丘博保險集團 (CB) 2014 Q2 法說會逐字稿

Good day and welcome to the ACE Limited second quarter 2014 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, ma'am.

Thank you and welcome to the ACE Limited June 30, 2014 earnings conference call. Our report today will contain forward-looking statements, including statements relating to company performance, pricing and insurance market conditions and acquisitions, including our expected acquisition in Brazil. 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'll 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 second quarter. Our growth and earnings was again driven by both strong underwriting and investment income while achieving good premium revenue growth globally.

After tax operating income for the quarter was $825 million, or $2.42 per share, up 5.7% versus last year's second quarter, which itself was an outstanding quarter. Our annualized operating return on equity was nearly 12% for the quarter, while book value per share grew almost 4% and now stands at $90.19.

We produced excellent underwriting results marked by a P&C combined ratio of 87.5%. P&C underwriting income of $478 million was up over 10%. The growth in underwriting income was again driven by current accident year ex-cats as a result of growth in global P&C earned premium which again excludes agriculture of 8.5%, an improvement in underwriting margin.

All divisions produced outstanding calendar year and current accident year combined ratios in the quarter. With our overseas general business in particular, producing a stand out improvement in results.

Growth in earnings was also driven by relatively strong net investment income of $556 million, up over 4%, and a good result given where interest rates are. Our strong cash flow has supported our investment income performance. So we'll have more to say about our investment portfolio, cat losses and reserve development.

It was a busy quarter in terms of advancing our company strategically. As you saw earlier this month, we announced our intention to acquire the large corporate P&C business of Itau Unibanco in Brazil for approximately $685 million. The addition of Itau's business will significantly strengthen our franchise in Brazil, where ACE already has a meaningful presence with 19 offices, a P&C business that serves large and mid sized corporate clients and a significant A&H business.

Itau's corporate business is a real franchise in the large corporate space. It has broad national reach and extensive distribution relationships with more than 600 brokers.

They have an impressive management and underwriting team, and a disciplined, technically oriented underwriting culture, similar to ours. The combination will make us the largest commercial P&C insurer in Brazil.

It brings a lot of talent, that, when combined with ours, makes us that much stronger. One plus one here equals much more than two.

We will improve their competitive profile and capability. By providing more product for their clients and brokers and international capabilities to serve their corporate clients outside Brazil, where many have growing exposures.

The addition of Itau's business raises our profile significantly in Brazil with brokers and customers. In fact, we are injecting a lot more Brazilian DNA into ACE and becoming that much more local in terms of relationships and knowledge of how to do business in Brazil. That increased presence will not only aid the growth of our combined, large commercial P&C business but also help us expand the balance of our businesses in the country, including small commercial, A&H, personal lines and life.

As important this transaction for me is a chance to renew a relationship with the management of Itau Unibanco, people I have known and done business with for many years and with whom we have a great deal of confidence. I am confident these relationships will translate into additional business opportunity.

As we said in our announcement we are paying four times published book value and expect the transaction to be accretive to our earnings immediately. The price is equal to 13 times Itau's 2015 earnings for a business where the average growth rate has been 22% over the past three years, in a country where the insurance industry has been growing 10% and is projected to continue expanding.

We expect the ROE in year two will exceed our cost to capital and by year three the ROE will equal or exceed ACE Group's projected average ROE, and increase from there. The cash-on-cash returns are significantly superior to that and very attractive.

Finally, there are potential capital and reinsurance efficiencies that may be realized. We look to close the transaction subject to regulatory approval early next year.

In the quarter, we also completed the tender offer for the balance of Samaggi Insurance in Thailand and now own over 93% of the general insurer, which will likely allow us to de-list and integrate the company with our existing operations sooner than we originally projected. As I said before, ACE Samaggi is a great fit to our existing business in Thailand, and we see even more potential there than when we first announced the acquisition.

The addition of Samaggi increases our presence and our ability to grow throughout the country, given its branch office network and Siam Commercial Banks retail branch system. The combined operation will turbo charge our ability to grow each of our focused areas of business, SME, commercial P&C, A&H and personal lines.

ACE is now the largest foreign owned P&C insurer in Thailand. Finally, in the quarter, as I'm sure you saw, S&P upgraded the financial strength ratings of our core operating insurance companies to AA.

Turning to revenue growth. Total P&C net premiums in the quarter grew 4.5% on a constant dollar basis and 7%, excluding agriculture, what we call global P&C, with strong double digit contributions from Asia and Latin America and solid single digit growth from North America and the continent of Europe.

In North America P&C net premiums written, excluding agriculture, were up 7%, an excellent performance and likely at least double the industry's growth rate. Growth was led by ACE Westchester and ACE Commercial Risk Services, our middle market and small commercial specialty businesses where net premiums were up 14% and 15% respectively, followed by ACE USA and ACE Bermuda, our large account businesses, each with growth of about 5%.

Our high net worth personal lines business, ACE Private Risk Services, had net premium growth in the quarter of 8.5%. Net premiums in our agriculture division were down 14%, in line with our expectations, and simply due to lower commodity prices versus prior year, when individual insurance contracts were priced.

Internationally, net premiums for ACE International were up 11% in constant dollars. Asia and Latin America led the way with growth of 19% and 18% respectively.

In Europe, growth on the continent was 6%, while the UK was 1%. Premiums in our London market-based E&S business were down 1%.

In our global A&H business net premiums were up 5.5% in constant dollars. We had international growth of 11%, led by Asia PAC, which was up 22% and Latin America where we grew 17%.

In combined insurances direct agency business, which is the guts of the operation, net written premiums were flat in the quarter in constant dollars with North America up 1%. Premiums for our global personal lines and small business division were up 20% in constant dollar.

For our global re-business premiums for the quarter declined 5%, in line with market conditions as we demonstrated good underwriting discipline. The reinsurance market is extremely competitive with prices softening and terms and conditions broadening, which, on the flip side, benefits a major reinsurance buyer such as ACE.

Finally our international life insurance business, which is focused overwhelmingly in Asia and Latin America had a very good quarter with net premiums written up almost 20% on a consultant dollar basis. As you can see, growth was well distributed across the company by territory, product line and customer segment. This is a reflection of the already broad, continued expansion and deepening of our business in key growth markets of the world, from Asia and Latin America, to right here in the United States.

I want to provide just a few quick examples of this growth as a glimpse of what I mean by diversity of product, geography, customer and distribution. In Mexico, as a top 4 insurer, our operations have broad capabilities. We underwrite commercial P&C for companies of all sizes.

We are the number two surety writer and one of the largest auto writers in the country and we have a significant accident and health insurance business. Net written premiums are up 10% for the year. Today, ACE in Mexico has 76 offices and over 3,500 agents distributing our products.

In Malaysia our agency-based ACE Jerneh operation grew 16% in the quarter and is up 20% for the year with growth coming from auto, residential and SME small commercial business. We now have 24 branches and nearly 2,200 agents in Malaysia.

In Korea, net premiums in our direct marketing driven A&H business are up 43% year-to-date. Our operation markets directly to consumers over television and through outbound telemarketing to credit card and affinity-based customers. We have over 1,800 telemarketers operating from 7 call centers in the country.

In Europe, net premiums for our specialty personal lines business were up 34% in the quarter. This business is predominantly focused on products such as mobile phone handset replacement policies, marketed through partnerships with some of the continent's largest telecom companies.

Globally, our specialty personal lines business was up 25% for the quarter. And lastly, here in the US, ACE Commercial Risk Services, which is focused on specialty products for the middle market and small business customer distributed through retail brokers and agents is quickly becoming a meaningful part of ACE. As I said earlier, net premiums were up 15% in the quarter, and are up 14% year-to-date.

I now want to say just a few words about the current market environment for commercial insurance. In the US casualty related pricing continues to hold up quite well and we continued to achieve rate in the quarter about equal to the pace achieved in the first quarter. I would characterize the casualty market as stable, whereas property rates declined and the rate of decline has accelerated.

For our business in the US casualty related pricing was up 2.5%, again, essentially as good as we have seen year-to-date and property related pricing was down about 6.5%. As with the first quarter, our E&S specialty marketing businesses continued to secure the highest level of casualty related rate increases.

For our larger account retail business pricing for casualty related primary or lead layer access business remains stable and we continue to achieve positive rate in aggregate, about as good as E&S. This is the business that requires more than capital, and an underwriter to compete and it is a significant amount of our business.

As a general statement competition is greatest when it is simply excess layer capacity placements. My colleagues and I can provide further color on market conditions and pricing trends when we get to the Q&A.

As the year progresses we expect the commercial P&C market to continue becoming more competitive, depending on the line of business and territory. However, as the commentary I gave you illustrates, we are seeing good growth and continued expansion of our business in the majority of markets in which we operate. Both developed and developing.

We are a large global company with a significant presence and capability to take advantage of growth opportunities that exist in so many parts of the world. To do this requires a deep and broad presence and product, distribution and underwriting know how. Something we have and continue to build.

We also continued to make investments, including acquisitions, that plant the seeds for long-term, sustainable growth. As a result I am very confident in our ability to out perform over any reasonable period of time.

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

Thank you, Evan. Tangible book value per share grew almost 4% and is up 7% for the year. Cash and invested assets grew $1.3 billion to $64.2 billion and our shareholders' equity topped $30 billion.

Cash flow was also strong at $846 million. Investment income of $556 million was up over 4% in the quarter.

Our strong cash flow has offset the impact of lower reinvestment rates and benefited our investment income. We expect this trend to generally continue.

For the past 12 months alone our operating cash flow was $4.3 billion. Our current new money rate is 2.6% versus our current book yield of 3.7%.

There are a number of factors that impact the variability in investment income including the level of interest rates, prepayment speeds on our mortgages, call activity on our corporate bond portfolio, private equity distributions, and foreign exchange. Therefore, we currently expect our quarterly investment income run rate to be $550 million.

Net realized and unrealized gains for the quarter were $523 million pre-tax, principally from our fixed income portfolio due to the decline in interest rates during the quarter. We remain in an unrealized gain position of over $2 billion after tax. Our net loss reserves were up $300 million in the quarter and our paid to incurred ratio was 90%.

Pre-tax catastrophe losses of $80 million were essentially flat with last year and came from 16 different worldwide weather events of various sizes. 60% were US related and 40% were from outside the US. We had pre-tax positive prior period development of $126 million, almost also flat with last year but about one-third coming from long tail lines and two-thirds from short tail lines.

As Evan said, growth in underwriting income was driven by current accident year results, excluding cats, and margin improvement. Current accident year margin improvement came from our international operations as a result of better product and geographic mix where margins improved 1.2 points and produced a current accident year combined ratio of 89.3%.

North America margins were flat year-on-year with an excellent current accident year combined ratio of 87.3%. For global REI the current accident year combined ratio was 75.4%, up from 70%, again an excellent result.

Our global P&C gross premiums written were up 3% for the quarter while our net premiums written increased 7% on a constant dollar basis. This relationship resulted from the non-renewal of a few accounts in the US with little or no net retention. Normalizing for these, the growth of our gross written would be 5.1% and our net to gross retention ratio would have been even with the prior year's quarter.

The acquisitions ratio in our agriculture segment is up 1.4 points. Due principally to lower seeding commissions from one of our quarter share reinsurance contracts that we did not renew this year.

Total capital returned to shareholders during the quarter was $460 million, including $240 million of share repurchases, and $220 million in dividends. Since we made the announcement of our repurchase plan in last year's fourth quarter, we have repurchased a total of $700 million through July 21st. We are on track with our program to repurchase up to $1.5 billion.

I'll turn the call back to Helen.

Thank you, and at this point we'll be happy to take your questions.

(Operator Instructions)

Jay Gelb with Barclays.

Phil, just on the share buyback, it seems like you emphasized the up to $1.5 billion of share buyback. So should we be penciling in the $1.5 billion of buyback this year? Or is that potentially driven more in the direction of the bolt-on acquisitions?

I would just say that we have said up to and that is what we meant and we'll see how it goes through the remaining part of the year.

Okay.

But we have got $700 million of the $1.5 billion accomplished so far.

I see. All right. Second point was on the life operating income. It seemed to dip in 2Q, a little below our projection. Just trying to get some perspective on that.

There is really three things going on in that. One is of course our VA business is running off, as you know. We also announced in the last quarter, for example, a one time reserve benefit of about $6 million or $7 million.

We also had a one time reserve release in our US operations of about $6 billion in the second quarter of last year. And then thirdly, we are continuing to make investments in that business, and they are not all capitalizable, right, so there is some GAAP strain as we continue to grow.

This is Evan. The international Life had growth in earnings in the quarter, but as Phil said, it is the international Life where we are continuing make the investments for growth and that dampened what could have been even stronger income growth.

That's helpful, thank you. Then just my final question is on the international aviation market. Given some of the significant losses that that market is seeing, both in the sort of traditional as well as the war market, what is ACE's presence in aviation? And what are your expectations in terms of that market going forward?

We have a presence in the airline market. We have a presence in general aviation.

It is a much reduced presence year-by-year over the last decade as that market has softened significantly. We are not one of the, we are a real player in it but we are not one of the major markets. It is not a large line of business for ACE.

Helpful, thank you.

Michael Nannizzi with Goldman Sachs.

I just had a couple of questions on the Brazilian business, if I could. Just trying to understand a little bit about what the construction of that business was before you bought it, in terms of how much was retained, how much was seeded, and how you plan to run that business as it comes on to your book.

Just trying to square some of your comments about the ROE, in terms of whether or not you plan to allocate more equity. Anything on that front would help us just as we are thinking about both top line and allocated capital going forward. Thanks.

I'm going to give you a general statement, I'm not going to give you any numbers. They, it is a significantly gross lined book of business, where they had much larger -- their net retention was reasonably low.

ACE runs a higher net retention per risk than Itau Unibanco did, so there is an opportunity to recapture net premium to the extent that we think it's reasonably priced. So I think that gives you a sense that there is that opportunity, though. We are not, as is our usual practice, we are not going into detail of that.

Got it.

You asked me something else there. What else did you want to know?

Just in terms of the capital. Are you going to seed business to your reinsurance sub, or are you going to kind of push some capital down just, or move some capital over or something just so you can write more net business?

Imagine this. We already have substantial capital in Brazil because we already have a real presence there. We will be combining the two companies, which brings their capital base and our capital base together into one entity. We have freedom.

There is also an ability to reinsure, internally. And we have very good relationships with reinsurers, we are a large global purchaser. That can benefit them as well in terms and conditions. And as I said in the commentary, we may actually have the opportunity to dividend capital.

Got it. Great. Thanks. Really quickly if I could Phil?

On the reinsurance expense ratio, it looks like it was a bit higher year-over-year. Just trying to understand, there, is that just higher seeding commissions? Or is there something more kind of one time in nature that caused that to rise? Thanks.

During the course of the fourth quarter of last year and first quarter of this year, we wrote some structured transactions that had higher acquisition costs. And those contracts now are earning in, so you'll see a higher acquisition ratio.

Okay, the indication would be that that is something that happened but that could or may not continue? I mean the structured transaction? Or should we assume that those are structured transactions that all else equal you expect will remain in place?

It is just as easy to think of it as a change of mix of business. It is like you wrote more quota share than you wrote excessive loss.

Got it. Okay. Thank you.

It just says it does bounce around, to a degree. So to imagine an exact pattern going forward for you is a little more difficult in that line business.

Yes, that's fair. I guess my question would be more to get to put a point on it was just, I was just wondering if conditions in the reinsurance market are such that seeding commissions are now higher or --

Oh, no, seeding commissions are a bit higher. That is not what drove that though. It is a mix of business change. We watch the gross commissions cohort by cohort, very carefully.

Got it. Okay, thank you.

You are welcome.

Kai Pan with Morgan Stanley.

First question is, could you give a little bit more color on the pricing, especially on the international side?

Sure. John Keogh?

Sure. Morning Kai.

Internationally, I would say in the retail business, pretty stable. If you look back over the last four quarters the rates internationally have been sort of 0% to down 2% quarter-by-quarter. This quarter retail rates international are down 1%.

By region, our UK business achieved a 2% rate increase, the continent of Europe was flat. Latin America, so our rates dropped 2% and Asia was down 5%. Differently, though, than retail, the London wholesale market we did see an increase in competition there and we saw our rates drop 5% in the quarter in our London wholesale business.

Great. So it looks like the margin improvements, underlying margin improvement into overseas general is not coming from pricing. It is probably more from business mix?

Yes, let me address that Kai. Let me first start by saying that when you look at our combined ratio this quarter of 89%, that is the combined, given the construct of our Business internationally that we are happy with and one that we are striving to achieve over the long haul. Already mentioned in the commentary by Phil, about half of the improvement you see in our margin from international comes from a change from mix of business.

When we look at our P&C business versus our A&H business, versus our personal lines, or small commercial, the growth of the better combined ratio business in that mix over the last year you see earning through. Roughly half of our improvement comes from that change of mix earning through in the combined ratio in this quarter.

Secondly, even within those cohorts of business, as you can imagine, not every one of our portfolios in 54 countries around the globe are running at 89 combines and there is always a handful of portfolios that aren't achieving that kind of combine for us. Those underwriting actions we have been taking on those portfolios over the last year you are starting to see the results of that burn through in the loss ratio you are seeing this quarter.

Thirdly, I would say that on of the investments we made in places like Mexico and Malaysia and Indonesia, in the personal lines and small commercial, while we liked those businesses and we bought them and said they were good businesses we always felt that from an underwriting point of view there was an opportunity for us to bring some capability and know how to improve the underwriting margins in those business. And we are seeing that come through now in the combined ratio this quarter.

And then lastly, the expense ratio is better. I think that is sort of simple fundamental discipline in terms of how we think about investment and our expense spend. So our expense growth has been a fraction of our revenue growth over the last year and you see that in the expense ratio improvement. Hope that helps.

Thank you so much for that. Similar question on the US side on North America. You see the core margin flat year-over-year.

I just wonder is that because of pricing gain you had on this business is roughly in line with loss cost trends? And do we expect that going forward to be like at least --keep at this level? Or you have room for further improvements from here?

I'm going to let John Lupica actually, because it will come up anyway on the call, give you more of a sense of the price changes we saw in North America in the quarter. But I'm going to answer your question.

Listen, an 87.3% combined ratio is world class and it hardly gets better than that. It bounces around in that range and over time, it is going to rise, in fact. We achieved rate.

Some classes it equals trend, in some classes it is ahead of trend, the rate we received, and in some classes it is below the rate -- the trend we received. Below trend. So trend is exceeding rate. All of our businesses we strive to earn an underwriting profit, and with that, John is going to give you a sense of what the rate changes are.

Yes, I'll just give you a little more color on rate. As Evan had noted, we are seeing stability in our casualty rate and we did get another quarter where we saw our casualty business actually get single digit rate increases, very similar to what we saw last quarter.

As I run through my companies and you look at ACE USA retail where we write a lot of our large commercial P&C business, our primary casualty lead layer programs we are getting about 4% rate increase in the quarter. And that is pretty consistent with what we have been seeing year-to-date.

In our general casualty business, as Evan had noted, we're getting about a 5% rate increase. That is mixed around some of the lines of business. Our excess lines are getting 5%.

Our construction business is getting 10%. Our environmental business is getting about 2% and our foreign casualty business we are getting about flat in terms of rate change.

You move into the specialty and professional lines, that book was up about 1.5% for the quarter. As I have said in the past, it is still consistent. The primary market is getting more rate than the excess market where capacity comes into play.

We definitely saw the property market get a little softer. Property related lines were down 5% in the large retail business. And our new business year-on-year was flat. We like the mix that we put on the book in terms of what we would call target and non target business.

And our E&S space basically saw the same trend. Casualty was getting some of our better rates and very consistent with the first quarter at up 5%. Professional was up 4%. And our property related lines was down about 6.9%. Again, pretty consistent with Evan's earlier comments.

Thank you so much for all the answers.

Cliff Gallant with Nomura.

I was wondering if you could expand on some of the comments you made at the beginning of the call. You are very enthusiastic about the acquisitions, but I was wondering if you could talk just a little bit more qualitatively about your general acquisition strategy. We can understand the math of projected no accretion or dilution.

But when you do deals in places like Thailand and in Brazil, it just seems like it would be very hard to successfully execute on those deals long-term. Can you talk about why shareholders should feel confident that you can.

Yes. Long-term we have been making acquisitions and for 8 or 9 years now, I think we have a track record of successfully acquiring, integrating and improving both the acquired target and our own business in combination, Number one.

Number two, we actually are informed by all that we learn from each acquisition. This company learns. And we have quite a cookbook that we use. Literally we call it the cookbook. It tells you in every single area of business that when we make an acquisition of how we go about integrating it, we try to behave like a machine in that regard in the execution.

Number three, we are present in 55 countries around the world. We are not tourists in those regions, in those countries or in the international business. We have been there for many years.

Our home office at the same time is not a provincial location. We have a lot of internationalists who have deep knowledge and experience in all those regions of the world, in addition to our people locally on the ground who have a lot of knowledge and a lot of experience.

We don't make acquisitions as a way that sort of simply gives us the knowledge of how to do business in that territory, we are already present. The acquisitions we make generally have been bolt-on size and smaller size that are quite manageable that we can integrate with businesses we already have in those countries.

Next, the fact is that growth in the insurance industry if you look at it around the world, look at the numbers, is coming significantly from the markets where economies are growing, middle class is expanding and business is developing. Those are mostly areas of the world such as Asia and Latin America. That is where the predominant growth is coming from. You want to grow, you grow where the opportunity is, where the need is the greatest.

Of course there is risk around this as there is risk around any business, and by the way you are an analyst in the insurance business and insurance is a risk business. We believe that in the acquisitions we make, we get paid to take that risk.

Everything never goes perfectly, and it isn't, which is my last point, and it is not about does it go perfectly, because if you expect that, you are going to fail. You are going to have mistakes, you are going to have things that don't go as well as you expect and it is how did you build yourselves to address those.

The risk management capabilities here from enterprise risk management, to compliance, to legal, to internal audit, to underwriting audit, to actuarial all provide safeguards to an international advisory board that helps with connections and contacts when we need them. All of that is part of your thinking in building a business that you always want to keep safe. I hope that gives you an answer.

Thank you.

Brian Meredith with UBS.

A couple quick questions here for you. The first one, just quickly with corn futures down 25%, 26%, 27% so far this year, any impact that we may expect here for the ag business?

So far, Brian, we make no call on it. Corn yields, crop yields, are also projected to be up, that's what's driving price on one hand.

Then you have deductibles. You have deductibles in product, you got yield that goes the other way as a hedge. You do have prices that come off, we have reinsurance, we have futures contracts that we use in hedging. And so, overall, as we mix it right now, we are quite comfortable with the pegs that we continue to hold.

Great, thanks. Second question, just curious Evan, could you talk about your exposure from a top line perspective, as well as maybe political risk and other potential losses out of the Russia Ukraine situation?

Yes, no top line. We don't see any top line issues. We are a large political risk and trade credit writer.

We understand our exposures quite well to do with Russia and the Ukraine. At the moment we have no development that is of any kind of alarming nature whatsoever to us. And frankly, when we look in it, when we do run war games on political risk and trade credit over the years, every year, and imagine scenario planning to us, of what could happen or occur as far as exposure in a book of business like that, that has informed us, and the kind, our appetite for risk and Russia, Ukraine fits right within that appetite.

What percentage of your business is in Russia? And overseas?

Tiny.

Small?

20 million bucks in premium.

Okay. Got you. So it's not much at all.

And it is doing just fine.

Excellent. Thank you.

You are welcome.

Vinay Misquith with Evercore.

On the international business you have done a great job of improving margins and this quarter is another example. Curious as to how much further you can drive margin up in terms of the accident year combined ratio ex-cat, and also, of the impact of I think flat to slightly lower pricing internationally?

We are not giving any forward views, Vinay, as you can imagine. Nice try. I don't think I should say any more.

Okay. And then on the Brazil acquisition, I believe you mentioned that it was 13 times 2015 earnings, so we have a number for that. Will ACE also be recording certain goodwill amortization that will sort of limit the positive impact on the bottom line?

Yes, that's why I gave you a sense of ROE, okay? And you always have to be careful.

When we announce acquisitions, typically, and you know, you do it in a public company, for instance, that we would acquire, or where there is standalone statutory numbers, you could see what the earnings were. And many times, analysts make the mistake of just taking those earnings and rolling forward into our EPS for the following year.

And you are exactly right. You have purchase accounting vagaries that will impact the earnings in the first few years. And then that is offset by growth, and other efficiencies you gain.

So I tried to give you a sense of the, we tried to give you a sense of okay, here's how ROEs will play out over a couple of years. But it is going to be very difficult for you to simply build in an earnings number, go forward. But it will reveal itself quickly.

Okay, fair enough. Thank you.

You're welcome.

Paul Newsome with Sandler O'Neill.

Congratulations in the quarter. I was hoping you could talk a little bit about your reinsurance strategy. As a reinsurance purchaser there has been some press reports that ACE was particularly aggressive or maybe changed their stance a little bit in the market. I don't know if that is even true or not, but would love to have your reaction.

Yes we read that in that local rag that you, that picked that up. We saw that. It is kind of the gossip mill, printed gossip mill for the business so we saw a little of that.

Look, what do you know about the reinsurance business? What you know is, as a reinsurer, you always want to reinsure the best cedents.

Those who you think are the best underwriters, who do a good job of, in their fiduciary responsibility, of producing a decent result for themselves. And that they don't just do it for themselves. They do it on a gross basis so that they protect their reinsurance partner, as well. ACE has a good reputation, is well known that way.

What do you also know if you're a reinsurer? The best cedents are also the toughest negotiators in purchasing reinsurance for the obvious reasons. They are professional. They understand the business.

They think deeply about their transactions. And by the way, they are numerate in how they imagine a transaction and risk reward. And what something is worth.

That is how -- that is interpreted as well ACE is a tough buyer of reinsurance. And somebody may want to use that characterization. I haven't noticed that reinsurers have somehow lost their appetite for ACE's business. Including those in the London market who like to grouse about it.

Right, so I guess the prior point, tell me if I'm wrong, is that ACE has long said that you are essentially a gross writer and happy to be there. That strategy has not changed at all?

We're not -- I don't see us as a gross writer. Where you are saying gross line to some extreme where we would put out huge capacities and take very low net retentions. Look at our net to gross. We use reinsurance appropriately to increase our capacity to our insured to require a certain limit of liability to be able to risk transfer to us. And number 2, we use it to dampen volatility in our business.

Great. Thank you very much.

We have not changed whatsoever our policy for buying reinsurance. It has not -- it doesn't change with the cycles that way, only on the margin.

Jay Cohen with Bank of America, Merrill Lynch.

Most of my questions have been answered. One other question: on the investment income, can you talk about the contribution from alternative assets? Was it above a normalized level this quarter?

It was higher than we expected. We had estimated our income to be $540 million and it turned out at $556 million. And the majority of that was from PE distributions and we also had higher than expected call premiums on corporate bonds that were called. So we are saying now the run rate we are expecting just on an ongoing basis with like more normal distributions to be about $550 million.

Perfect. Thank you.

Meyer Shields with Keefe, Bruyette & Woods.

On the structured transactions within global reinsurance, does that also impact the accident year ex-cat loss ratio the same way it affects the expense ratio?

No I don't think so. I think we saw a little bit of an increase in our loss ratio because, as Evan said, the mix of business. There was less property cat and more casualty that would drive, just a mix would drive the loss ratio up.

Okay. Fantastic. I'm looking at the sort of consolidated results here. On the other income/expense can you talk a little bit about what actually drives that quarter-by-quarter?

Yes, if you look at page 2 in the supplement, you'll see in, for example in this quarter, we had another expense of $26 million. Quarter before that it was $23 million. It runs about that level and it is principally the amortization of the intangibles from our acquisitions.

Okay, great. Thanks very much.

Al Cupertino with Columbia Management.

Actually, Cliff asked my question and Evan dealt with that, so thank you very much. I'm all set.

You're welcome.

Thomas Mitchell with Miller Tabak.

I don't know if it is really relevant to ACE, but I was wondering if you had taken a look at the court decision that had reinstated a $500 million judgment on a legacy Johns-Manville claim relating to asbestos liabilities and whether that affects you or if it affects the industry and the reserves of the industry?

Well, Tom, I can't speak for the industry. We did notice that article that came out yesterday, that news. And we don't believe that has relevance for ACE, specifically.

Okay, thank you.

You are welcome.

Ian Gutterman with BAM.

I had one on North America and one on Brazil. In North America you talked about that commercial risk services business growing very nicely, I think healthy double digits. I just wondered if you could talk about how sustainable you think that is going forward as we hear more of your competitors maybe not quite acting more aggressive yet, but at least talking about less need for raid, starting to think more about growth. Do you anticipate as we go forward, seeing more competition in sort of those core North America spaces where you are showing the growth, that that might make it harder to keep up this growth rate without having to cut price down in the next, say, four quarters?

Yes, Ian, here's what I would say about that. The commercial risk services is middle market business. And lower middle market. In fact, going all the way down to micro market, for us. It takes a lot of work to get that business.

You can get it a couple of ways. You can write programs and anybody can come in and write someone's program business and that can become very competitive.

You can write line slips. Anybody can come in and give a pen to a producer, to a wholesaler, and put together line slips and that part of distribution could become very competitive.

Another dimension of it is retail distribution. And to do that, you got to have a lot of great presence. You have to build it over time, patiently. It is agency related and to get that agency distribution, competition starts to fall off, significantly.

Finally, each of those cohorts, whether it is micro, whether it is lower middle income, lower middle market, whether it is middle middle market, whether it is upper middle market, those are very distinct cohorts. And your knowledge of it, your product capability, your technology to distribute efficiently, some of it is no touch to be able to do it right.

That takes time and insight to build, both from an underwriting and a technology point of view. So yes, competition can grow in any of these businesses. But it's not, and in some of them, it can be instant, and as I just gave you an example, and in a whole bunch of it, no it cannot be.

And I, you can only see what we have done and the results of what we've done. No one can see the results of what we plan to do or what we're just rolling out. And we have been working on this for quite awhile, and slowly and patiently building it.

And we don't talk about it until it starts to produce and until we start to really see something meaningful. That is what you are seeing now.

With that, I am confident that this business will continue to grow. Whether it grows at 15%, whether it grows at 8%, whether it grows at 20% or 25%, this business is going to keep on going.

Got it, very helpful. Could you give us a rough sense of even how big that book is in total right now?

That book will approach, that book is around $400 million or $500 million of business.

Got it, thank you. Under Brazil, can you just talk maybe just about the general underwriting environment down there? I guess what I'm thinking about is you have an economy that looks like it's headed towards a recession, maybe a tough one.

You have inflation going the wrong way. Normally I think of stagflation being a difficult underwriting environment, right? Loss costs are going the wrong way and it is hard to get the consumer to pay a whole lot more when times are tough.

How do you navigate that environment? Or maybe the macro isn't necessarily affecting the insurance world yet?

Yes, sure. First of all, we don't make an acquisition or grow our businesses based on 12 or 24 months or a short-term, simply a short-term view.

However, with that said, I don't see Brazil in recession. I see Brazil at very slow growth. Brazil is nothing like Argentina. There is a stability to Brazil that is real.

Brazil has a resilience, has a deep economy. It has important areas, structurally, of its economy that have real strengths, its agriculture, its energy development sector. It's got a pretty deep financial industry, a large consumer market and a growing middle class. So Brazil has a lot going for it.

What it has is lousy government policies, and an inability to embrace another way of deregulation. It has an important election coming in October, and hopefully they do the right thing, because that could be tremendous for growth in Brazil.

It is an underinsured market, and you are seeing, and significantly underinsured. And you are seeing a growing awareness and consciousness for insurance, and in the business community, and that is developing. So I don't see that.

Inflation is well more under control, prices are very high in Brazil and insurance rates reflect that, by the way. But inflation has been relatively tame in Brazil. You have nothing like a hyper inflation.

So I actually don't feel bad about the country, economically. At the moment, though, it is not overly exciting. I'm not concerned about that. As far as inflation, it is reflected within the pricing and the reserving of the business.

Got it. So it's not like we are heading toward a soft market in Brazil or something like that that we need to be concerned about that?

Brazil insurance market is a soft market.

Okay.

It has been for the last couple of years. So you got to know that. We make a decent underwriting profit, we have a good mix of business. We know the areas that really don't make money and we stay away from them.

Itau Unibanco, in the large corporate space, in spite of soft pricing has done very well. Its capabilities have just been superior to others in the market, and we are only going to improve those, and I think that has done a lot to help insulate that business. And they have got relationships with the largest of corporate in Brazil that are very deep and go back a very long way. And I think that provides a resilience to this that will help us ride through that short-term period.

Got it. Thanks so much Evan.

You are welcome.

We have no further questions. I'll turn the call back over to Helen for any additional or closing remarks.

Thank you everyone for joining us this morning. We look forward to speaking with you again at the end of next quarter. Thank you and good day.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.