growth in North America P&C here for the better part of the year. I think including this quarter, although I'm not sure you said it explicitly, but rate in excess of loss trend.

The underlying loss ratio looks like it is about flat. I don't know if there is some noise in there from a comparability perspective, but obviously margins are great as a starting point. But when should that rate in excess of loss trend combined with premium growth start to roll through?

So last year we had about 0.5 point worth of benefit in loss ratio that didn't repeat this year. So on a normalized basis it is probably about 0.5 point better, number one.

Number two, you heard my comment about loss trend that, sure, maybe on an observable basis, if you are looking at the past, you could say rate is exceeding loss cost trend. But that is not how we think about it. We look at more historical loss cost.

Casualty, the decisions you make stick with you for a very long time. We are not optimists and we are unwilling to believe that a more benign loss cost trend of recent past is what we will endure forever into the future.

Sure, as you book your loss ratio you might say the first two or three years of the paid pattern is going to be at the current trend, but after that, if you are prudent at all, you are going to revert to the mean in the loss cost trend you are picking.

Got it. And then last quick one. Do you (multiple speakers)

If in the future that proves to be conservative, then it will show up in your reserves, in your reserve studies and that becomes prior period.

Understood.

[I don't care] whether it was current or prior, just run your company conservatively.

Got it, great. Thank you. Last one, do you hedge commodity prices? You mentioned the commodity price change since probably February. On the crop side is that an exposure that ACE hedges?

That is a good question. Modestly, we hedge very modestly.

Remember, we take a longer-dated commodity risk exposure. In essence from March, because that is when the dance begins, until the end of October is kind of a commodity price exposure for us because that is when the government ultimately prices for loss; takes an October average. So we do a little hedging, but modestly. We do buy reinsurance as you know.

Right, so you will be able to push some of that loss on to the reinsurers then?

Well, you say loss, let's be careful about that statement. We historically run the book -- it is historically run below a 90 combined. What we are saying is, because of commodity prices and what we see, we are raising it to a 92 combined. That is not a loss, that is an 8 point underwriting gain.

That is still a very, very good result, but a more conservative result and a little less than it has historically run in the average. So we are not foisting a loss on to reinsurers.

Understood. Lesser than normal -- I understand. Okay, thank you very much.

Jay Gelb, Barclays.

Thank you and good morning. Evan, the 12% to 13% return on equity profile that ACE is generating currently, how would you put that in perspective relative to where we are in the cycle?

Well, our objective is to achieve a 15% over the cycle. We are running 12%-and-change for the quarter -- for the year, around 12.5%.

Interest rates, I think we have said before that something like everyone 100 basis points of interest rate has a 2 point impact on ROE. So we are below what we would say is our objective over a cycle.

Interest rates will remain where they are forever. Our portfolio mix of business and our geographic spread and how we see our strategy to continue to build competitive advantage, I am a firm believer in the 15% over a cycle.

And your acquisition strategy will help drive it there?

Well, the acquisition strategy is simply to compliment what we are doing organically. And while we have our eyes open for opportunity and we are vigilant and we are constantly looking, what we can believe and what we look at fundamentally is what we can deliver organically. That is what is in our hands with both what we have built and what we have integrated into the Company through acquisition.

Acquisition is a part, but not all. Remember, we showed a number I think last year, and don't hold me to it exactly, but roughly if you looked back on the last seven years 75% of the value we created or more came organically. The balance came through acquisition.

On a separate topic, there is a move by FASB to meaningfully change the financial accounting standards for property casualty and life insurers. It seems that that could cause some meaningful dislocations. I was wondering if ACE could provide their view on that issue.

I'm going to ask Phil to embellish on this, but we are in the -- we are very active in discussion with FASB. It is -- for me, accounting should truly mirror economic reality. And any improvement to what we have today ought to create better clarity and help to make things, the financials, more insightful for investors and investors to make decisions, because it mirrors an economic reality.

It is so interesting to me that the number we use and that our investors use and that we all find meaningful is operating income, because it is a non-GAAP measure, though it best mirrors what we think is the true picture. That says something about accounting.

When I look at the changes that FASB is suggesting right now, I get the theoretical but that is divorced from practical reality, what investors really use to judge and what management really uses to judge one company to another or the health of a company. The insurance accounting as it stands today has been around a long time and it has been tested through all kinds of environments and it is reasonable. I don't know what kind of problem we are trying to chase here by making changes.

The notion of, well, it is driven by convergence with IASB. Well, IASB has no insurance accounting standard right now, so I would suggest to them that they adopt what has been tried and tested and that is US insurance accounting.

Finally, what I would say is the notion of fair valuing all and that that somehow is the best indicator of value, particularly for a buy-and-hold company, and also the notion of introducing more volatility because you are going to try to predict long-term cash flows on businesses that are currently not stable, in my mind, is imprudent and I don't know whose benefit you are ultimately serving except a bunch of academics.

Phil, do you want to add anything to that?

I don't know if I can add anything to that. I would say though that we are -- I am working actively with my peers and other companies to meet with both the SEC and the FASB to express that view that Evan just talked about. They are also working to have our investors understand the issues so that they can voice their opinion as well. So we all feel very strongly about it here.

You can tell I do feel a little passionate about it.

Thank you for your thoughts on that.

Greg Locraft, Morgan Stanley.

Good morning, great quarter. Wanted to -- this may be one of the last times we talk about guidance at ACE, and I'm certainly not going to miss it (laughter), but can you sort of educate us how are you going to talk about guidance going forward?

Are you going to give none? Are you going to give some, but not the overall EPS? What are you going to do when the fourth quarter is reported?

Boy, I don't want this to turn into a headline across Bloomberg, but I know it will. We are just going to end up trading one hell for another.

We intend that we are not going to provide guidance period. That you will do your work, you know enough, and we will report. At this moment in time, where we are is we will not provide guidance period.

As we have said, we might give elements like our investment income run rate and those things that might be helpful, but that is where we are.

Okay, sounds good. Thanks and congrats again.

Vinay Misquith, Evercore Partners.

First question is on the crop insurance business. Just curious what were the sessions to the federal government this quarter.

And looking at the premiums for the year that is about $1.4 billion. If crop prices stay at these levels, what do you estimate you are going to have next year in premium? Do you think it is going to be lower?

Yes, the premium --.

Yes, to answer it simply, the premium would be lower. But the premium, I think, is -- frankly, for all the businesses that we engage, I think the premium is the least effective means of determining the health of the business when it comes to crop insurance. Because it doesn't really -- it is not indicative of ultimate profit and loss of the business, and even quantum necessarily of profit, the way it works.

Your premium moves around from period to period, not just based on commodity prices, but how you share risk, something called the SSAP, which we are really not going to get into today. But that is the area that governs the calculation between the government and the insurer of how you share premium because of loss experience.

Last year, ironically, premium goes up in the third quarter substantially because we are going to have more loss. On the other side of the coin, we are going to see a better premium growth versus last year at this time in the fourth quarter because of the same anomalies around a drought environment. It just is not indicative period to period.

So, yes, to answer your question, if commodity prices stay where they are you will price off of that in March and premiums will be lower, but when we think about underwriting profit they really don't line up exactly.

Okay, that is helpful. (multiple speakers) Because the simple math is I thought is that a target, say, maybe you [steadied below 90% combined] ratios, just say that you target an 89% combined. And so if the top line is down 5%, I would think that the bottom line would also be down 5%, but maybe I am being too simplistic about it.

You are being too linear in how you think about that and understand it's over -- that 89% is over a period of time. You can be worse one year, better another year.

Also remember, if you start commodity price when you price a contract at a lower than historic average, you actually have reduced exposure to yourself to some degree. You have less exposure to falling commodity price. Now, you still have the exposure but less so.

You start at $5 corn versus $4 corn, well, you know, your exposure just changed too. So all that has to go into how you think about this.

Sure, fair enough, thanks. The second question was on growth. You have grown a lot in North America and probably Europe was hurt by a slow economy, so do you expect growth to re-accelerate in Europe and maybe to slow down a bit in North America as pricing slows down here?

Well, you know, Vinay, first of all, exposure growth -- we had exposure growth that comes from economic activity of a couple of points. I do expect that Europe will slowly pickup. I don't think we are going to feel Europe much different next year than this year. The difference between 0.5 point down economically and 0.5 point up isn't much.

Then what I would tell you is the US economy, if it grew through the second quarter, was projected to grow for the year roughly 1.8%, remember that sequester scrubbed about 1 point or more off of that. So next year you ought to see the US economy, on an absolute sort of apples-to-apples basis, grow closer to the 2.5%. Somewhere between 2.5% and 3% depending on what our colleagues in Washington do, whether they help it, hurt it, or at least do us a favor and be neutral.

And so I don't expect that much of a difference. I do think that the pricing environment is ameliorating -- is moderating. Property is flattening out. You are not getting -- casualty you are getting rate on rate, but rate is not accelerating. It has leveled out and so you do have to take that into consideration when you look forward into growth rate.

We have had good growth and I expect that we will continue to have reasonable growth.

Sure, fair enough. Thank you.

Thomas Mitchell, Miller Tabak.

My first question is sort of a big picture, which is that for many, many years casualty lines underwriters were able to plug in interest rate factors, yields on the cash received and not paid out for a number of years that were two or three times or even more what they are now.

In the process of underwriting and sort of looking out with the potential that interest rates may move up by another 1.5 or 2 points or more over the next two or three years, how would you anticipate, if you would, changing your own underwriting approach to take that into account? Then, secondly, how would you anticipate the rest of the industry responding to that kind of change?

I will answer your question very simply. It is not a long answer. We don't cash flow underwrite here, so we don't consider interest rates and the investment income we make. We consider only to make an underwriting profit.

Flat and simple, so there is really nothing more for me to say about that. And how the balance of the industry will react, good underwriters will do the same. Mediocre underwriters will think differently and they will double down on risk. Oh, you can project the loss cost and at the same time you can project interest rates?

Very good answer. I like that. Now the second thing I had in mind, and if this gets too complicated you can put me offline, but your retention in the third quarter in the crop line was about 55% this year and it was about 80% last year. Is that something that you decide or is it in that complicated formula?

It is in that complicated formula. It strictly has to do with how we share loss with the government. Just very simply, when you are going to have a loss year, as you do, you are in the sharing how it is between government and private sector. It flows through the premium line, so we got additional premium because we were paying additional loss.

Got it. Okay, thank you very much.

You're welcome. And it wasn't too complicated.

Brian Meredith, UBS.

Thanks. A couple of questions here. First, Evan, you gave us what the acquisition in Mexico did for the global personal lines business. Wonder if you can give us what was the benefit in the overseas segments, not only from a premium perspective but how is it looking from a profitability standpoint? Did they add to the profitability to the Company this quarter?

Yes, overseas gen on a constant dollar basis grew 17%. Excluding the acquisitions, it grew 7%. They did contribute to the growth, the underwriting. These aren't huge businesses; they are good sized businesses. And we made an underwriting profit in both companies and that is reflected in there. It is not a huge part of it, but everybody contributes.

These acquisitions are on target or ahead. Very early days, but on target or ahead. We are really pleased with what we see and how it is working. There is more value than we originally imagined, and my colleagues are more confident and more enthusiastic about it today than we were at the time we actually made the acquisitions.

Great, thanks. Then my second question is combined insurance in the US; can you kind of give us an update of what is going on there? Also, with respect to combined insurance, what do you think the challenges and opportunities of the Affordable Care Act actually brings to that business?

Sure. So let me dissect this a little bit for you. Combined was down in the quarter. And I'm going to take North America, because I think that is the main action of combined and that is the size and scale of combined. Most of the business is there.

It was down about 3.4%. Last year we had a one-time benefit of about $12 million. You take that out -- and I am going to talk a little bit more about that -- the core of combined was up 1% in the quarter. That is the agency business of combined.

Our agent count in North America, I am feeling good about combined. I am not feeling good about its published; I am feeling good about what I see as the underlying health. It truly is building and I am going to explain it like this.

The agent count is up 40% in North America to about 25 agents. The annualized new premium -- somebody buys a policy, they pay their premium over time in the year. They don't pay it all at once on these customers. The annualized new premium is up 40% over prior year.

It does take time to show in the booked premium because the quantum of that new premium has to grow to a size that it overcomes the normal lapse rate you would see on the renewal book that is large. But, overall, you are now seeing the core growing at 1%.

The one-time benefit we had last year of $12 million, what we also have this year is they have a modest small book of university health insurance business and that business we are getting is coming off the books. It made really no profit. It is competitive and the Affordable Care Act hardly made it interesting.

So we are just shedding that and that is having noise on combined revenue growth, plus the UK that is shrinking as we have talked about has that impact. But I see the power of combined building and I am confident that that is going to show itself. I feel good about the fundamentals of it.

The product we are selling -- finally to answer that -- it really doesn't run up against Affordable Care Act. It is more about loss of time insurance for people who work for employers who don't have lost time benefits for employees, and that is the core of what combined sells.

Thank you.

Meyer Shields, KBW.

Good morning. Evan, can you talk a little bit about how you balance your property reinsurance by I am thinking specifically considerations of opportunistic pricing versus longer-term relationships?

Well, we are a very large reinsurance buyer. Counterparty credit quality is the very first consideration and that somebody is there to pay, particularly as you look -- and you are talking property and you are thinking probably less on a risk basis and more on a cat basis. The further you go out on that tail, well, the bigger that event is for the industry. So I can tell you, counterparty credit very (technical difficulty) to us.

We do recognize long-term relationship, at the same time, we hardly take one for the team. We have to be equipped to compete in the marketplace and so our cost of goods sold has to be competitive for us to be able to compete on the front end. We balance that with relationship and we expect that reinsurers who play it smart -- we're there for the long haul.

We are good underwriters. I would suppose that reinsurers -- and I am in the reinsurance business. What is more important to me than price is a cedent's ability to underwrite. The better the underwriter, usually the sharper they are in reinsurance negotiation. On the other hand, the more likely they are to produce a book of business that is sound for the reinsurer.

ACE has a reputation as a good underwriter and as consistent and long term and willing to do the right thing when pricing in both pricing and exposure management. And I expect reinsurers to recognize that and that I build into any of our thought about long-term relationships.

Okay, thank you. If we can switch gears really quickly, you talked about how some of the longer-term interest rate increases faded and that is obviously true. As Berkshire sort of assumes a bigger role in primary specialty insurance domestically and as they focus on equity returns instead of fixed income, do you expect that you actually meaningfully affect the overall market over the next three to five years?

You know what, I don't expect one carry to what is already a dynamic and large marketplace to have a disproportionate impact on the business. It takes a long time to build an insurance company that can compete on a national basis, that can write the lead primary layers, that can manage all kinds of size of customer and different cohorts of customer needs both domestically and internationally in a broad way.

Your best day is the day you opened. After that it is a grind it out day in and day out, and anybody entering this business, whoever you are, I wish you luck.

(multiple speakers) That is very helpful, thank you.

Jay Cohen, Bank of America.

Evan, Willis just announced their new platform in London, Willis 360, and of course Aon has its own platform. Can you talk about the impact that these ventures could have on the business and maybe your participation in some of these ventures?

I don't know the final detail of the Willis program so I can't comment on that specifically, but I will make a couple of general comments.

One, if it involves [ceding] underwriting control and underwriting decision making on a risk-by-risk basis to somebody else, you are ceding your fate. And I know how that ends. It only ends one way; it is just a matter of time.

We have seen that story plenty of times. It is just new bottle, old wine. So that is the case.

Number two, I assume that it may have an impact on smaller following line players, squeeze them. Number three, I haven't noticed a dearth of capacity in the marketplace, and so while I hear it is going to serve client interest, I really wonder what that means.

Number four, well, if it is an easier way of doing business and it, therefore, is more efficient, then does the broker make more money from this? That is what I got to say.

Thanks for the response, Evan.

Ian Gutterman, BAM.

Good morning, Evan. I guess start out to follow up on the crop. Can you tell us just, in the elevated loss ratio you are assuming now, what crop price is that assuming? Is that spot are or are you assuming maybe we drift down to 4.25 to be conservative? Just curious, if price keeps going lower in the last few days here, if Q4 could be a little worse.

Ian, I am not going to give you a -- I don't want to give you a specific point estimate number, but I am going to answer this way to you. The way you decide the commodity price for adjusting loss the government comes back to you with a number and they use the October average, for corn and for soybean.

So it is the October average, which as of two days ago -- I don't watch it -- was $4.41 for corn. But I don't watch it. Okay, does that --?

That makes sense, sure.

Okay. Are you waiting for me to say something else? I think I answered your question.

Okay, I am sorry. Well, let me try to clarify a little bit. At $4.41 it is right on the margin of whether we get claims or not, right? So if it moves a little bit either way --.

Ian, whoa, whoa, whoa. Buddy, whoa, whoa, whoa, whoa. Don't say that. What was the yield versus historic yield? What is the deductible that each farmer picks? I mean you have got a whole lot of stuff that goes in here. You can't guess that, because I can't.

Well, I guess I'm just saying for an average farmer, if they had a normal yield and a 20% or 25% deductible, then they are right on the cusp, right? So you may end up having zero claims or you may end up having a lot of claims.

Ian, you will make your own decision.

Okay, fair enough.

Now it varies by crop, by state and it's going to -- so you are putting a rule-of-thumb national average, but that is not how ultimate profit and loss gets calculated.

Sure, sure.

It's farmer by farmer and then it aggregates by state. One state might produce a worse than average or even a loss, while another state produces a bumper, and how does that play into the profit and loss and the sharing with the government? You now get into all that.

Fair enough, fair enough. Okay, I will move on. Overseas general -- the reserve releases in overseas general --

I can't figure it out right now, you know with precision, so you can't.

I understand. I thought I would try.

The overseas general reserve releases are usually elevated Q3, which as I recall is in annual review. I was just kind of curious; any specific lines that that drove the high releases versus the first three quarters or is that just a normal review process?

It was normal review process. As you can imagine, it is casualty more than short tail lines and it is fundamentally for years 2008 and prior.

Got it, okay. Then my last one is --

Phil is just going to say we will have all the details in the 10-Q that will come out shortly.

Got it; I will be patient. Then my last one, I think it was maybe it was Brian's question when you said you were more excited about Mexico now than when you entered in the transaction. I was hoping you could expand upon why.

Well, it is the franchise -- it is two or three things. The quality of the people; we have spent a lot of time with them and we have a lot of confidence in that we know them better. And they are good operators, number one.

Number two, the quality of the franchises is deeper with greater possibility than when we even first imagined. Number three, with the power of our strategies to take what is large distribution that each one had been driving on a monoline basis and, given the power of what we bring to the table, being able to drive through that distribution on a multiline basis in cross-selling, the opportunity we see there is just more significant and we are more optimistic.

The beauty is that optimism is flowing to us from the ground. The ACE people in Latin America, the ACE people in Mexico, our new ACE colleagues are all very clear believers and have clear focus on it.

The way we are seeing execution go right now and integration go and the cultural compatibility and the back and forth understanding that is gratifying to us and giving us more confidence in that. So when I add it all up, it just --.

And then our ability -- I would add one more thing. Our ability to help them do what they have done well, but do it better. In flat-out automobile underwriting in Mexico we are already seeing impact and benefit to that. The power, we see glimpses of the power of that.

So I add all that together and that is what gives me the confidence and what is behind the statement I made.

This sounds exciting; I look forward to hearing more about it. Thanks, guys.

Paul Newsome, Sandler O'Neill.

Good morning. I apologize if you already caught this, but I did notice the cash flow look liked it fell into the year over year. I apologize; I had to jump off the call quickly, but can you address that at all?

Our cash flow for the quarter was $928 million, as I said in my opening remarks, which is a very strong cash flow number. When you compare it to last year, the number was about $1.6 billion, but it was just a timing issue. Because of the crop losses last year, the payment of the premium, the remittance of the premium delayed to the fourth quarter. So there is just that one anomaly.

And I will -- that is great.

Make this clear, last year's third quarter was higher because we didn't pay the government last year until the fourth quarter. This year we paid it in the third quarter, so this is a much more normal quarter.

And thank you very much for the comment on the accounting. I think it is a bit of a train wreck, so I appreciate at least one management team taking a stand on what I think is an important issue.

You got it, bud.

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

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