丘博保險集團 (CB) 2014 Q3 法說會逐字稿

Good day, and welcome to the ACE Limited's third-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.

Thank you, and welcome to the ACE Limited September 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 our current at the time of the call and will not be updated to reflect subsequent material developments.

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

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

Good morning. As you saw from the numbers, ACE had a record quarter with growth in earnings driven by growth in both underwriting and investment income. After-tax operating income for the quarter was $891 million or $2.64 per share, up 6% versus last year's third quarter which itself was a record.

For the nine months, we have produced $2.5 billion in operating income, up 4% on last year. So, again, year to date a record for our Company. Our annualized operating return on equity was 12.6% for the quarter, bringing the year to date ROE to about 12%, a very good return on shareholder capital while at the same time we continue to invest for the future.

As you saw in our announcement yesterday, we've received all regulatory approvals needed to close our acquisition of the large corporate P&C business of the Itau Unibanco in Brazil. We now expect to close at the end of the month, well ahead of our original schedule.

Our integration teams have been hard at work and we are ready to hit the ground running in putting our two businesses together. We are excited about the addition of this terrific franchise and the joining of our collective forces. I don't expect we will miss a beat.

Underwriting results in the quarter were simply excellent. We produced $586 million of total P&C underwriting income, up 5%. Underwriting income growth resulted from both earned premium growth and an outstanding underwriting margin, which was essentially flat with last year. The combined ratio was 86.3% and benefited from strong current accident year results, prior year's reserve development and relatively light cat losses.

All divisions contributed to the good underwriting results. Our overseas general business in particular delivered another standout quarter, producing over $340 million of underwriting income, up over 19% and an 80% combined ratio.

Growth in earnings was also driven by excellent growth in net investment income, up 8.5% to $566 million, primarily as result of growth in the invested asset and partnership income. Book value per share growth was flat in the quarter, affected by both foreign exchange and the impact of a rise in interest rates on our corporate bond portfolio. For the year, per share book value was up 6.5%. Bill will have more to say about our investment portfolio, prior year's reserve development and cat losses.

Turning to revenue, total P&C net premiums in the quarter grew 2.2%. Growth was impacted by our agriculture business where premiums were down 5% as a result of lower crop commodity prices versus prior year.

Excluding agriculture, global P&C net premiums grew 4% in the quarter. This compares with growth for the first nine months of over 7% in constant dollars. We expect stronger growth in the fourth quarter in constant dollar terms than what we experienced in the third.

In North America, P&C net premiums written, excluding ag, were up 2.7%. We had good growth in ACE Westchester and ACE Commercial Risk Services, our middle-market and small commercial E&S and specialty businesses, where premiums were up 9% and 18%, respectively.

We also had good growth in our high net worth personal lines business, ACE Private Risk Services, with premiums up 9.5%. Premium growth was constrained this quarter in our large account commercial P&C businesses, ACE USA and ACE Bermuda. Premiums were flat in ACE USA and down 10% in ACE Bermuda, as both businesses exercised continued underwriting discipline in a more competitive market.

As I mentioned earlier, premiums in our agriculture division were down, in line with expectations. Our crop business was a good contributor to earnings in the quarter. The combined ratio reflects our best estimate of the projected underwriting results for the year as of quarter end, and fully considers commodity price movements, crop yields, and deductibles by state.

Our projected results also consider our portfolio protection, including reinsurance and commodity hedges. We are comfortable with our selected combined ratio and believe it accurately reflects our exposure as we know them to be.

Internationally, net premiums for ACE International where up 11% in constant dollars. Asia had an exceptionally strong quarter with growth of 25%. Latin America also had a decent quarter with growth of 10%. In Europe, net premiums grew 4% in the UK, while growth on the continent was down 1%. Premiums in our Lloyd's-based business were down 6.5%.

In our global A&H business growth accelerated, as expected in the quarter, with net premiums up over 6% in constant dollars. International grew 10%, led by AsiaPac, which was up 25%, and Latin America where we grew 13%. Premiums for our international personal lines and small business division were up over 20%.

For our global Re business premiums for the quarter declined 22%. The decline was due to the nonrenewal of a large Worker's Comp treaty. Given the competitive reinsurance market conditions, I am pleased with the underwriting discipline shown by our reinsurance team.

Finally, our international life insurance business, which is focused overwhelmingly on Asia and Latin America, had an excellent quarter, with production up over 22%.

Let me say just a few words about the current market environment for commercial insurance. Overall in North America, market conditions, particularly for large account business, were incrementally more competitive. We continued to secure rate in many general casualty and specialty casualty related classes, but it was harder to come by.

Property rates continued to decline at around the same pace we experienced in the second quarter. To put some more detail around that, starting with our large retail, large account business, risk management rates were up 3.8%, and professional lines rates were up about 1.5%. Both up essentially the same as prior quarter.

General and specialty casualty rates were flat overall, with some lines continuing to receive decent rate while others were down. For example, excess casualty rates were up 4%, and medical professional rates were down 4%. For retail property and other short-tail classes, rates declined about 4% while in the second quarter they declined 5%. So, essentially the same.

Again, in our large account retail lines, new business was harder to come by in the quarter. We increased our submission and quote activity, while our quote to close ratio declined as we became more selective. To me that equals underwriting discipline.

Renewal retentions were steady on a policy count basis and were up on a premium basis due to the retention of larger trades and rate increases. For our US wholesale and specialty middle-market and small commercial businesses, pricing continued to hold up pretty well. Casualty rates were up over 4%, property was down about 5.5%, and professional lines rates were up about 4%. And that's why we continued to grow these businesses more quickly.

For ACE International, our international retail business, commercial P&C market conditions grew more competitive in the quarter with rates down 4% overall. The UK and Europe were steady with prior quarters, while Latin America and Asia became more competitive. For international in total, casual rates were down 3%, property was down 6%, and financial lines rates were down 2%. My colleagues and I can provide further color on market conditions and pricing trends.

While we are realistic about the commercial P&C market becoming more competitive, and our resolute and our discipline to trade premium volume for underwriting profit, I am encouraged by the solid growth opportunities for many of our businesses around the globe, from E&S middle-market and small commercial specialty and high net worth in the US to small commercial and personal lines in Asia, Latin America, and Europe; to our significant A&H operations globally and our international life insurance operations in Asia; and of course, our Company's significant large account commercial franchise globally. I am confident in our ability to continue to outperform.

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

Thank you, Evan. Starting with investments, strong investment income this quarter benefited from an increase in our cash and invested assets, which are up $2.6 billion for the year. Investment income also benefited from an increase in private equity distributions and increased call activity from our corporate bonds. Our average new money rate for the year is 2.8% versus our current book yield of 3.7%.

For the past 12 months, our operating cash flow was $4.5 billion. As I've said on previous calls, our strong cash flow has offset the impact of lower reinvested rates, and we expect this trend to continue. Our cash flow for the third quarter was again strong at $1.1 billion.

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

Net realized and unrealized losses were $396 million after tax. This included losses of $301 million in our investment portfolio, primarily due to increasing yields from our corporate bonds and a $95 million loss from the mark-to-market impact on our variable annuity business. Our investments remain in an unrealized gain position of $1.8 million after tax.

Our net loss reserves were up $93 million and our paid to incurred ratio was 88%. We had positive prior-period development of $232 million pre tax, principally from long-tail lines and from accident years 2009 and prior. This included $63 million of adverse development for legacy environmental liability exposures in our Brandywine runoff operation, which is included in our North American segment. As in the past, we conduct our environmental review in the third quarter and our asbestos review in the fourth.

On the other hand, our prior-period development also includes the positive impact from the release of a $52 million individual casualty-related claim reserve dating back over a decade in our overseas general segment. Pre-tax catastrophe losses of $86 million include $53 million from Hurricane Odile in Mexico, with the remainder coming from a number of US weather events.

Our global P&C gross premiums written were up 1.7% for the quarter, while our net premiums written increased 4%. Gross written premiums were impacted by the nonrenewal of a few large fronted accounts with little or no retention in the North American and overseas general segments. Normalizing for these, the growth of our gross written would be 4.3%.

Gross written growth would have been 3.5% for our North American segment and 8.3% for our overseas general segment. Adjusting for these, our net to gross ratio for global P&C would have been consistent with the prior year's quarter.

The expense ratio in the overseas general segment was 39.2% this quarter versus 38% last year. As we disclosed at the time, last year's ratio included a 2.1 benefit from a one-time purchase accounting adjustment related to our Mexican acquisitions. The global Re expense ratio is up, due in part to the nonrenewal of the workers compensation treaty that Evan mentioned, which had a low acquisition ratio, and a change in the mix of our business which included new structured contracts with higher acquisition costs.

Our operating effective tax rate for the quarter was 16.9% versus 14.9% last year. And our effective tax rate based on net income was 18.3% versus 14.4% last year. Both rates were higher this year because we had more of our earnings that came from higher-rate jurisdictions.

The net income rate was also affected by the loss from the mark on the variable annuity business which generated no tax benefit. Last year's lowered year-to-date operating tax rate of 12.4% was impacted by favorable adjustments to prior-year tax accruals.

Our operating tax rate is 14.2% year-to-date. We believe this is a better indication of our run rate, which should range from 13% to 15%. Total capital returned to shareholders during the quarter was $670 million, including $450 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 $1.1 billion through October 20.

And now I'll turn the call back to Helen.

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

(Operator Instructions)

Michael Nannizzi, Goldman Sachs.

Just one question. You mentioned the reinsurance expense ratio. Taking that casualty business out, or that comp business out, and thinking about some of the structure transactions you were talking about, is this where you would expect the expense ratio to normalized? Or do expect to replace an equivalent contract to the comp one that didn't renew to get that back down? Thanks.

Number one, we don't expect to replace that contract. But the portfolio composition this quarter is different than the portfolio composition you'll typically see in the first and second quarter, which by the quarter is when we write most of the volume.

And I think the expense ratio you see in the first two quarters is closer to what you would see going forward. It's a mix of business question and most of the business written in the first and second.

Got it.

So, should we expect the mix of business to more likely approximate what you have now versus that then, just given what -- I'm just trying to figure out if this is the way that we should be thinking about it.

The third and fourth quarter are the lighter quarters for premium volume. You can't really -- and it depends on the composition of the portfolio.

We are in a competitive reinsurance environment. And I can't tell you with specificity how much cat we're going to write versus risk property, quota-share versus excess of loss, and global versus simply domestic treaty business. It'll very depending on where we see the opportunity to make some underwriting profit.

Okay. Thank you.

And then taking the other side, thinking about the businesses that feed into the reinsurance market, how are you leveraging what's taking place there? And where should we begin to see examples of that? Thanks.

I don't know that you will see examples of that. We're major buyers of reinsurance, as you well know. We buy it to protect for both capacity, limits greater than we can manage on our balance sheet, retain on our balance sheet, and we also buy reinsurance for volatility and to help spread volatility.

We are good buyers of reinsurance. We are professional at it, just like we are on the front end underwriting, and so we will take advantage of what the market has to offer.

Got it. Okay. Thank you.

Jay Gelb, Barclays.

Good morning. Evan, for the fourth quarter where you're anticipating an improvement in top-line growth, does that simply reflect that the third quarter had a headwind from the nonrenewal of that worker's compensation reinsurance program, or are there other factors at play, as well?

There are other factors and the business is a bit seasonal. Different businesses have a greater weight depending on the quarter that you're in.

We've been growing at around 7% year to date on average. The third quarter was a bit lighter. The only thing we were signaling was that we expected modestly stronger growth in the fourth quarter from everything we know.

Okay. That's helpful.

And then my second question is on the North American agriculture. We're all aware that commodity prices have come in. And your commentary on the call seemed to signal that you'd already taken that into account with the year-to-date accident year pick. I'm just trying to get a perspective on, for the fourth quarter should we also anticipate around a 90% calendar year combined in agriculture?

Correct. We pegged what we think is the run rate for the year. If we thought that run rate was up, as we did last year, we would have adjusted our combined ratio. But we think as premium earns in, this is the proper pegged combined.

And we considered -- we have reasonably good models. You never know with certainty until the crop is actually harvested but we know by state our exposures. We know our crop mix by state. We know our deductible levels by state. And we consider all that in addition to commodity price movements.

And that is what all goes into the thinking as we settle on what we think is the combined ratio that reflects the year's performance, what will be the year's performance. And, by the way, we also consider all our protections, reinsurance and commodity hedges.

So, clearly that will be a lot better than the fourth quarter a year ago results?

If we are correct in our estimate. As I sit here today -- and we made that estimate a couple weeks ago -- but as I sit here today, I feel just as good about it. It means that the fourth quarter would be materially better than fourth quarter last year.

Great. That was a lot better than we were thinking. Thank you.

Kai Pan, Morgan Stanley.

Good morning.

The first question is on the margin trends. Thank you for giving the market color in terms of pricing.

Just wondered -- there are a lot of moving parts here, but if you look out to see if the rate environment is what it is right now, and given what the loss cost trends that you see in each different line of your business across the globe, shall we expect the core underlying margin to be stable, as we have seen in recent quarters? Or would there be some deterioration or you can see some improvement there?

Kai, a couple of comments I'll make about that. As I've said in recent calls, depending on the class of business, I think the level of rate increases are either not keeping pace with loss costs or barely keeping pace with loss costs. There are a few that are ahead of loss cost. And that over time naturally -- you look at the kind of combined ratios we are producing -- naturally over time I'd expect the combined ratios to rise. Again, that's just natural.

Beyond rate and loss cost, it's really about risk selection and portfolio management. So, product mix, that is another tool that you have to help mitigate margin deterioration, and we practice that rigorously. Does that make sense to you?

And then the other comment I'd make is, look, we're in the risk business and there is also at the same time, there's volatility in losses quarter to quarter. And that will bounce around. For instance, this quarter we had -- which we are not out there trying to pound our chest about it -- there were greater individual large losses in the short-tail business, particularly in energy and aviation. And that impacted the current accident year a bit, meaning that it was losses outside our normal pegged loss ratio. And, so, we recognize those losses in the quarter.

But that's just normal noise in the insurance business where a current accident year is just not a straight line.

Thanks for the answer.

My next question actually related to on the capital management side. You purchased $1.1 billion out of the $1.5 billion authorization. Are we on track to finish that program by year end?

And, also, do you think the Board will think these as one-time deal or basically on going forward thinking you about is more a two for year -- one to match your share grip, another one being probably more proactive in terms of reducing your shares given that you probably have excess capital position?

First of all, we are on track to complete our program, which is to repurchase up to $1.5 billion. I believe we have repeated that continuously. Secondly, when our Board meets in November, and when we finish reviewing our plans for the year, for the coming year, when we look out at opportunities as we view them in the landscape, then that's how we think in totality about our required needs for capital and capital management at that time.

And, so, as part of that, we will consider all capital management tools available, including share repurchase. And if we anticipate that that will be a tool that we employ for the 2015 year, we will alert the investing community to that fact, as we did last year, in due course.

Thank you so much.

Vinay Misquith, Evercore.

Hi. Good morning.

Just wanted to follow up on a margin question. You've done a good job in the past of business mix change and also chopping some wood in the underperforming countries where you've improved your loss and combined ratio. Curious how much wood is left to chop in the underperforming countries that will help you to keep improving the combined ratio.

I don't know what wood to chop really means. And I don't know about underperforming countries. I don't recall speaking about underperforming countries and I don't even relate to that. I don't know about underperforming countries.

Last quarter on the call there was some commentary saying that not all countries are performing up to par. You managed to improve performance in certain countries and that helped the combined ratios. So, I was wondering, do you have something more there that will help you in the future?

Vinay, again, I don't relate to the comment about countries at all. But as far as portfolio management goes, which is line of business, and it's line of business by cohort of insured, by territory, by country, that is a constant work in progress. It's iterative to constantly gain more insights into where are you making money, where are you not in cohorts of risk, and where can you improve your insights on predicting future loss behavior of individual cohorts of risk. And that's a constant work in progress.

And that helps -- that plus market conditions -- help to define how your mix of business changes over time. And it will change naturally if you have clear underwriting insight and you know your minds, and you are constantly working to improve that and your distribution capabilities and your product innovation help to keep you relevant within the marketplace, then market conditions will then dictate how successful you will be at each of those efforts.

And that dictates what is really a dynamic movement in the mix of your business over time, and helps to ameliorate what is natural gravity that pulls on combined ratios as rates go one way and loss costs go another.

Sure. That's helpful.

And just one follow-up big 50,000-foot question. You've been through various cycles. How does this feel?

We see tightened competition but does it seem slower than in the past? And given that interest rates are now lower, do you see a certain amount of discipline in the market?

The market is a chaotic place, and everybody wants to always put it in a very neat statement. I know you want one and I struggle to give you one.

The market is growing more competitive. There are some ends of the market that are behaving in a more ferocious way. Reinsurance is an example.

And then there are ends of the market, like middle and small commercial, that are behaving in a far more orderly way. And you have every gradation in between.

And it varies very much by country and even within large countries, territory, and by line of business, and different competitors have a different capability in different territories and behave differently. So, the marketplace is dynamic that way.

What I would say different than the past, it's more global, and so you do see some uniform trends at 50,000 feet where the world is behaving more in lockstep, because there are major underwriting centers that can move their capacity around the globe rather quickly. And that is different than in the past.

On the other hand, I do see companies' ability, particularly large companies, with the analytics and the data they have, they are able to do a better job of discipline. But at the same time, there are always a lot of smaller and mid-sized players who are just gun and run, and they come in and they have a way of disrupting market. So, you've got all that going on right now. But the fact is, we're moving into a softer market.

All right. That's helpful. Thank you.

Jay Cohen, Bank of America Merrill Lynch.

Yes, thank you. Two questions.

I'll just give you both and hopefully you can comment on them. The first one, I'm wondering, relative to the Itau acquisition, what you have found so far. Give us an update on what you found as you began the integration process.

And then, secondly, it has been in the press that ACE is interested in forming some sort of internal hedge fund reinsurance operation. I'm not sure if you can comment specifically on that but maybe, Evan, if you can talk about the concept of a reinsurance company linking up with an asset management company and generating more returns from the asset side.

I'll take your second one first. As you can appreciate, I'm not going to speculate or comment on what is rumors and speculation out there. When and if we have something to say, you know we'll say it. We'll be clear about it.

As far as a more general sense of, you're calling it hedge fund marrying up and the investment capability, I maybe see it a little bit differently than that. That I think is just a feature.

In our shareholder letter this year, I went into some length to try to give some thoughts, at least for me, of how I see the marketplace changing, and capital, in our business. It's been a very traditional buy and hold model for reinsurance where the originators of risk and underwriters and managers of risk around the world, the primary companies, would distribute to buy and hold pools of capital, simply traditional reinsurers.

And that I think that over time, as this happened in other asset classes, that will evolve, and evolve beyond that. And needs to evolve beyond that because the model constrains how much capacity there is to take on the values of risk that are being created around the world. And values are increasing.

I think technology in all its forms, from the math to the IT, informs us that, as these tools evolve, we will be able to evolve how we use and harness the capital around the world. I think what you're seeing right now are glimmers of early steps towards new kinds of buy-and-hold models, potentially, that are using other sources of capital.

And if it's a buy and hold and its private, and the purpose is long-term gain not simply annual income, then, frankly, the investments, while remaining conservative and appropriate to an insurance company, can evolve. And what it also says is the originators of risk can directly package and provide to the providers of capital new forms of capital. Don't need a wholesale market in between to do that necessarily.

And so I just think there's thought around that, there's activity around that, there's talk around that. And that is natural. You can't stand in the way of progress and you can't fight against that if you think it has a sound promise. That's my view of it.

And ACE, as a large company, as an originator of risk around the globe, with a good reputation for being able to earn a reasonable return on the risk it takes, will necessarily be at the forefront and in a leadership role as these things evolve, if they make sense to us. It's our job.

Interesting observations. And then on the Itau?

John Keogh and I just spent some good time with the Itau and ACE people in the last two weeks on the granular detail related to implementation and integration. And I can tell you that we are as impressed or more impressed with the leadership, with the people, with the culture, with the response of both the ACE underwriters and team, that is a great team, in Brazil, and the Itau team, and the positive feeling among both about how one and one is going to equal three here. Their insights and their capabilities are simply going to make us better.

Great. Thanks, Evan.

Paul Newsome, Sandler O'Neill.

Good morning and congratulations on the quarter.

I was hoping you might talk a little bit about the M&A environment. I think, at least my experience historically, as we get into softer markets we see more stuff coming up for sale. And I was wondering if you think that that is emerging, as well.

And maybe just give us an update of what you think the environment is from a competitive M&A environment.

Look, I think M&A activity will increase, particularly around companies that will find it more difficult in this environment to continue with the strategy that has served them in the past. And I think there will be more pressure that builds on performance. And as pressure builds on performance, that generally is a catalyst for greater M&A activity. I think -- that's on the sell side.

I think on the buy side, typically what happens is there's inflation in what people will pay for properties because it's just a more competitive environment. Others will see no other way of getting their growth or actually keeping themselves from shrinking or margins deteriorating, and they see this as their only option. So, that hunger builds.

I expect you'll see more M&A activity as time goes on. I expect you'll see more of a feeding frenzy for what comes to market. As we've always said, for ACE, it's pretty simple.

We have a strategy that we are pursuing for organic growth. If an acquisition comes along that will complement what we are already doing on an organic basis, and if the returns are favorable for our shareholders, we will pull the trigger. If not, we are very happy to sit on the sidelines.

Thanks a lot. I just had the one question. Thank you very much.

Meyer Shields, KBW.

Thank you. Good morning.

Evan, can you talk a little bit about what the marketplace for cyber insurance looks like domestically, whether it's attractive, how it's growing, and all that?

Yes. The demand for cyber is obviously growing quickly, and that's very good. And it's among small companies to large companies. All sizes. And ACE is an active participant in the cyber insurance market.

I think the question right now, particularly for larger target type risks is the kind of pricing, and does the price reflect the actual exposure. I think in smaller- and medium-sized risk, as the market evolves in many classes, I think pricing is looking reasonable.

I think on the larger accounts, that's the question. So, I think there's an appetite to provide the coverage -- can you get paid for it?

Okay, fantastic.

And really quickly, probably this is for Phil, the policy acquisition costs on the life insurance have been up significantly year over year. What's driving that, please?

Yes. It's simply in the prior year, or during the course of this year, we saw some expenses that were classified as administrative expenses that we think are now better classified as acquisition expenses. So, you'll see a decline in admin expenses offset by an increase in the acquisition.

Okay. Perfect. Thanks so much.

Cliff Gallant, Nomura.

Thank you. I believe in your opening remarks you mentioned growth in professional lines. I think it was 4%. I was wondering if you could talk a little bit more about what you're seeing in that line of business.

Also if you could update us on what's happening in personal lines, particularly in your high net worth class of business. Thank you.

I'm sorry, Cliff, I didn't say 4% growth in our professional lines. I said two things. I only referred to pricing.

And, so, in the large account I said we got rate of about 1.4% on average. That goes between E&O and D&O and not for profit. And then in the smaller-risk, medium-sized risk and wholesale market business we got 4% rate.

And your second part of your question?

It was on personal lines.

High net worth?

Yes.

I think we continue to make good progress in that area. I'm pleased with the progress. We grew 9.5% in the quarter. That makes the right sense to us.

I think there's a good balance between underwriting, marketing and sales, and customer service, and portfolio insight and management. So, we can constantly fine-tune our exposure and our view about pricing, depending on the coverage that we're providing.

I think our reputation for service and for consistency is excellent. We run surveys among our agents and brokers and among our customers. Our retention rates are very high, which speaks to very good -- obviously if customers aren't happy they are going to vote with their feet. So, I think it speaks to good customer satisfaction, good reputation that way.

And we're sticking to our knitting. We're very focused on the high net worth and, to some degree, the mass affluent, and we're not straying away from that. We know the risk profile. And it's consistent with our vision from the beginning, and that's the brand we're building. And, remember, it takes years to do anything really well and create a great franchise in our industry.

Great. Thank you very much.

Charles Sebaski, BMO Capital Markets.

Good morning. Thank you.

I had a first question about the crop business, and a follow up on how last year looked. If we look at the fourth quarter and the first quarter this year and a true-up, I'm wondering if you guys are doing anything different today regarding hedging of that portfolio where changes could have a similar outcome or a different outcome with the same kind of events.

First of all, in how we manage our selection or peg our combined ratios and our estimating process, that has not changed. That is the same. If anything, we have only improved it. It's more rigorous. We've refined it. We've worked on our models between last year and this year, and we'll work on them again between this year and next year.

So, that remains the same. We just think we're a little better at it.

As far as our protections go, our protections vary from year to year. For instance, we bought less quota-share reinsurance this year than we did last year. We've been engaged in commodity hedging and that program was a bit more rigorous this year than last year. So, the reinsurance and any other protections we have vary by year.

Okay.

And in terms of the Itau, the acquisition in Brazil, is that solely going to be in commercial or is there a personal lines element to that similar to the Mexican and Latin America businesses you did previously?

No. This acquisition is only focused on -- is only large commercial. But ACE, our business in Brazil, we've been there for many years, and our business in Brazil is a mix of large commercial, a very large portfolio of accident and health business, personal accident, and small commercial, medium-sized commercial, and some limited personal lines, more in the high net worth area that we're incubating there.

This acquisition will not directly help us pursue those other channels of growth. But what they do do, it gives us a bigger image and profile in the country. It gives us greater attention, of broad distribution in the country. And so it'll have a halo effect that, if we execute right, will lend a benefit to those other lines of businesses.

Excellent. Thank you very much.

Thomas Mitchell, Miller, Tabak

Thanks.

Firstly, I'm wondering, historically it seems like India has always been a very hard place for financial services companies to do business, and I'm wondering if the new government in India has created pressure, new or different opportunities, and if you are looking at that area to expand.

Tom, the new government in India is a welcome statement of change of direction by the electorate in India, the largest democracy in the world. It is a more business-friendly government, their economic and trade and investment-related policies. The words are the right words and the right language. Modi has a history, a track record, of supporting economic growth and fostering it. I'm hopeful that that will translate into legislation and action that will really help stimulate further growth, accelerate growth in India. And I think it will.

And for the insurance market, it may create greater opportunity. It may lift the ownership cap from 24% to 49%.

ACE is not present, as you know, in India. But we're dynamic. We're constantly probing and looking. And if the environment is more favorable, and we see the right opportunity, and it makes sense to us, then we will take advantage of it and enter the Indian market. It's always on our radar screen, and there you go.

That's very helpful.

And my other question is, I'm not sure of the timetable on the federal terrorism -- as I understand it, we need new congressional action. Is there any new reading on what that looks like going forward?

Congressional action for what? I'm sorry, Tom.

For TRIA.

Yes, we do need congressional action. We need congressional action to renew TRIA.

When you look at the risk of terrorism today, which is greater than the risk has been, I consider it irresponsible of Congress to keep TRIA as a question mark around the certainty of government backstop and protection. That is bad for the economy. It is bad for business. Business thrives in an environment of greater certainty.

Both houses know, and both parties know, what needs to be done to renew TRIA. The difference between them is not great. The only thing they can take time for is campaigning rather than legislating to the benefit of our country, is shameful to me.

Well put. Thank you very much.

(Operator Instructions)

Ian Gutterman, Balyasny Investments.

Hi. Thank you.

Evan, my first question is, on the crop it looked like there was a footnote in the supplement that the hedging helped, if I'm doing my math right. Phil, it looked like about $40 million. Is that pretty close?

And, secondly, am I understanding right that that went through the combined ratio?

It was $45 million and it is in the combined ratio.

Okay, great. Thank you.

Secondly, Evan, the comment on the environment that's surprising a little bit was that wholesale is holding up better than retail. I would have thought the opposite. We obviously have a lot of excess capacity in the market and it's a lot easier to enter wholesale, especially if you are Bermuda or London, than to get casualty retail.

So, A, are you surprised by that? And, B, why do you think it's happening? And will it persist or do you think wholesale is just lagging and probably will follow retail?

Ian, good question. Chaotic market.

So, here it depends on how you're defining wholesale. When I was talking about the US, I was talking about our wholesale E&S and specialty business, which is the Westchester and Commercial Risk Services. And those both grew nicely, and they're after that middle market and small commercial. They have offices around the US and they are dealing with the US wholesalers. And their pricing held up better.

On the other hand, I said our Lloyd's operation shrank 6.5%. And I said our ACE Bermuda operation, which is large risk wholesale, shrank 10%. And, there, pricing is more competitive.

Got it. We've seen, obviously aware, the flavor of maybe not the month but flavor of the last couple of years for the guys who are struggling in reinsurance to try to set up onshore US wholesale divisions. Those people aren't ruining the market in the mid to small account, then?

They haven't gotten quite to it yet. It's harder work. You've got to have underwriters.

The business is placed locally. It doesn't just box itself up into one place. So, you've got to be present in Chicago and LA and San Francisco and Atlanta and Boston and New York. You've got to have underwriters across a broad swath of lines of business.

And you've got to really have the relationships. It's flow business and trades move fast. And you've got to have the confidence of the brokers. And that's not instant.

By the way, easier for them to get excess than primary because you do less work on excess than you do on primary. So, a lot of those guys are doing better with, they're writing excess and it'll be actually on larger account business than the smaller account business.

Got it.

And then my final one, I hate to bring up your favorite topic but VA reinsurance, just with interest rates back to their lows again. I was looking at your old disclosure from a few years back and when you gave those scenarios, and the more cautious scenario that had a tenure, I think it was north of 2.5, I want to say 2.6 maybe. And obviously a much lower S&P than we are at today, so maybe those offset.

But we're also, I think, about halfway through the annuitization phase. I was wondering if you can just give us any update on what you're seeing from annuitization trends, and what does the benefit of a higher market do versus the offset of lower interest rates you were hoping for a few years ago.

Yes. Ian, the annuitization and lapse rates, we study those on the portfolio. So, we look at our actual experience versus our expected. We're just completing studies and reviewing them in that area for the year and we are not seeing anything in aggregate that gives us concern that we're not pegging them correctly. So, those seem okay to us.

Equity markets are ahead of what we expected. Interest rates are lower. And I also don't believe that the 10 year -- we're at a volatile moment on interest rates right at the moment. And there's been a risk-off trade because there's a complex picture about economic and geopolitical at the moment. I don't believe the 10-year rate is going to remain where it is.

Understood.

The trend, I think, of the primary players is that lapses have been much lower and actual choice of annuitization has been much lower than expected. Is it reasonable to expect you've seen similar trends?

What we have seen is certainly less utilization from an annuitization standpoint. And lapses, maybe marginally lower than we would have expected. But net-net we don't think that the experience is going to change our view.

Perfect. Thanks so much.

Jay Cohen, Bank of America Merrill Lynch.

Thanks.

I had just one more follow-up and it related to a news item that came out, I think yesterday or the day before, about ACE suggesting it may exclude Ebola coverage from certain GL policies. I have not heard that from others. I'm wondering, one, are you the only ones doing it? And, secondly, what prompted this action?

Thank you for asking me that question, Jay.

I can't comment on what others are doing but I'll comment a little bit about ACE. I read the press report. We all did. That, in my mind, tends to sensationalize normal common sense underwriting.

Look, as underwriters, we start with the facts to understand the risk exposures of our clients on a case-by-case basis. These exposures, for example, include the types of activities they are engaged in, the locations where they take place, and the kind of safety protocols that they employ.

We have many tools to manage and price risk. We can offer full coverage. We can sub limit exposures. We can exclude coverage altogether. And we can vary the price we charge depending on the exposure we assume.

The Ebola endorsement referenced in our US global casualty unit is only one of many tools at our disposal, and we're using it selectively and on a case-by-case basis. It's not being applied in some indiscriminate, unilateral or blanket way to address the Ebola risk. Does that --?

Yes, that's helpful. That made it clearer than what I've been reading about in the press, so that was helpful.

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

Ladies and gentlemen, this does conclude today's conference. And we do thank you for your participation.