丘博保險集團 (CB) 2013 Q4 法說會逐字稿

Good day and welcome to ACE Limited fourth-quarter year-end 2013 earnings conference call. (Operator Instructions). Now 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 December 31, 2013 fourth-quarter and year-end earnings conference call.

Our report today will contain forward-looking statements. These include statements relating to Company and investment performance, pricing and insurance market conditions, and potential acquisitions including our recently announced expected acquisition in Thailand, 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 us 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 is my pleasure to turn the call over to Evan.

Good morning. ACE had an excellent fourth quarter that contributed to a record year. All the divisions of the Company made a positive contribution to our results that were highlighted by both strong premium revenue and underwriting income growth globally. The outstanding underwriting performance benefited from both good current accident year margins and margin improvement as well as low catastrophe losses and strong positive reserve development.

After-tax operating income for the quarter was $824 million or $2.39 per share, up 67% and the P&C combined ratio in the quarter was 89.3%. For the year, net operating income was $9.35 per share or over $3.2 billion of operating earnings, up 23% from 2012 and records for our Company. Our P&C combined ratio for the year was 88% resulting in $1.8 billion of underwriting income which was up over 110%, simply outstanding.

ACE's strong current accident year underwriting has been at the heart of our great calendar year underwriting results. The current accident year combined ratio excluding cats was 90% for the year, almost 3 points better than prior. The current accident year results reflect our premium revenue growth globally, a more favorable pricing environment in North America, continued margin improvement globally in many of our businesses as a result of portfolio mix efforts, and product mix.

And finally, our current accident year combined ratio benefits from excellent expense control, another hallmark of our Company.

To break it down a step further, our current accident year results excluding cats for global P&C which excludes agriculture, was 89.4% for the year and our combined ratio for ag was 95%. Ag ran 105% in the fourth quarter which was worse than we projected due to significantly lower corn yields in Iowa, Missouri and southern Minnesota.

Net investment income was quite strong in the quarter and a bit better than we anticipated. For the year given our strong cash flow, net investment income of $2.1 billion was down less than 2%, a good result given the continued pressure from ultra-low interest rates. So we will have more to say about the quarter and the year.

Our earnings led to an excellent operating ROE of over 12% for both the quarter and the year. Per share book value grew 5% for the year or 11% if you exclude the unrealized losses from our investment portfolio as interest rates rose.

I look at adjusted book value growth because we are fundamentally a long-term buy-and-hold investor so the mark is a timing question. At nearly $29 billion at December 31, our book value has doubled in the last five years and tripled in the last ten.

Turning to growth, P&C net premiums written in the quarter grew nearly 20% on a constant dollar basis with growth coming from a majority percentage of product lines in all regions and as this earns its way in it will be a source of future earnings. For the year, P&C net premiums increased about 8% in constant dollars or 11% excluding agriculture.

Let me add a bit more insight and break down the P&C growth by area. For the year, our commercial and specialty businesses generated growth of 10% globally with contributions from every region. US retail and wholesale grew 11% and 13% respectively. Internationally, retail commercial P&C was up 10%; Latin America led the way with commercial P&C net premium growth of over 20% in constant dollars followed by solid single-digit growth in Asia, Europe and Japan.

Growth in our London-based E&S business which saw more competition during the year was modest at 2%.

Net premiums for our agriculture business were down 12.5% for the year and were in line with our expectations. The decline was due primarily to an increase in the amount of crop reinsurance we purchased.

For the year, our A&H business grew 5% globally in constant dollars with international up 10%. Premiums for our combined insurance business were down 2%. For our core combined business as I reported last quarter, agent manpower counts in North America are way up and so are new sales and those factors will translate into net premium growth at the combined.

Net premiums written for personal lines were up 40% in constant dollars in 2013 or 11.5% excluding the contribution from our acquisitions particularly in Mexico. We have done a good job to date of integrating these companies and they have been accretive to our earnings in their first year. We are making them more valuable by combining their impressive talent and local product and market expertise with our global underwriting and analytics capability and our distribution management capabilities and our broad product portfolio.

Our personal lines business is poised to continue its substantial growth globally.

Our international life insurance business, which is focused primarily in Asia and secondarily on Latin America, had a reasonably good year. Premium production grew 18.5% in constant dollars.

Lastly, our global reinsurance business had an excellent year with a combined ratio below 66% and underwriting income up over 45% due primarily to low catastrophe losses and good results from the core P&C book. Net premiums declined 3% as we maintained underwriting discipline in the face of flat to declining rates and increasing competition as the year progressed.

Given the soft conditions in the reinsurance market which is a wash in capital, global RE is not going to be the place where ACE expects to achieve near-term growth as we are fully prepared to shed further volume as necessary in order to maintain an underwriting profit. We take great pride in the underwriting discipline of our reinsurance colleagues, we applaud them and we reward them for it.

By the way on the other side of the coin, ACE is a substantial buyer of reinsurance, one of the largest in the world and our risk appetite has not changed, it remains steady. We pride ourselves on the long-term relationships and the money we have made for reinsurers over the years. We are a sought after cedent. A softening reinsurance market benefits ACE in terms of pricing and improved terms and that will positively impact our future financial results.

Looking forward, we are off to a great start in January where pricing was similar to the fourth quarter. Remembering of course that we are in a brisk business, I expect we will have a good year in 2014 from a revenue growth perspective as we continue to take advantage of the many growth opportunities we see around the globe including right here in the US.

I want to say a few words about the current pricing environment. Our commercial P&C business in the US continued to benefit from a positive price environment with another quarter of rate on rate increases. Overall North American pricing, both wholesale and retail, was up 3% in the quarter. General and specialty casualty related pricing strengthened in the quarter, up nearly 4.5% compared to an average 3.5% year to date.

Large account risk management-related casualty pricing was up 4.3% versus 4.8% for the year. Management and professional lines pricing was up about 3.5% in the quarter, the same as it has been for the year. On the other hand, the rate of increase for property related pricing continued to flatten in the quarter, up about 0.5% versus an average of 3.5% for the year.

In our US retail business, new business writings grew 6.5% year on year and our renewal retention rate as measured by premium was 100% in the quarter. On the North American wholesale side of our business, new business was up 22%.

Internationally, the retail commercial P&C environment is competitive but remains stable. In total rates were down 2% in the quarter versus 1% for the year. Rate decreases varied between 1% and 3% depending on line of business and territory. The UK, Latin America and Asia are competitive while the continent is reasonably stable and in fact, we secured rate increases on the continent for certain classes such as property and professional lines.

Let me add a comment here. Strategy for rates is not simply about achieving more rate and improving margin. It is about using underwriting and marketing to achieve growth where risk-adjusted underwriting margins are favorable and then on the other side of the coin achieving better terms or shrinking where they are not.

John Keogh and John Lupica can provide further color on market conditions and pricing trends.

Earlier this month shareholders approved a 24% increase in the common stock dividend. Raising the dividend this amount is consistent with our long-term commitment to a strong dividend with a target payout ratio of approximately 30% of operating earnings. Our dividend has increased 80% since the beginning of 2012.

As all of you know, we also announced in the quarter a plan to target the repurchase of up to 1.5 billion of our shares in 2014. The buybacks are not a change in strategy or our view of opportunity. We have simply reached a point, all things being equal, where we have built up sufficient capital flexibility for both opportunity and risk that we can return additional capital surplus we generate in 2014 via share repurchase without impacting our growth capability.

We will continue to capture organic growth where the returns are attractive while pursuing acquisitions opportunistically to complement our growth strategies.

To that point as you all saw, we announced earlier this month plans for a small but strategically meaningful acquisition in Thailand. We plan to acquire a 60.9% stake of Siam Commercial Samaggi Insurance, a writer of auto, small commercial and personal accident insurance. Samaggi is well-established with excellent distribution including its 12 branches and 1000 independent agents and a close commercial relationship with Siam Commercial Bank, one of the country's most venerable financial institutions.

The addition will complement our existing commercial P&C, A&H and life businesses in that country. After we close on this transaction we hope sometime in the second quarter, we plan a tender offer for the remaining 39.1% for a total transaction cost of approximately $185 million.

In summary, ACE's financial results for the quarter and much more importantly the full year, distinguished our Company. We performed well as measured by operating and net income, combined ratio, book value and premium revenue growth and of course ROE. We finished the year more diversified in terms of product and geography increasing our presence in areas such as the US, Asia and Latin America that present opportunity for future growth.

And of course, our balance sheet is in excellent shape. We are in fact well positioned for an excellent 2014 and beyond.

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

Thank you, Evan. We had an excellent quarter and record year. Full-year net income was $3.8 billion or $10.92 per share. Tangible book value per share grew 3% for the quarter and 4% for the year. If we exclude the impact of our acquisitions, tangible book value per share grew 6.7% for the year whereas if we just exclude the unrealized losses from the investment portfolio, it grew 11.8%.

Our cash and invested assets grew to $61.5 billion and cash flow was $1.3 billion for the quarter and $4 billion for the year. Our balance sheet risk profile remains extremely strong.

Net realized and unrealized losses pretax were $21 million for the quarter and principally comprise losses in our investment portfolio of $151 million, foreign exchange losses of $16 million, and gains in our VA reinsurance portfolio of $149 million which included a $92 million realized gain from an out of period adjustment for an error in a third-party market valuation model.

Investment income for the quarter was $557 million. This was better than anticipated principally due to higher private equity and other distributions and slower prepayments in our agency mortgage portfolio which have a higher yield than current new money rates. Current new money rates are 3% [if fully] invested in a similar distribution and our current book yield is 3.8%. We estimate that the current quarterly investment income run rate is approximately $540 million which is subject to variability of portfolio rates, private equity distributions and foreign exchange.

Our net loss reserves were up $508 million or 2% for the year adjusted for foreign exchange. The paid-to-incurred ratio was 96% for the year or 85% on a normalized basis which takes into account cat loss activity, prior period development and crop loss activity.

During the quarter, we strengthened reserves in our brand new line, runoff operation, by $91 million pretax. Reserve increase principally relating to asbestos is driven primarily by settlements of a few accounts and incurred development in our assumed reinsurance book. Our portfolio of accounts remains reasonably stable both with respect to frequency and severity. We have seen no real changes in the asbestos claims environment.

The Brandywine strengthening was more than offset by $213 million of positive prior period development principally from short tail lines primarily from 2009 and subsequent accident years. Cat losses were $31 million after-tax in the quarter from worldwide weather events.

A&H net premiums written were up 4.7% in constant dollars compared to last year's quarter. Operating income was down 7%. Excluding nonrecurring tax items, A&H operating income is up 3.8%.

Our tax rate for the quarter of 9.2% was favorably impacted by a split of PPD and cats between taxable and low tax jurisdictions and a one-time tax benefit in the quarter. We believe a reasonable current accident year run rate for tax is in a range of 13% to 15%.

We have repurchased approximately $160 million of our shares since the November announcement of our plan to repurchase up to $1.5 billion.

I will turn the call back to Helen.

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

(Operator Instructions). Amit Kumar, Macquarie Capital.

Thanks and good morning and congrats on another strong quarter. The first question is a follow-up on the discussion on risk-adjusted margins in your opening remarks. In terms of loss cost trends in North America commercial lines, are there any lines which might be witnessing meaningful more pressure I guess compared to maybe six months ago in terms of loss cost trends?

I'm just thinking for a moment before answering that but no, a one-word answer, no, not really.

And I guess related to that would be any change in the competitive pressure?

Well, competitive pressure, you know, it really varies by line of business. You can't generalize about that. Where margins improve and become more adequate, heads-up underwriters compete more for that business, that is just natural and you see that.

On the other side of the coin, when people are suffering, competitors are suffering because rates are inadequate or loss costs are rising more than pricing and there is a deterioration, then usually you will see more of a pull back in that class and more adjustment to pricing. So it varies.

Got it. The only other question I have is I guess a follow-up on your --.

It is hardly that the market is not -- the market is a competitive marketplace. That is all there is to it.

Yes, I just wanted to ask are you seeing some competitors being much more aggressive based on their capital position than what you might have seen in 2013?

No, no.

That is helpful. The other question was on the reinsurance purchase comment. Would it be fair to say that you might look to consolidate your US and international cat treaties when they renew at July 1?

Stay tuned.

Okay. I'll stop there and requeue. Thanks.

Are you in the reinsurance broking business now?

No. Maybe I should be.

I don't know, buddy.

Mike Zaremski, Credit Suisse.

Good morning. Thanks. So I guess a first question on operating leverage. Topline growth has been outpacing expense growth for a little while now. Should we expect that dynamic to continue into 2014?

That is going to vary by area, by mix to business but overall, that is thematically correct.

Okay. I guess next, if I look at I guess this is related to Amit's a little bit. Topline growth seems to be, to have accelerated a little bit and I think some of that is due to -- on a net basis -- due to lower ceding levels. So I guess how should we think about the topline growth rate in 2014 maybe overlay that with should we expect the ceding levels to continue falling as well maybe back to their historical average ceding levels?

First of all, whatever is to be judged by 2014, that will be your business, we are not giving guidance. So I am not trying to work on your worksheet here. But we have not changed our risk appetite, as I said, and so therefore our net to gross remains pretty steady. It varies depending on mix of business. So if certain lines of business that have a higher net retention to them grow faster, then the overall net to gross will be a higher net as a percentage. But within each cohort, each line of business, our risk appetite is steady.

Okay. Just a final follow-up to that question then is some of the recent acquisitions impacting 4Q potentially?

Impacting the fourth-quarter results?

Correct.

In terms of retention or overall?

Premiums written. Maybe I am missing that dynamic in terms of the upward growth trajectory.

Well, of course they do. Mexico impacts our growth. As I said, our personal lines business grew 40% but if you take out the impact of acquisition, it grew 11% so that is giving you a sense of it and then for our total international, Phil?

ALG in total as reported grew 15.1%; excluding acquisitions, it grew 8.8%.

So acquisitions impacted the growth of course, and they are, they do impact the net in that case as well, the net to growth because there is more personal lines which is a higher retention line. So that is one of the dynamics.

Thank you.

You are welcome.

Michael Nannizzi, Goldman Sachs.

Thanks. Just a couple, on the crop book, so I know you retained less this year versus last year, purchased a bit more reinsurance. Do you expect to repeat either this year's version of how much you retained or last year's? I think you had said at one point that you expect to revert back to 12 type level. I am just trying to understand is this a business that you're going to either grow more and cede more or go back to your prior levels of sessions? Thanks.

Michael, I think our reinsurance purchases most likely in 2014 will be very similar to what they were in 2013. As far as third-party private reinsurance is concerned, we purchase both quota-share and XOL. I would expect that to repeat. Our sessions with the government can vary on the margin though that also depends on lossmaking or not lossmaking state crop or year.

Great, thanks. And then on the development, Phil, could you specify a little bit in terms of what lines broadly drove the favorable development this quarter?

It was principally short tail. If you put the Brandywine aside, it was principally short tail lines for 2009 and subsequent. We will give you the detail of the lines in the 10-K.

Got it. I mean I'm just thinking like short tail I would think -- I'm sure I'm not thinking about this right -- but I would think that really recent accident short tailed lines would be the ones that would be developing just because they probably would have already developed. The 2009 year probably would have already developed by now.

Michael, I think the thing you have to keep in mind is first of all, the development comes from where we do our reserve studies in the quarter and our reserve studies occur all year long. We don't study all reserves every quarter in actually a deep dive way. So these are the results of the deep dive so more short tail is reviewed in the quarter than long tail and that is why it is more short tail versus long tail related.

Development, when you are thinking -- well, you think most of it is more recent than 2009, etc., it depends where it is coming from. Wholesale business for instance where you are writing on a policy or basis, a year of account basis that accounting and the development of that can take longer than say a primary retail book. So if you are a prudent underwriter, there is going to be a different development pattern even for short tail than -- it is not all created equal.

Got it. And then just one last maybe. You talked about the reinsurance markets. Obviously there are a lot of players that write reinsurance and also insurance primarily through broker intermediate markets. Do you think -- is there any possibility of the conditions that you are seeing manifest on the reinsurance side rolling into the insurance markets or do you feel like for a host of reasons that that is not something that will manifest soon?

Who knows. I can't speculate about that of when or what but thematically, of course. Reinsurance becomes competitive and that -- it is almost like arms dealers, that feeds the primary side of the business and as reinsurers are hungry and that generally leads to a more competitive marketplace on the insurance side. And if that occurs, we are fully prepared for that. And I have absolute confidence in our ability to outperform in an environment like that.

We are global and the whole world won't behave the same way. We have got a lot of lines of business that are not subject to cycle. We are in growth areas of the world where in fact exposures are growing. We are in areas of commercial P&C that require distribution to reach customer bases and are in areas that are not subject to the same kind of cycle movement. So for a host of reasons.

And then when I look at our commercial business, our insights and portfolio management of how to distinguish among cohorts of risk in both pricing and terms, ACE will outperform. When it happens, bring it on.

Got it. Thank you.

Jay Gelb, Barclays.

Thank you and good morning. With regard to the accident year combined ratio ex-cat, Evan, you sound pretty constructive on the outlook for 2014 including the topline growth. So I am just thinking directionally should we expect that important metric to improve again in 2014?

Jay, I am not guiding that way. I am not going to give direction that way. I will just repeat one thing that I did say. A lot of the discussion I listen to is so obsessed simply about margins and I get that when it is speaking to companies that aren't growing so the only source of earnings stability is through margin improvement, I got that.

ACE is a growth Company, growing in many areas and with a lot of opportunity. Margins are good. I mean, look at the underwriting margins, they are decent. Now it is not all classes and so we are underwriting margins, we judge them to be a good risk-adjusted return. We view that as an opportunity and it is our job to ferret out that opportunity for growth.

Where we see underwriting margins are not decent, it is to do what we always do, either achieve terms including price that will secure reasonable risk-adjusted return or shrink that business. That is how we are planning.

Switching gears on the share buyback authorization, is that just for 2014 or should we consider this something we should anticipate in future years as well? Because when Phil mentioned the 30% target payout ratio for the dividend, that basically backs into around a 50% use of operating income for the buyback. So I just want to see if I'm thinking about that the right way.

I won't comment on the 50% but the share buyback is a 2014 only and when we get to the end of 2014, we will speak about capital management for 2015 and that is going to depend on our capital flexibility at the time combined with how we see the environment going forward. Right now we have plenty of firepower and flexibility and we didn't need to continue to increase that. So there is plenty to do exactly to execute strategy exactly the way we have been and anything surplus that we generate we can afford in 2014 to return that -- all things being equal.

If we find a great growth opportunity that uses capital, that would be our preferred way to use it. The secondary option is when we can't put it to work then we will return to shareholders.

So just to clarify on that point, Evan, what you are saying is that the $1.5 billion authorization for this year, that is a decision based on the expected capital generation but you are also leaving the door open for that to continue. You are not saying that this is a one-time deal?

That is exactly correct.

All right. Just wanted to clarify. Thanks.

Greg Locraft, Morgan Stanley.

Good morning, thanks and great quarter and great year. Wanted to just pursue what Jay was just talking about on the capital deployment side. I think the way all of us are modeling ACE or many of us are modeling ACE, we are unable to model for M&A. So therefore there is this future growth optionality in your Company where we are not modeling it appropriately in the out years. And so what I feel like we should be doing is we actually should be dropping -- we should continue the buyback in perpetuity because what you have effectively done in the fourth quarter is you have said we have enough excess capital to do what we want to do and again, all else being equal in other words static world, which we know it won't be, the only way to model a company appropriately is to continue to take the excess and put it through buyback.

Is my philosophy meshing with yours? That still leaves you the ability to do M&A and if you do M&A, then we pull in the buyback in whatever year.

You know, Greg, we have to each live in our own hell so you have to do what you think as you are going to model the Company and we have to do what we think. I can't answer that question for you of how you should imagine the future beyond that. The only thing I can tell you is buybacks are not our first choice. Our first choice is to grow book value through growing the Company and deploying. And if in fact we find the surplus we use the surplus capital or a portion of the surplus capital, we will likely generate that back, retain that, an amount to come back to where we are.

And if we find opportunities which we are always on the hunt for organically or through acquisition to deploy that capital at a rate of return favorable to shareholders, we will do that as opposed to a buyback.

Yes, you can't see it, we can't project the unknowable but you are right, the world is not static and it is dynamic and it is just a matter of timing generally. You have to be patient if you are not going to make a mistake.

Yes, great. It is just the change in philosophy was the news in the quarter and again, you have now said -- I feel like you have said to the world we have plenty and we are going to give back the excess from here.

To the extent we use the plenty, then there you go.

Okay, great. And then last, on capital deployment as well, how did you get the 30% as the right payout ratio for the dividend? Why not 20%, why not 40%? How did you set that level?

We study it and we studied an awful lot of -- we over obsess around here and we studied what are payout ratios of companies and they vary between 30% and 70% on average depending on whether you are a growth company or you are a value company based on whether you are balance sheet company or you are more of a cash flow company. And so based on the study of that, we figured it was -- what we arrived that 30% was a good balance between a good payout ratio and dividend to shareholders while at the same time, we are in a risk business, flexibility so that we feel that that dividend rate is protected even in down years if you have bad lossmaking years, because you want your dividend to be steady and not hurting our optionality for growth.

Okay. Great. Congrats again on the year and the quarter.

Thank you very much.

Vinay Misquith, Evercore.

Good morning and congrats on a good quarter. The first question is on the future margins and I know you answered Jay a little while back but you guys did a good job last year that is in 2013 of increasing margins quite significantly by lowering the expense ratio and through business mix. Should we expect some of those elements to also play out in 2014?

We continue to strive to improve the efficiency of the Company. So I'm not going to give you a point estimate but what I'm going to tell you is that thematically on one hand, we strive to improve and grow expenses at a rate slower than we grow revenue. On the other side, we continue to invest in the Company.

And finally, we write -- it depends on mix of business. We write businesses that will have a higher expense ratio and a lower loss ratio that have very favorable underwriting margins and we have a mix of those. Some have good margins and they are higher loss ratio, lower expense and as I said the other way around.

So it is going to depend on how that comes out. I am not going to thematically though give you a -- the expense ratio is going to continue to drop in 2014 answer.

Fair enough. A follow-up to growth. I mean your growth is very, very strong this last year. Now that the market is getting just a tad more competitive especially in the US, should we expect the gross topline growth to slow in 2014 versus 2013?

Vinay, we are not guiding revenue growth numbers for next year, it is not happening. The only thing I will say that I did say, ACE has grown -- has outpaced the industry in growth rate both on a global basis and in the US by itself. I expect that ACE in 2014 will continue to outpace the industry's growth rate.

Okay. Thank you very much.

You are welcome.

Josh Shanker, Deutsche Bank.

Good morning. You have had two years in a row of unfortunate experience compared to history in the crop business. Can you help me think about normalized premium volume for the second half of 2014 not really looking for guidance but of course there are so many adjustments in the last two years, I could use a little help there.

No, not really. What I will tell you is this, premium through the year is really is dependent an awful lot on what commodity prices are. Our exposures are pretty steady, they've grown a little bit. I don't expect dramatic growth, meaningful growth in exposure. So what will affect premium growth is primarily -- or premium levels, primarily commodity prices. Right now commodity prices for when you would price insurance contracts at the moment are lower than they were in 2013 when we priced.

So all things being equal, that would bring premiums down. I would not confuse that with underwriting income abilities. That would be number one.

Number two, what you look at in the second half of the year in particular and in the fourth quarter is premium adjustments that have to do a lot with the loss or gain sharing with the government based on how each individual state and crops loss experience comes out and that is very state specific, very crop specific. It is experience driven and so there is no way I can speculate on how you should imagine that for the future except to tell you the way I imagine it, is I would think about commodity prices for premium on one hand. And when I think about underwriting, I think about our long-term historic average because we don't use one or two years though the most recent years go into the average as we compute on what we think would be next year's combined ratio.

And on that basis, it is roughly it is in the same range as we imagined when we entered 2013. I think that is more than you asked me.

It makes sense which we saw a high cede in 3Q and a low cede in 4Q this past year and the year before we saw a low cede in 3Q and a high cede in 4Q.

You just got it backwards but that is okay.

But you understand my point. I'm just trying to understand how that (multiple speakers) works?

Now you're just down to worksheet that we will take off-line. You can call Phil and he will talk to you about that.

Okay, thank you.

You are welcome.

Brian Meredith, UBS.

Thanks. A couple of questions here for you, Evan. The first one, I'm just curious, could you give us your thoughts on the economic environment in Latin America and what could that potentially impact do you think that could potentially have on your A&H business and personal lines business down there?

The theme of Latin America right now that I see is about the same as we had in 2013, maybe a little better. It is very country dependent, country specific. And what I mean by that is I expect Mexico's economic growth to actually improve in 2014 versus 2013. It will be in that 3.4 to 3.5 range is what is projected whereas 2013 was much more tepid.

Colombia's growth rate will continue reasonably well, I don't see a lot of change there. Chile and Peru will do reasonably well. So the Andean and Mexico, I think reasonably stable. I don't see economic activity impacting our business versus 2013 better or worse except maybe in Mexico where I expect it to be better.

On the other side of the coin, Brazil is underperforming. Yes, it's got a current account deficit as do a number of large emerging market countries. It has failed to implement reforms that would stimulate growth in the country. It is more protectionist. We experienced this throughout 2013 and I expect that to continue in 2014. I don't see a lot of change at this moment maybe on the margin to our growth rates in Brazil in 2014 versus 2013.

Great. Thanks. And then just one other quick question on the agriculture business. Any thoughts on the impact of the Farm Bill?

Well, the Farm Bill actually, remember something about agriculture insurance that I just want you to keep in mind. It doesn't rely on the Farm Bill for authorization, it is a separate permanent law. It didn't need to be reauthorized. However, what the Farm Bill did do is it eliminated direct subsidies to farmers roughly I think it is about $5 billion and it actually puts more reliance on crop insurance as the centerpiece of government support for the agriculture industry. They actually strengthened crop insurance offerings in areas in the bill.

So that could be somewhat of an offset to the lower commodity prices?

No, I don't expect to see that. No. And you know, listen, the reason that for all of you, the reason that we break out crop when we show you revenue growth from the balance of our business is, the balance of our business you are using revenue growth as a proxy for exposure growth, growth of the Company and market share in areas around the world and its presence and crop is different than all of that. We have a steady market share. We have a steady exposure to the business and its commodity prices that fundamentally are the biggest driver of increase or decrease to revenue.

And by the way, is a head fake if you are using math to try to determine what the underwriting profit will be on the business. It is not. So in many ways, not in all ways, but in many ways premium revenue growth in crop is just a head fake, growth or decrease.

Thanks for that answer, Evan.

You are welcome.

Thomas Mitchell, Miller Tabak.

Thank you. A couple of things. The first is the area of man-made catastrophes whether it is something like credit cards being hacked or let's say Amazon starts using drones to make deliveries and they crash into gas terminals or something. In the sense of technology-driven man-made catastrophes, is this an area that becomes a specialty for an underwriter in that the customer pool actually is either now paying for or seems likely to be paying for in another two years or so?

First of all, Tom, the way you couched it you sound like a Luddite. But look, to answer your question directly, yes, the answer is, yes. I don't know about your two-year timeframe and in fact people are buying today. Cyber risk insurance is growing.

Society continues to evolve. Science, law, regulation all drives -- and other factors all drive exposure changes to society and exposure growth in new areas exposes clients to potential loss. And for insurance to remain relevant, you have to be able to offer protection in areas where exposure is growing and good underwriters are constantly innovating.

You can't do it in a mindless way though. We have limitations to begin with our balance sheet. You can only take exposure to the extent of your balance sheet and then you can only take exposure to the extent you actually understand the risk that is creating the exposure and you can structure it and you can price it and then you can transfer it.

So that is a process. For thoughtful underwriters that is a process and it evolves over time just as these exposures do. And sure, we are looking at all of those maybe with the exception of we are not looking to drone delivery at the moment. But stand by, I think it is terrific. We will be delivering our homeowners' policies to high net worth customers that way in the future. Your drone will be there.

Thank you. The other question I have is that it seems like, and it may be just the tone that the Asian life insurance business is adequate. But it would seem that being a higher growth area of the world, in terms of GDP and the possibilities that we should be seeing increasing populations of people who have more reason to be covered by life insurance, is 15% to 20% really as much as we should be looking for or should it be closer to something like 25%?

Well, first of all, I'm not going to guide the future, but what I am going to tell you is it grew, overall our international life business which included Asia, grew at 18.5%, and I characterize that as reasonably good growth. My colleagues know that to take off the qualifier of reasonable, I obviously expected something a little different. The Asia business in that 18.5% grew at a faster rate.

Okay. Thank you very much.

You are welcome.

Ian Gutterman, Bank of America.

Thanks. I will try to bang these out quick. First, Phil, on the investment income run rate of $540 million, that was up I think from about $525 million last quarter; just curious what drove the change. I guess I would have thought the buyback if anything would have brought it down a little bit.

Well, it is new money and we are seeing as I said our mortgages are persisting. The prepayments on the mortgages are extending the duration, and they have a higher yield than new money rates. And in general, we have had a slight uptick in interest rates. So these three things together are making us believe $540 million is the right run rate.

Got it. And then I had some different questions on crop. Evan, I was a little surprised, you said the reinsurance purchase would be similar to last year. Just given your comments last quarter that the lower prices for corn means there is essentially less risk this year versus last year because it is starting at a lower point, I would have thought that would have opened up the opportunity to opportunistically cut back your quota share and keep more of that for yourself if you think there is less price risk in this year's crop.

First of all, we don't speculate. We don't use reinsurance to speculate. We make rational risk appetite decisions versus the terms we are offered for reinsurance. And that is as far as I am really going to go on that. But it is rational and I wouldn't be surprised on a risk reward basis is my answer.

Got it. And then is winter wheat a meaningful portion of your crop book and any concerns about the harsh weather?

No, it is not a meaningful portion and about the harsh weather, I think Brian Dowd will give you the most eloquent answer on that.

I think it is too early to really make any view on how winter wheat will turn out. What we know is most of the crop got planted timely. It emerged and is now dormant so there is certainly areas where we would like it to be a little moister than it is right now. But you are at the stage where winter wheat is essentially dormant and the next few months will determine what the ultimate yields look like. But most of the crop got planted in a timely fashion.

Got it, great. And then I think my last one since we are getting late is, Evan, any thoughts on Turkey and just -- or maybe just a quick refresher. I know when these things happen people worry about political risk. Maybe a refresher on what exactly you do on political risk in places like Turkey and I can't remember if Argentina is being (inaudible) or not, but why we shouldn't hopefully have to worry too much about that?

I am not worried in Turkey about confiscation or ex-appropriation or nationalization of foreign businesses. That is hardly the history of Turkey. Turkey as a country of laws, of a market-based economy, of relative political stability. They have reasonably strong institutions and when it comes to currency exposure which would be the other, that would be about where you can't exchange the currency where in fact it is not available to be exchanged. And if we have any exposure to currency in convertibility, which is what they call the coverage, it always has long deductible waiting periods on it -- six months, three months, one year.

And so no, I do not have concerns when it comes to political risk. I am always vigilant but I don't have concerns and remember, we don't write general bond issues or any of that. That is not what we are insuring.

Perfect. Just wanted the reminder. Thank you.

You are welcome.

Meyer Shields, KBW.

Thanks. Two quick ones if I can. One, can you walk us through the negative expense ratio in North American agriculture?

It is due to profit and loss sharing with the government is in essence how we -- what you want to talk for a moment about, we can take you off-line on a worksheet and give you a little more tutorial of how it works.

All I have is to your point, it is just a true up of the full-year admin and profit commission cost for the results of the year.

And it comes through the expense line when the government makes us whole both for our (inaudible) -- we don't make money on the operating expense, they don't even make us whole but they pay a large portion of the OpEx and that comes through in a reimbursement to us because other than that we collect a pure rate just for losses and then you've got the true up of profit and loss.

Okay, that is helpful. I will follow-up more I guess on the worksheet issue. Second question, I don't want to over read into what you are saying but if loss cost inflation remained basically stable, then is the only recent tat the favorable development was focused on short tail lines is simply because the reserve reviews for longer tailed lines wasn't done in 4Q?

Correct.

I'm sorry. I missed that.

I said correct.

Okay. What is the timing for that, is that something that you disclose?

We do them all during the year. We don't give a schedule of any of that, it depends on the division. North America does some of it throughout the year but more predominantly in the second and third quarter. And they do some in the first and then AOG has different timing depending on line of business and global RE has different timing depending on line of business.

I think an important thing to note is that we are consistent every year in what we do and what quarter.

We studied -- it is bandwidth of our actuaries and timing of data and all of that and we have the same schedule every year.

Okay, fantastic. Thanks so much.

You are welcome.

Jay Cohen, Bank of America, Merrill Lynch.

A couple of questions for Phil. The first is, Phil, you suggested there was some discrete tax benefit at the operating level?

Yes, we had about $15 million of one-time benefits; $10 million of it was in the life division and the rest was in P&C.

Great, that is helpful. Secondly, if you could just describe the out-of-period adjustment on the life reinsurance business, what exactly that related to?

So in the fourth quarter, we found a mistake in the way a third-party market valuation model that we used to set up our liability if you will for the VA Mark and it was just misusing the interest rate that we put into the model. So it caused a higher fair value liability than was necessary and we took the adjustment in the fourth quarter.

Did that cause you to reflect on other valuation models that you use or is this kind of a one-time thing?

It is a one-time thing although we have a program in place to evaluate both third-party and internally developed models throughout the Company.

Okay, thanks.

Jay, what is clear is any time we find something like that then we also reflect on what are our controls in place to assess and look at mistakes that could have been made and see if that -- we learn from that is there something we should know that would cause us to tighten our procedures, to adjust them, etc. So we reflect that right on it.

Great. Thank you.

Charles Sebaski, BMO Capital Markets.

Thanks for getting me in. I just had a question, Evan, about conceptually growth in emerging markets and probably more so in Mexico and Latin America, what do you think is more important for your growth potential? Would it be exposure growth with GDP or insurance penetration in these markets?

I would tell you that it is in fact both and that is how I actually think about exposure growth; GDP growth increases exposure because let's talk about what creates GDP growth. It is business activity that is more business is growing and it is more businesses as a cohort and it is more business growth of the existing businesses that increases exposure and that increases availability of insurance exposure, number one.

Number two, economic activity increases wealth generally among a broad segment of the population, more poor emerged to the middle class, more middle class move up the ladder contrary to some of the speaking that I listen to among politicians and that creates exposure growth.

So automobiles in Mexico, they manufacture more autos and they sell more autos. That is economic growth and guess what, who is buying those autos, that is because the emerging middle class is growing and they are buying the car and so that increases more opportunity for insurance, more growth of the business, more trade in goods and services, more marine, more casualty, more companies raising capital, more public markets, therefore more D&O.

More people visiting doctors, more lawyers active because of more rule of law because the more the economy that grows the more people want certainty of property rights and E&O grows. So there you go and by the way, they've all got to house themselves either for commercial activity or for residential means and so construction.

If you are a heads-up government, you are creating more infrastructure, less regulation to support all of that and you get real economic growth. Somebody tell that to Washington.

So outside where we might think about growth potential in a mature market as GDP being a metric, this coupled, this GDP and then exposure, so I mean is it a two times GDP when you incorporate penetration?

I don't know how you mathematically do that. It really varies by country but what is true is as economic -- as economies grow and they emerge and move up the scale, insurance penetration increases so you get both.

Excellent. I appreciate the answers.

You are welcome.

Thank you 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 appreciate your participation. You may now disconnect.