丘博保險集團 (CB) 2015 Q1 法說會逐字稿

Good day, and welcome to the ACE Limited First Quarter 2015 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 March 31, 2015, First Quarter Earnings Conference Call. Our reports today will contain forward-looking statements, including statements relating to Company and investment portfolio performance, pricing and business mix, economic and insurance market conditions, including foreign exchange, and integration of acquisitions, all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filing, 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 development.

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

Good morning. ACE had a reasonably good start to the year, with earnings per share essentially flat with prior year. It's a difficult quarter for US-dollar-based multinationals. Foreign exchange impacted our revenue, earnings, and book value growth in the quarter. Beyond that, we also overcame a couple of favorable items that benefited first quarter 2014.

After-tax operating income for the quarter was $745 million, or $2.25 per share. We overcame about $0.18 of head winds, $0.06 from FX, $0.12 from the items that benefited 2014 and didn't repeat. We produced an operating return on equity of nearly 11%.

Book value per share growth was up 1% in the quarter, and stands at $90.81. Underlying book value per share grew 2.4%. If the dollar does not strengthen in any material way from here, we don't expect any further foreign exchange impact to book value.

Our P&C combined ratio was 88.4% in the quarter, down about a half a point from prior year, with total underwriting income up over 3% pre-tax. It's worth noting, simply for underlying trend purposes, that the positive items in 2014 that I mentioned benefited the global P&C current accident year combined ratio in that year by 0.5 a point. Remember, global P&C excludes Agriculture. Adjusting for those items, the global P&C current accident year combined ratio for the first quarter was essentially flat year on year. Phil will have more to say about the one-time items.

We benefited this quarter from the 2014 crop year run off by $33 million, bringing the 2014 year ultimate result to an 86.5% combined ratio, a very good year. In essence, the positive crop insurance development versus last year's first-quarter offset, the impact of foreign exchange, and the positive items in 2014 to generate flat earnings per share year on year.

We produced $551 million in investment income in the quarter. This too, is a good result, given record low interest rates, and speaks to our strong cash flow. Phil will provide more detail on our investment portfolio and results.

On a constant-dollar basis, total premiums grew 2%, net premiums. Excluding Agriculture, global P&C net premiums were up 5%. Foreign exchange impacted premium revenue results in the quarter by five points. In North America, net premiums for P&C, excluding crop, grew 1%.

In our large commercial business, ACE USA, net premiums declined about 2.5%, due to a particularly large account booked in 2014 that we chose not to renew this year. We grew over 30% in ACE Commercial Risk Services, which serves small to mid-market clients, and 6% in ACE Westchester E&S, as all lines except property grew.

Net premiums for our Agriculture business were down over 50% in the quarter, due in large part to the premium-sharing formula with the US government. Because the 2013 crop year was a difficult loss year, we received more premium from the government as part of the profit and loss true-up in the first quarter of 2014 than this year. We don't expect nearly that rate of premium decline for the remainder of the year.

In ACE international, where the impact of foreign exchange was most pronounced, P&C net premiums were up over 2% on a reported basis, but 13% in constant dollars. Asia and Latin America had strong growth, with net premiums up 14% and 50% respectively, while premiums in Europe were up 1%. In our London market-based E&S business, premiums were up about 1.5%, again in constant dollar.

There was some softness as expected in the quarter in our global A&H insurance business, where net premiums grew about 3.5% globally in constant currency. Premiums for Combined insurance were up 4% in our core North America business, with new sales continuing to grow at a double-digit pace. We expect on a constant-dollar basis total A&H growth to accelerate each quarter as the year goes along.

Net premiums written for global personal lines were up about 19%, again in constant dollars. As you saw on April 1, we closed our acquisition of the US high net worth personal lines business, Fireman's Fund, and are busy integrating that business with ACE Private Risk Services, which is now one of the largest high net worth personal lines insurers in the United States.

Our Asia-focused international life insurance business had a good quarter, with net premiums and deposit growth of over 18% in constant currency. Finally, due to market conditions, net premiums declined 9% in our global reinsurance business.

Given the impact of foreign exchange and recent acquisitions, it may be difficult for those who invest in or follow us to project our growth. Therefore, I want to provide a little assistance. In what we know now, net premium revenue growth for the full year 2015 will be up mid-single digits on a published basis, which means almost 10% on a currency-neutral basis. We will benefit from our growth initiatives, both organic and acquisition-oriented, particularly in the US, Latin America, and Asia.

I want to now say a few words about current commercial P&C insurance market conditions. The underwriting environment grew modestly more competitive in the quarter for our commercial P&C business globally. In general, the underlying pattern we see is large account business is more competitive than mid-sized. Wholesale is more competitive than retail, and property more so than casualty related. In the US, rates for general and specialty-casualty-related classes were up 2%, while property rate prices declined 7%.

Taking our US commercial P&C business by its components, and starting with our large and upper-middle-market retail business, the ACE USA pricing trend was pretty stable, with general and specialty-casualty-related pricing up 2% in the quarter, and varying by line. For example, large account risk-management-related casualty pricing was up 2.1%. Management and professional liability pricing was up 3.2%. Excess casualty was up 2.1%; and foreign casualty pricing was up 1.3%. Property-related pricing continued to decrease at a steady pace, down 5.2%.

To maintain these price levels requires discipline. For our US retail business, the renewal retention rate, as measured by premium, was 93% in the quarter, and by policy count it was 83%. The impact from change of exposure added about 2.5 points to premium.

Turning to our US E&S business, casualty rates were up 1.4% in the quarter. Professional lines rates were up 3.7%, while property was down about 8%. Internationally, while commercial P&C insurance market conditions were again modestly more competitive, the pricing for the business we wrote was pretty stable overall. Rates were down 1% in the quarter. Asia was the most competitive region, with rates down 4%, whereas pricing in Latin America and the continent was flat, and the UK was down 1%.

For international in total, casualty rates in the quarter were down one. Property was flat, and financial lines rates were down two. In our London market E&S business, rates were down 3% in the quarter.

We are ameliorating the impact of pricing on our combined ratio through a combination of mix shift, targeting classes with better margin, portfolio management that informs underwriting actions, including tighter individual risk selection, and pricing actions in more stressed areas, as well as better marketing and new product innovation.

As you know, personal lines, small commercial, and A&H are approaching 40% of our Company net premiums. For these businesses, rates were flat to up mid-single-digit, depending on portfolio and territory. In the US, small commercial and personal lines achieved rate, including exposure growth of 5% to 6%, and internationally 1% to 2%, while group A&H pricing was flat. John Keogh, John Lupica, and Juan Andrade can provide further color on market conditions and pricing trends.

In summary, we produced good results this quarter despite foreign exchange, and remain confident in our ability to overcome these challenges as the year progresses. With that, I'll turn the call over to Phil, and then we'll be back to take your questions.

Thank you, Evan. Book value per share grew 1%, and tangible book value per share grew 1.8% in the quarter. Both were impacted by foreign exchange losses of $441 million, $268 million of which impacted tangible net assets. As a reminder, these losses represent a point in time, mark-to-market valuation adjustment, and do not affect the capital position of our foreign operating units.

We match our assets and liabilities in each jurisdiction, and we keep our required capital in local currencies. If and when the dollar weakens, the book value impact would be positive. Excluding unfavorable foreign currency movements, book value per share increased 2.4%, and tangible book value per share increased 3%.

We had a very strong operating cash flow of $1.075 billion for the quarter that benefited our investment income, and contributed to the growth in our cash and invested assets, which are now $65 billion. Investment income of $551 million was about what we expected, and was impacted negatively by $7 million of foreign exchange when compared with the prior year.

Our strong cash flow will continue to benefit our estimated quarterly investment income run rate of approximately $550 million, even with current new money rates of 2.6% versus our current book yield of 3.6%. The estimated investment income run rate is subject to variability in portfolio rates, call activity, private equity distributions, and foreign exchange.

During the quarter we had pre-tax realized and unrealized gains of $455 million relating to the investment portfolio, and a mark-to-market loss on our VA reinsurance portfolio of $57 million. Both of these were primarily due to decreasing interest rates. Our net loss reserves were up $247 million for the quarter, over 1%, after adjusting for foreign exchange and crop activity. The paid-to-incurred ratio was 109% for the quarter, or 89% on a normalized basis, which takes into account prior-period reserve release activity and crop loss payment activity.

In the quarter, we had net positive prior-period development of $83 million pre-tax, principally from short tail lines. Cat losses were $40 million after tax in the quarter, primarily from a number of US weather events.

Evan mentioned that there are a number of favorable items that benefited last year, and impact the year-on-year comparison of our operating earnings per share. North American P&C underwriting income pre-tax benefited by $25 million, $18 million after tax, from both lower excess of loss premiums seated under our 2014 catastrophe reinsurance program, and a favorable settlement related to prior-year state premium assessments.

In addition, life underwriting benefited last year from a reserve release of $6 million, both before and after tax. Also, the tax rate was lower in 2014, because prior-period development emerged in lower tax jurisdictions. This increased our operating income in 2014 by $16 million for global P&C coming from North America. The total after-tax impact of these items was $40 million, or $0.12 per share.

When comparing year-on-year results for global P&C, note that last year's positive prior-period development of $100 million included $42 million of positive prior-period development from the resolution of a large 2003 claim in our North American P&C segment. Excluding this claim, prior-period development last year would be $58 million, compared to this year's $50 million. Also, prior-period development in our Agriculture segment was negative $38 million last year, versus positive development of $33 million this quarter.

Total capital return to shareholders during the quarter was $560 million, including $340 million of share repurchases and $220 million in dividends. I'll turn the call back to Helen.

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

Thank you.

(Operator Instructions)

We'll take the first question from Michael Nannizzi with Goldman Sachs.

Thank you. I had one question about capital deployment. It looks like you now, you've stepped up pretty consistently and are buying back $350 million to $400 million a quarter, deploying about 70% of earnings. Should we be thinking about that approaching 100% of earnings at some point, or do you expect it -- you still want to keep some capital there for M&A? Not that you don't have plenty to do that, anyway, but how should we be thinking about your propensity to potentially lift that back up to 100% of earnings?

I think the way you should be thinking about it, Michael, is not to speculate. We gave -- we gave some guidance, in essence, by our intention of share repurchases for the year. That is, there's an authorization to repurchase up to $1.5 billion. That was our stated intention. That's what we're doing. Our dividend, you see what our dividend is. In total, it shows we're returning -- our intention is to return roughly this year in that range, that 70% range. As things go along, as we see the environment, assess the environment versus our strategy, and both together speaking to our needs for capital, we'll make future decisions, and you'll know about those.

Okay. One question, Phil, on the debt that you guys issued. I'm guessing you mentioned pre-funding some debt that's coming later this year. Should we assume that the $450 million in May and the $700 million or so in November that you'll just pay those off, and not reissue any debt at that point? I'm just trying to think about --?

Yes, that's our plan. That is our plan.

Okay, great. Last question, just on crop. It sounds like there should be no catch-up impact in the second quarter from what happened here; that this was just related to the settlement of the prior crop year. Is there anything other -- whatever we were thinking about for the rest of the year on crop, it sounds like that shouldn't change based on what we saw in the first quarter Is that fair?

That is very fair. The first quarter is a -- first of all, it is a small percentage of the total premium.

Right.

You get that. You have this messiness of depending on your profit and loss in the prior year, you have the true-up with the government. Also last year, the winter wheat season, which is a 2013, 2014 season -- this year is the 2014, 2015 season, but winter wheat, it crosses years. We booked more of the winter wheat premium last year in the 2013 fourth quarter. This year we booked more in the first quarter of this year. More of it was in the fourth quarter. You have that timing difference. As we go forward, the way our accounting works, we should not have that. We should be consistent with how we did it this year.

Great, perfect. One bigger-picture question on cyber. As a topic and as an area of focus for ACE, is that an area you see as an opportunity to have a pretty substantial impact on the way that product and vertical evolves, or is it still a little too early to start really setting up a big presence there, as those liabilities starts to come into focus? Thank you.

Well, that's a good question. Look. In order for insurance to remain relevant in society, you can't simply hold on to the past. Perils are emerging as society matures and develops from science, regulation, legal, all kinds of areas that impact it, globalization. As economy digitizes, as society digitizes, there are more exposures that are going to emerge. Cyber risk security is one of them. This is something that the industry, to be relevant, has to come to grips with, and meet the needs of these exposures for clients.

ACE is one of the major insurers of cyber insurance as it is today. It's a nascent area. It's small. Most of the product demand is in the United States. It's not in other countries, yet. We keep probing it for other places, for there to be more of a demand for the risk -- more demand for insurance for the risk.

We're committed to the line, we see lots of opportunity for it, but it's still small. Overall, the premiums globally are about $1.5 billion to $2 billion. We estimate our market share at 8% or 9% of that. We're quite active. We're mindful of the risk environment around it. It's category of client and size of client related. You've got to be mindful of that. You've got to get paid properly for the risk. But with all that said, this is an area of growth for ACE.

Thank you, Evan.

The next question is from Cliff Gallant with Nomura.

Good morning. Congrats on the good quarter. The question I had was just in regard to ABR Re, and your investment in that. I was wondering if we're now at a point where you can comment on what you think the opportunity might be there?

Well, the opportunity, it doesn't do third-party business. You've seen all the material on it. It's out there. It is in essence, the only reinsurance business it will be accepting is ACE's business.

Will that change over time, or what is the long-term plan?

No, that's not our intention. The Board of the Company -- we own, 10% or 11% of it, and we're one Board member. The Board and the Management of the Company may decide differently in the future, but from everything I can see right now and the next number of years, that will not be the case.

Okay. Thank you, Evan.

You're welcome.

The next question is from Ryan Tunis with Credit Suisse.

Thanks, good morning. My first question, drilling down into the life results a little bit, obviously $66 million reported this quarter. That compares to $76 million in the fourth. I think the press release referenced the run-off of the VA block, or the reinsurance block as contributing to that. Breaking it down a little further, how much of that sequential decline was related to reinsurance, maybe versus something else -- either international life or US A&H?

As we said, there was a $6 million item reserve release in the fourth quarter of last year. We also had the runoff of the VA, and we also had FX. The three of those together combined to be the impact of the change.

Okay, understood. Also on the supplement, you guys disclosed personal A&H operating earnings. I'm guessing that's mostly US Combined; but this quarter I think that was $113 million. That looked in line with a year ago, but if was down from what looks to be a low $120-million run rate over the past few quarters. I'm wondering what's going on there? Is there a seasonality around that? Anything you can add would be helpful.

We're a little -- we're sitting here a little perplexed by your question. I'm not sure exactly what you're focused on. But I'll tell you what, how about if we take that off line and Phil and --

Sure.

We don't see anything. We don't see a sequential weakness. But Phil and Helen will take it off line with you.

No problem. I guess one for Evan. Your comments on the smaller end of the market, I think remaining somewhat less competitive than the larger. I guess we saw that this quarter, another strong growth quarter in commercial risk services. I think you set up 30% there. Over the past few quarters, how has the competitive environment been evolving? Growth looks like it continues to remain robust. Thanks.

Yes, it's a -- first of all, it benefits from its size. It's not a huge business. It's in the hundreds of millions of dollars as a business for us -- not in the billions. It is specialty oriented more than traditional package business. In the traditional package area we're really focused only in the micro market. That is very small companies where we see good opportunity.

We've invested more and more in the space in terms of product, in terms of I should say begin with talent. We have really in the last two years beefed up the talent in that area, though we've been investing in it with people for five or six years. We've expanded product significantly over the last 18 months, and we've expanded cohort of customer focus. In addition to mid-market, on the very small -- the smaller end of the market, we went right down in the micro.

Those efforts, and that leads to distribution and the technology we've put in place to help facilitate that. A lot of investment, and we're benefiting from the result of that. I don't expect these kinds of growth rates will continue forever; but we're getting -- they are in line with our plans, and they're not a surprise to us. Did I answer your question, Ryan?

I think you did, Evan, thanks.

We'll go next to Jay Gelb with Barclays.

Good morning, Jay.

Good morning. I just want to touch base on a couple items. Phil, I believe you mentioned that even if -- or if the dollar doesn't strengthen further, there should be no further impact on book value from foreign exchange. Is that the same case for earnings per share, as well?

Well, no, not on a comparative basis. The run rate you saw in this quarter might get mildly worse in the second and third quarters -- just mildly. It's a reasonable run rate to use. Then the fourth quarter should get better, because we've had the deterioration in the fourth quarter. We've already experienced a deterioration in last year's fourth quarter.

4Q better, meaning less of a drag than 2Q to 3Q?

Yes.

Okay.

2Q and 3Q will be right in -- they're right in the range of First Q.

Okay, that's helpful, thanks. On the Agriculture business, Evan, I know you mentioned that directionally premiums could be lower for the rest of the year -- not as much of a decline as in the first quarter. I believe Agriculture premiums for all of 2014 for net premiums were $1.6 billion. Do you have a sense where that may shake out for the full year 2015?

I think you should imagine that commodity prices are going to have a low double-digit impact -- 10%, 11% range.

For the full year?

Correct.

Then we would take into account volume, as well?

Yes, but I just took that into account to give you the impact on premium.

Perfect, thank you. The final question I had is given the severe winter weather in 1Q, particularly in the northeast, I was wondering if that was a factor at all in ACE's results? Also noting that your catastrophe impact for 1Q was a lot lower than what we saw for example out of Chubb, which also has a high net worth business, I wanted to get your perspective there.

Yes, we had -- last year cat losses were a little bit elevated. This quarter, they were right in line roughly with that, a bit elevated; but nothing terrible.

All right. Thank you.

We'll go next to Kai Pan with Morgan Stanley.

Good morning. Thank you for taking my call. The first question on the -- thanks for the color on the total premium growth for the addition of the acquisitions. Do you also have to see any combined ratio impact from these acquisitions?

Combine ratio impact from these acquisitions? Sure, every acquisition -- Kai, every acquisition is going to have -- if it has anything of size in terms of premium, it's going to produce a certain run rate of its business. It's going to have a combined ratio. It's going to mix into our total. Mathematically, you get that. If you're looking for how much it will be, well buddy, that's another question and I'm not going there. (Laughter)

Directionally, of those two acquisitions - Itau and Fireman's Fund -- do they have a higher combined or lower combined ratio relative to your existing book?

In total, they will be beneficial.

Okay, thanks. Then a second question. If you step back, Evan, if you look at the past three years, you produced operating ROE around 10% to 11% while P&C pricing was generally rising, and the catastrophe losses have been relatively benign. Going forward, we've seen the P&C pricing is decelerating. Do you think the ROE going forward will decline, or are there any other drivers you can pull to maintain or even improve that ROE?

Yes, Kai. I said this earlier in the commentary, it's about more than pricing. We are quite diversified by product area. A lot of our business is not commercial P&C, and our commercial P&C is spread very well across the globe, and spread around a lot of products. Our data analytics and our portfolio management capabilities continue to improve, and so our risk selection and ability to focus in areas where we see better margin for the current rate levels, and our ability to shift mix that way, improves.

Then we have acquisitions that just are another way of contributing to that in terms of mix, be it product or geography, that help ameliorate movements in price. I think we have a lot of handles to pull, and we're pulling all that we can that help to ameliorate the impact of pricing.

Okay, that's great. Lastly, if I may, it's on the -- you've seen the recent wave in the merger acquisitions in the reinsurance space. Do you think the current environment's also ripe for more acquisition-like opportunities in the industry consolidation on the primary side, and where ACE sits in that space. Do you see more opportunities for future acquisitions? Thanks.

Well, there's a constant flow of deals. We've said before many we look in the -- at circa, 100 deals a year on globally -- pull the trigger very selectively. It's got to meet our strategy and meet our standards. That kind of flow activity continues. It's driven by many things. It's driven by the P&C cycle, on one hand. It's driven by economic conditions in various territories. It's driven by owner strategies of where they -- what kinds of businesses they want to be in, in the future. There are many things that drive the motivation.

Of course, when you have -- just as you look narrowly at the P&C industry, whenever there's, whenever you have pricing pressures and growth pressures, and now you've got low interest rate pressures, earnings pressures, and growth pressures. That will drive many who don't have a view of, or an ability to move beyond that, it has them assess the opportunities for merger and acquisition. You typically will see it at this kind of point in the cycle, and see it pick up. Wouldn't surprise me.

Thank you so much.

The next question is from Brian Meredith with UBS.

A first one, is it possible to give us some color on the impact of Itau acquisition on the Overseas segment. Particularly, I was a little surprised your actual premium retentions went up in the quarter, given that was a part of the consolidated results now, as well as admin expenses actually going up, given the favorable impact of FX on expenses.

Yes, so, Brian, what's the question?

The question is what's the --

Ye, I'm just trying to break it down.

Sorry, it's a long convoluted one. The impact is why are retentions up on the Overseas -- premium retention up on Overseas on a year-over-year basis with the Itau coming in. Did that have much of an impact on it?

On premium retention, no, that's more -- that's a mix of business question. There wasn't a change of re-insurance, and yes, Itau came in, but it's a big organization. There were growth in a lot of other areas. You saw personal lines growth and A&H growth, and then there's a lot of other small commercial in Asia and other places. The mix -- that will bring it down. That's why you shouldn't simply imagine Itau. Also, remember, however Itau reinsured in the past, that was based somewhat on their own net retention appetite. ACE may have a different appetite.

Okay. Also, just quickly, Petrobras, obviously a lot going on down there with respect to Petrobras. What's ACE's exposure to what's going on down in Brazil and Petrobras?

I was trying to get John Keogh to answer it and tell you that we're not going to comment on it (inaudible - background noise) exposure, but he doesn't want to (laughter). But he didn't say it, so Brian, we're not going to comment on an individual situation. We're not -- we're mindful of Petrobras' circumstances, obviously, and the impact on both growth in the construction business, as well as as surety exposures, both their own, and generally within the construction industry, and while we're alert, we're not concerned.

Okay. Thanks, Evan.

You're welcome.

The next question is from Thomas Mitchell with Miller Tabak.

I was wondering if you might have an equivalent of year-over-year premium growth on what might be called a same-store basis -- that is, without acquisitions?

Yes, we're not breaking that out right here. Once -- as you know our policy, once something becomes a part of the Company, fundamentally we just don't start breaking down all the parts and pieces of each part of the Company. These fold in and there you go.

I wasn't asking about the individual pieces. I was just wondering about the impact of acquisitions on the overall total.

Right, but they're acquisitions that we've made over the last eight or nine or 10 years. Are you asking me pull all those out?

Well, it would be very nice. (Laughter)

Yes. I got you, buddy. Well, I that's like, yes. I don't see the value, I know you will, you'll like the -- you're a data junkie, but we're not pulling those out.

Okay. Separately, what either has happened or hasn't happened with the terrorism insurance act?

Well, it renewed, and therefore the market is stable. It's business as usual, because the TRIA back-stop is in place, Tom.

Okay, thank you.

You're welcome.

Next question is from Jay Cohen with Bank of America.

Good morning, Jay.

Good morning. Question is on ABR Re. Will ACE be ceding additional business to ABR Re, or will you simply transfer stuff you're ceding to others now, and move it into ABR Re?

The latter is more correct, is correct. ABR Re will simply be a following participant on our treaties. They will not -- our existing pool of treaties. The intention is they will take a share across the board. They will not be a leading market. We're going to maintain the discipline of the third party reinsurers, establishing terms. The market place establishes terms for reinsurance, and ABR Re will be a capacity player.

Got it. Do you pay a brokerage commission when you cede to ABR Re?

Well, we never pay a brokerage commission. The re-insurer pays a brokerage commission, by the way.

Got it. Is there any economic benefit to, for the market, to having ABR there?

Is there any economic benefit to the market? Not that I know of.

Okay.

You mean the market generally, outside of ACE? Is there a benefit to them that ABR Re is there? No, I see a benefit to ACE's investors, and I see a benefit to the investors in ABR Re, and I see a benefit to ACE. I don't see a benefit to the general market. We did not create it with that in mind.

Got it. Thanks, Evan.

You're welcome.

The next question is from Charles Sebaski with Bank of Montreal.

Good morning.

Good morning.

First question is on the ACE 4D. There was a press release that went out yesterday on the data and analytics, and how that will be incorporated in your business, and how that's different from how you have been doing business up until this new system or new offering on risk selection has gone out?

Oh, okay. Yes, please. John Lupica is going to answer that question for you.

Yes. Great, thanks for noticing. The 4D is a tagline we're using for our data analytics tool for our loss predictive modeling. We view it as a great win-win. Housed inside our claim operation, sits mainly in ESIS, but we can -- ESIS is our third-party administrator, and we can use it at these claims, as well.

What it is, in essence, we look at claims at in-take at three months, six months, and 12 months. We can identify the high-risk claims for our insureds and ourselves. Again, we say it's a benefit because it adds a third-party administrator benefiting our insureds in the deductible; and then certainly benefiting ACE if we manage those large severe claims better into smaller numbers that avoid attaching into our layers. We view it as a claims product for ourselves, and the market -- i.e., the win-win there. Does that help you?

Okay, and so for the market, will you only be using this internally, or this will be available for outsourced?

This is for clients.

Yes.

We're doing this as a service to clients.

Okay.

We use data analytics to benefit ourselves in portfolio management and risk selection and in claims management, but we do a lot of risk management business, where our clients have skin in the game, and this is to help them.

Okay. I have another question on the cyber risk in general. The question I have is for the market to mature and scale, how do you guys view risk aggregation in that product? Because it would seem to fall more along the lines of a war risk than a more traditional insurance risk on how aggregations could be in that product. I'm just curious on how you guys think about that?

We don't particularly think of it as war risk, which is very extreme. But we think of it a little more akin to cat risk, only it has different geographic boundaries. We do in our enterprise risk management, we do go through, as we do with many of our businesses, we are mindful of aggregations. We do event-planning scenarios where we imagine different kinds of events, and the impact they could have on our concentrations of exposure. Therefore, what you call the PMLs of maximum losses that could occur from a portfolio.

Now, admittedly, as anybody would say, it's a kind of a crude exercise. It's to use the best brains and the best data and technology available you can find to help you with that, but you know there's a lot of basis risk. That therefore informs how much aggregation we're willing to take, understanding that the number is wrong. If that helps you with it, we go through that exercise.

I guess in the thought on the enterprise risk management and the aggregation, my thought is conceptually, you could have a rogue hacker data breach that could theoretically hit every insured in a portfolio regardless of geographic circumstances. How do you -- do you aggregate it just from a total product purposes, that total cyber ag exposure will be X regardless of geographic or industry?

No, you didn't exactly listen to me, so no. We don't see 100% PML.

Okay.

You're using the word "rogue hacker." Rogue hacker typically will hit one or two or three. You're more concerned about something like wild virus. That will have more of a systemic to it, or bringing down of the Internet -- which wouldn't be rogue hacker. That would have a systemic nature to it in terms of denial of service. How you sell cover and then how you PML those exposures because the notion of 100% loss, no. We don't see that. There are many other factors that come into play.

I appreciate the insight. Thank you.

If you -- Charles, if you want to become a cyber underwriter, we welcome you. Come on in. You're thinking about it, and hey, you know what? We're hiring. (laughter)

Well, thank you very much. (laughter)

The next question is from Al Copersino with Columbia Management.

Hi, good morning, thank you. I don't know if this is a particularly easy question to answer, but thinking about US commercial underwriting versus overseas commercial underwriting, we on the buy and sell side obviously focus perhaps too much, but we focus a lot on pricing, and maybe we focus a little bit less on loss cost trends and how expensive LAE is, and things like that. But I was wondering if you could tell us what is the combined ratio or ROE or margin differential for a US large-case commercial business, versus an overseas large-case commercial business? Are the two roughly similar, because you choose where to play overseas?

It is such a difficult question, in the sense that -- and I'm not going to evade it, I'm going to see if I help you with it. But in the first instance, when you get to commercial P&C, the accounts are so different. Comparing one account to another -- but if I tried to do that very crudely, and I look coverage -- and we take similar coverages, because ROEs and combined ratios will vary by type of coverage.

The terms and conditions adjust to the local market place, as well. For instance, we might have much tighter conditions around casualty in the United States to get to the same result than we do on the continent of Europe, or in Mexico as an -- if I just -- picking examples for you. The market place adjusts that way.

Number two, it will depend also to a degree -- so you get a sense of how messy it is -- what's the access? There are some markets where the combined ratio on commercial P&C will be lower, because the market is just a more stable market place. That may be cultural, they have tacit renewals. It may be that there is less influence from major global players in the re-insurance markets in that market place. It may be the dominance of local players of a couple of local insurers, and business community in total protecting their own.

There's all kinds of things that drive and affect this. You can't really put it in a neat box, I think the way you're struggling to do it, and I understand the question. Hopefully I helped you a little bit.

You did, that's helpful. The only reason I ask is you all are focusing, and rightly so, on reminding us of the geographic and product diversification. Almost 40% is non-large K, that sort of thing. I was just curious if you could point us in that direction in terms of the relative profitability. But that was helpful. I appreciate that.

You're welcome.

Our next question is from Ian Gutterman with Balyasny.

Ian. Hello?

Can you hear me?

He got bored with the last answer and went away.

Evan?

Yes, I'm here.

Okay.

Is that you, Ian? (Laughter).

I've been here, but my handset's not working, so I switched to speaker. My first question is just a follow-up.

Pay your phone bill.

Yes, I know. It might be a loose cord, who knows. The Overseas growth of 11% ex-currency, as a follow-up to the earlier question, if I -- is there seasonality in the Brazil business? If I took my estimate of Brazilian premium divided by four, and subtract that from the 11%, it looks like the core Overseas growth was pretty flattish. Am I close there, or is there seasonality that skews that analysis?

No, I'm going to let John Keogh answer, because we're both shaking our heads violently. There was actually very good growth.

Okay.

No, Ian, when I look at Latin America, actually without the Itau premium that we had this quarter, we had good solid, double digit growth in Latin America ex Itau. I can say that. I'd also say in terms of any seasonality at Itau, there's nothing in first quarter that would suggest that.

Perfect, okay. Evan, can you talk a little bit about -- you talked a lot about pricing in various parts of the market. Can you talk about terms and conditions, and quality of underwriting in general. Are we getting to that point in the cycle where underwriters are not wanting to give more price, so they start changing language or giving in on sub-limits and things like that, that tend to lead to bad outcomes a few years later; or are we not there yet?

Ian, we're seeing it, but we're seeing it more on the margin. It's not back to the late 1990s that way. We are seeing it -- but we are seeing more of things that cause us to shake our heads. We'll see a broadening of terms and conditions and property. We're seeing marginally a broadening of terms and conditions at times in casualty. It's related, in particular, new business of any size comes to market. People have been really hungry. But we're not seeing the stupidity we've seen in the past.

Okay, good.

Not yet (laughter).

Not yet, exactly. Lastly, just a little more on the M&A question from earlier.

By the way, that's more of a US, UK, Australia comment.

That makes sense.

Anywhere else in the world, okay, when we talk about terms and conditions.

That makes sense, okay. Lastly on M&A, I was curious if you could expand a little bit more on your thoughts on what we're seeing in the industry elsewhere. Obviously, a lot of it so far has been reinsurance, and that's probably of less interest to ACE. But what do you see when you look at the chess board of what the next moves are? Do you think it remains a reinsurance game, where scale really needs -- is needed there, or do you think this spreads and we start to see major primary deals as well, because there's a need for more scale at this point in the cycle?

Ian, I don't see any major primary on the horizon. But, you know how that goes, and then tomorrow morning I get on the train and I pick up the newspaper and there it is.

Right.

I'm not a savant at this. But I don't see that on the horizon at the moment. There are a couple of situations that are pretty well known out there of larger primary that wouldn't surprise any of us, including you. That's a question of -- probably a little more of a question of when than if.

Got it. All right, thank you. I'll have a new phone for you for next quarter.

(Laughter) It may have been cyber.

(Laughter) It might have been. Charles is hacking my phone.

(Laughter) Exactly. That was you, Charles.

The next question is from Meyer Shields with KBW.

Pardon me. Thank you, good morning.

Good morning.

Evan, my impression of (no audio) --

Hello? Meyer, I lost you on my impression of. Wow. This is not these guys. This is something in the service, Helen. Has to be. Meyer, are you there? Paul Newsome, are you there? Or did we lose the call all together? Wow. Well, in case anybody is there, Phil Bancroft will sing a song now.

If the callers who were in the queue would please re-queue.

The last one that we, operator, that we were supposed to have was Meyer Shields.

And we have a question from Meyer Shields of KBW.

Okay. You saved Phil from having to sing a song.

Yes, can you hear me?

Yes.

Oh, fantastic. Sorry about that. My impression of the high net worth market, First lines market in the US is that it's fairly concentrated, and now more so with the acquisition of Fireman's Fund. Does that have any implications for pricing or profitability, the fact that one of the relatively small group of companies is now subsumed within ACE?

I don't think so, Meyer. We don't view our opportunity as simply three or four players trading business back and forth. The high net worth personal lines potential market place is a much larger market place than it is today. It's being served by good companies, but the traditional lines companies, who don't really meet the needs, both coverage and service, of high net worth client base and customers. Our real opportunity is to migrate more of those customers from where they are today to ACE, and not simply chasing someone else's business.

Okay, that's helpful. Phil, quick question. If we adjust net investment income for foreign exchange, you came in ahead of the sort of $550-million quarterly run rate.

Yes, I think the run rate was $555 million.

Okay, so it's just the FX issue.

Right.

Okay, great. Thanks so much.

You're welcome.

Operator Eric, is there anyone left in the queue please?

At this time we have no further questions. I'd like to turn the call back to Helen Wilson for any additional or closing remarks.

Okay. 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.

This includes today's call. Thank you for your participation.