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ACE Limited (NYSE:ACE)

F1Q09 Earnings Call Transcript

April 29, 2009 at 8:30 am ET

Executives

Helen M. Wilson - Director, Investor Relations

Evan G. Greenberg - Chairman, Chief Executive Officer

Philip Bancroft - Chief Financial Officer

Brian Dowd - Chairman, ACE USA

John Keogh - Chief Executive Officer, Overseas General

Timothy Boroughs - Chief Investment Officer

Analysts

Jay Gelb - Barclays Capital

Mark Lane with William Blair & Company

Matthew Heimermann - J.P. Morgan

Thomas Mitchell - Miller Tabak & Co., LLC

Newsome - Sandler O'Neal and Partners

Paul Newsome - Sandler O’Neill

Vinay Misquith - Credit Suisse

Brian Meredith - UBS

Ian Gutterman - Adage Capital

Matthew Heimermann - JPMorgan

Everett Gong - Riversource Investments

Thomas Mitchell - Miller Tabak & Co., LLC

Operator

Good day and welcome to ACE Limited first quarter 2009 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.

Helen M. Wilson

Thank you and welcome to the ACE Limited March 31, 2009 first quarter earnings conference call.

Our report today will contain forward-looking statements. These include statements relating to our financial outlook and guidance, business strategies and processes, competition, growth prospects, investment and use of capital, general economic and insurance industry conditions, a stock price in the capital market, pricing and exposures, losses and reserves, all of which are subject to risks and uncertainty. Actual results may defer maturely. Please refer to our most SEC filing as well as or earnings press release and financial supplement which are available on our website for more information on classes that could affect these matters. This call is being webcast live and will be available for replay for one month. Over March, May during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

So I would like to introduce our speakers. First, we have Evan G. Greenberg, Chairman and Chief Executive Officer; Philip Bancroft, Chief Financial Officer; and Tim Boroughs, our Chief Investment Officer. They will take your questions. Also with us to assist with your questions are several members of our management team.

Now it is my pleasure to turn the call over to Evan.

Evan G. Greenberg

Good morning. ACE had a very good first quarter, strong start to 2009. Overall, our company is in good shape and our performance was steady. We are, of course, operating in a deep global recession and the financial markets remained difficult. That means a challenging environment for all business including insurers. There was some improvement in both debt and equity market conditions in the latter part of the quarter, and time will tell if this improvement, particular in equity markets is transient.

That depends on the future state of the US and global economy which in my judgment is in turn dependent to a large degree on the health of bank balance sheets and financial markets particularly in the US and Europe.

Ace’s financial results in the quarter both in operating and net income basis were quite good, with all the visions of the company making a positive contribution to results. After tax operating income in the quarter, $669 million or about $99 a share while net income in the period was $567 million.

Book value grew in the quarter, up about 2%. We continued to be impacted but to a much lesser degree by credit spreads and equity prices. Our PNC combined ratio for the quarter was 87.5%, simply an excellent result. We benefited modestly from prior period development, short-tailed related and this includes a prior year crop insurance adjustment that was positive but much less so than ‘08s first quarter. While there were a number of natural catastrophes in the first quarter around the globe, our CAT losses were within expectations at approximately $36 million after tax. That investment income was up modesty over prior year but below 4th quarter. Investment income was impacted by both a more defensive investment posture adopted in the 4th quarter and foreign exchange. So when Tim Boroughs, our Chief Investment Officer will speak more about that. But let me simply said it, we’re adjusting the tactics around our investment strategy again having gained a bit more visibility and will be putting to work in the 2nd quarter, much of the cash built up by our portfolio managers.

Our balance sheet is in good shape and in my judgment, our capital position is strong. Our return-on-equity was about 18.4%.

I want to make a few comments about the growth pricing and the market environment. Total (??) net written premiums were up 9% and adjusting to the negative impact of foreign exchange were up approximately 15%, a pretty good performance given global recession and pricing conditions. Keep in mind we continue to benefit from the combined insurance acquisition which again improved our growth rate this quarter.

Our PNC businesses, both insurance and re-insurance grew in the period. This was the first time our global PNC re-insurance business has grown since 2006. The net premium is up 4% over prior year. In fact, on a 3-year basis, our re-insurance premiums were up 23% year to date through April and this will show up in future quarter growth rates. For re-insurance, growth was due to a combination for firming prices, particularly in the North America and Bermuda markets, as well as companies purchasing additional re-insurance due to capital management requirements. In the US, we saw rates for most lines in particular risk property move up about 5% to 10%. In Bermuda, we also saw prices improved with CAT-related lines up 7.5% to 15% for US business and flat up to 7.5% for international business.

CAT re-insurance pricing is continuing to firm and in the second quarter so far, we’re seeing prices up 20% to 30%. One clear trying to cross the world that benefited our global re-business is Counter Party Security. It is clearly more important to clients and as a result, ACE is definitely benefiting with stronger signings and increased line size.

Turning to the insurance side, PMC pricing during the quarter was generally in line or better than what we contemplated in our ’09 plans. As I said last quarter and its still hold through, rates overall are firming and faster in re-insurance than insurance. In many classes of insurance, rates are flat to up and when prices are declining, they’re doing so at a slower rate.

The balance of 1st quarter insurance pricing was essentially unchanged from what we reported for January 1 although in April, we have seen some further tightening in selected classes such as energy, CAT-exposed property, and certain areas of professional lines.

In general, the larger the risk, the firmer the pricing.

Primary or first access layers are generally firmer than access layers. It is clear in lines and layers were just more than simply capacity where clients are seeing the service, expertise balance sheet and presence of a company like ours.

Prices are firmer. We are definitely experiencing in our retail business a positive benefit from flight to both capability and safety and that is showing up in growth rates in certain lines, particularly casualty related.

At the moment, there are countervailing forces that work in the market place. Some boat towards continued firming, others keep prices for firming more rapidly and in fact fueling competition. On the demand side, client exposures are down due to recession that means less pressure on capital to exposure.

Further, because of economic conditions, buyers have less ability to pay for increases and are seeking cheaper alternatives or any alternatives but a price but a price increase. Many are willing to place their business with lower rated, cheaper capacity so demand is down.

On the supply side, one large damaged company and smaller newer companies simply in search of market share or willing to cut price. However, the fundamental truth that forted continue firming remained. I include in that, current industry underwriting and investment results, weaker though adequate balance sheets and affirming reinsurance market. In some, I do believe rates will continue to firm as time goes along, how far, how fast, what lines and where, I cannot predict with certainty. But we are patient and as they do, we will gain share and that equals growth.

In the meantime again, recession is impacting exposures and client’s insurance budgets and this along with foreign exchange will continue to place pressure on premium growth rates. But we provide a bit more color around PNC growth and pricing. Our PNC net written premiums grew 1% on a reported basis while on a constant dollar basis, they grew 7%. On a constant dollar, our global retail PNC business, that’s ACE USA and ACE International grew 5% while our London and US wholesale business, excluding crop insurance shrank by 15%. Wholesale remains more competitive than retail.

Let me dig a little deeper into the divisions. In North America, net written premiums increased 2.5%, retail was up about 3%. With long tail lines growing and short tail shrinking, new business was up 20% while renewals were down about 4%, much of that exposure related due to recession, though also due to our pricing discipline. Our renewal retention rate is about 88%. We’re able to secure our prices more often on casualty business again than short-tail lines and that’s the flight to capability and safety element. Our specialty casualty lines including excess casualty, construction raps and environmental grew about 7%. Our risk management business was up 4%, our professional lines including financial institutions grew 24% and our medical professional was us 12%.

Overall rates in US retail were up about 3% in the quarter. For US wholesale, premiums were up 29% but excluding crop premiums, we’re down 16%. Rates were up 3.5% overall with casualty and property up 4% and 6.5% respectively. Competition continued unabated in the NS casualty and we deliberately shrunk our property portfolio, freeing up aggregate for a firmer rate environment later in the year.

For International PNC, retail premiums in constant dollars were up 5%, new is up about 7.5%, and renewal retention was 77%. Rates overall in international PNC were up modesty about 1% in the quarter and all lines and regions were in a pretty tight range with pricing varying from up 3% to sort to down 1% and also a lot was flat. Except for Continental Europe, market tone is improving and pricing firming. One or two large damaged players continue to be the exception.

For international wholesale, premiums and constant dollars were down 14% as we strobe to obtain price in a continuing competitive London subscription market environment. Our rates were up 9% driven by property, energy, marine and professional lines.

Before turning it over to Phil, I like to repeat a few comments I made last quarter about our political risk and trade credit business as we continue to get a number of questions about our exposure given global economic conditions. Trade credit continues to run in line with our expectations. There is nothing that we had seen to date that is outside of our expectations or loss to the business. Also true at the political risk business. We have what we consider to be reasonable level of exposure in any other countries that are in the news that you might be concerned about. We approach this business conservatively and was stuck with the fundamentals. We have no claims of any size reported or pending at this moment. We have a situation watch list and we are constantly reviewing our portfolio exposure.

Again, as I mentioned on the last call, our exposures are being declining in hot spot countries. We hold reserve for this business and re-insurance for the portfolio and results are tracking with and or better than expectations. Our course, we expect a certain level of loss activity. After all, we are in the risk business but we’re not concerned with our exposure. Frankly I just don’t see a problem on the horizon and political risk. I hope that helps. We’re planning to record a presentation in the subject to educate you further and it will be available in the next 30 to 45 days.

In closing, I am quite confident about ACEs prospects in both the near and long term given our capabilities, our balance sheet, our people and our single-minded focus on staying truth underwriting integrity. We are gaining in the market place, acquiring talent and growing our presence, particularly in specialty classes. It’s a long race and we’re patient in strategy and impatient in execution.

With that, I’ll turn the call over to Phil and they will take your questions.

Philip Bancroft

Thanks Evan. Good morning.

Market volatility continued throughout the first quarter. Inspite of this, our balance sheet and capital position remained very strong. Our cash and investment assets grew by $500 million, our reassurance leverage drop to about 93% and our tangible book value increased 2% on a per share basis.

Net realized and realized losses from our investment portfolio were $305 million after tax. Included are $192 million of looses for securities deemed other that temporarily impaired. $27 million of these were due to actual credit losses, the balance is all pricing related.

For the unrealized losses in our fixed income investment portfolio, we believe our strong liquidity and continued positive cash flow support our view that will hold our highly rated investments until they recover they value as the approach maturity.

Our local equity holdings representing about 2% of the portfolio are actively managed and are highly diversified.

Since quarter end, the portfolio has recovered in value by $450 million to $500 million.

These guidance was issued by the (??) this month related to both March market accounting and OTTI. We’re planning to adopt these guidance in the second quarter, although we don’t expect a significant impact in our book value principally because we don’t believe the valuation aspects of the guidance will apply to the types of high quality assets in our portfolio.

I’ll ask Tim Boroughs, our Chief Investment Officer to talk about the movement in our investment income for the quarter in just a moment.

Our net loss reserves increased about $100 million during the quarter after adjusting for foreign exchange. Our cash flow of about $560 million was below our recent run rate but within our expectations. It was lower primarily on payments related to CAP losses and a few other individual large loss payments and higher tax payments.

We provided disclosure in our supplement on our debt maturity profile and back credit facilities. You’ll see we have a minimal debt refinancing needs over the next 5 years. Our LLC revolving credit facilities are executed in 2007 for a 5-year period. The LLC facilities are principally used for collateral requirements relating to our re-insurance business in Bermuda.

As of March 31st, we entered in the securities lending agreements, totaling approximately 1.4 billion. The proceeds for these agreements are invested in fine, short-term market funds. We do not use commercial paper or any other short-term securities to finance our operations.

With that, I’ll turn the call over to Tim.

Timothy Boroughs

Thanks Phil.

Net Investment Income is up 3% from last year’s first quarter and approximately 4% lower than last quarter. Foreign exchange, lower yields on short-term securities and a tactical shift in our asset allocation all contributed to the quarter’s decline in investment income. Although our portfolio is conservative and has service well throughout the recent turmoil, we took additional measures to support our balance sheet strength. Once consequence of these measures has been a delivered increase and our cash in shorter term investments which has put downward pressure on our book yield. But not that many sectors of the credit markets has begun to stabilize, we are redeploying that cash into high grade, fixed income securities. Overtime, this is tactical shift should lead an improvement in both book yield and investment income. And with that, I turn the call back to Helen.

Helen M. Wilson

Thank you, Tim. At this point, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, Ms. Wilson. The question and answer question will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch stone telephone. If you’re using a speakerphone, make sure your mute function is turned off to allow your signal to reach our equipment. Once again, press star 1 on your touch stone telephone to ask a question.

Our first question comes from Jay Gelb with Barclays Capital.

Jay Gelb - Barclays Capital

Thanks, good morning. Evan, you pointed out some countervailing factors with regards to premium growth. Can you give us a sense when you think we could see some sequential improvement in that growth rate?

Evan G. Greenberg

Jay, I don’t have great crystal ball. I think the problem, you have 3 factors. Clearly, you have foreign exchange rates. Now, on a year on year comparison, if rates stay where the are and the dollar doesn’t weakened which you take your guess on that, then the impact of that really last through the 3rd quarter. 4th quarter, are you recall, there have been a huge flight quality in the dollar, safety in the dollar last year and so it soared in the 4th quarter. So that’s one thing.

Recession and the impact of recession, you tell me. My own judgment, the balance for this year will be negative growth and sometime in ’10 or late ’09 you’ll see a bottoming and a slow recovery. So, that has an impact. And then the balance has to do with pricing within the insurance markets.

Those are the things I think about and I can’t guess with any certainty when you’ll see that sequential change.

Jay Gelb - Barclays Capital

That’s fair. And just if could just give us a bit more color on the phase of the reserve releases. They slowed quite a bit on quarter basis. Is that something we should think as a runway going forward and maybe talk about they were slow in the first quarter than some of the previous quarters.

Evan G. Greenberg

Well, we don’t manage our reserves that way. We look at our reserves all the time for adequacy and we do different studies of different parts of our book at different times of the year. Most of our reserve studies are, the predominant number of them is done really during the second and the 3rd quarter, some done during the fourth and the first generally, our lighter quarter for those studies and whatever you see is just a consequence of those studies and if they show that they were either holding too little or that reserves have reached a point of where they appear redundant and were comfortable with the results of that they are saying then we take an action. The only thing you’re seeing is the result of own reserve management in that way.

Jay Gelb - Barclays Capital

Was there something in the back half of the year that causes the reserve’s releases to be more significant than have been previously?

Evan G. Greenberg

The back half of last year?

Jay Gelb - Barclays Capital

Correct.

Evan G. Greenberg

Well, I think you saw 2nd quarter, you saw 3rd quarter, I think that was the largest amounts and that was due to really all the casualty studies that we do in those quarters.

Jay Gelb - Barclays Capital

Okay, thank you.

Evan G. Greenberg

And more on the casualty study as the year goes along.

Operator

Our next question comes from Mark Lane with William Blair & Company.

Mark Lane with William Blair & Company

Good morning.

Evan G. Greenberg

Good morning, William Blair & Company. Good morning Mark.

Mark Lane with William Blair & Company

Only one &. 2 questions. First question is, Phil or Evan, regarding accident and your loss ratios. It seems like in all 3 major segments, your loss ratio excluding CAT and prior period development is actually down from the full year 2008. What are some of the factors?

Evan G. Greenberg

We’ll answer that question. First of all, it’s not all 3 it’s 2. It’s in North America and it’s in global rate but AOG is not. In North America, last year, we have a lot in the 1st quarter. We have a lot of energy and large property losses, just a series of them. Last year was unusually high in North America. Secondly, we do have a reserve adjustment in claim adjustment expense in the 1st quarter this year where we have just had just too much claim adjustment expense we felt and that was a benefiting current accident here. So that’s caused the swing in North America, one area to the next if you’re following me. In global rate, it’s simply a change and mix of business. Less casualty, more property this year and property-oriented and short-tail alliance and that runs a lower loss ratio as that mix came through on the year.

Mark Lane with William Blair & Company

I’m looking at the first quarter vs. all of 2008. Given that on the 4th quarter last year, you said that you adjusted loss ratios up for earlier in the year. So I’m not sure of the 1st quarter of last year is a good comparison.

Evan G. Greenberg

I think it is, I think that’s how you do it. Other than that, you’re running to all kinds of seasonality and mix and other issues. So, I don’t look at it the way you do that way. I don’t look at the sequential. When it comes to loss ratio, it’s much truer when you’re looking on a year on-year on comparison.

Mark Lane with William Blair & Company

Second question is regarding the life free insurance business. Can you talk about the factors that kept benefit the losses down relative to last year, the policy benefit levels under $100 million given the stock market was down over 10% in the first quarter?

Evan G. Greenberg

Two things happened. One, the interest rates were up and that have an important impact. As we look at the underlined policy holder funds, they had performed better than we have anticipated. In addition to that, we have a gain of about $25 million on our hedge programs. So, that all together contributed to the results.

Mark Lane with William Blair & Company

Thank you.

Evan G. Greenberg

You’re welcome.

Operator

Our next question is from Matthew Heimermann with J.P. Morgan.

Matthew Heimermann - J.P. Morgan

Hi, good morning everybody. First question, just with respect to the potential strategic shift and the investment portfolio as the year rolls on. What type of yield pick up are we talking about once that is fully implemented? Hey, I’m on?

Evan G. Greenberg

Yeah.

Matthew Heimermann - J.P. Morgan

You want to take a shot at that?

Evan G. Greenberg

Matt you know, the cost of holding cash is probably the highest it’s been in our lifetime right, zero. I mean if you go back just recently is the fall are short-termed investments were about 7%, 6%-7% of the portfolio, they were 10% March 31st. So even if you just take several points of that out on a $40 billion portfolio, you’re talking about $1 billion to $1.5 billion going from, essentially is zero into a blended rate of 5% where you have high grade corporate, 6.5% to 7% and agency mortgages are 4%. So we’re thinking on those terms.

Matthew Heimermann - J.P. Morgan

Okay, that’s helpful. Evan, can you just, I probably should back in to this based on the numbers you gave earlier but just with respect to the crop business, can you tackle… Obviously, commodity prices are down vs. last year, can you talk about what that book is gonna look like for you in terms of size?

Evan G. Greenberg

You asked the question I didn’t think you’re gonna ask.

Matthew Heimermann - J.P. Morgan

You can answer the one your probably gonna have (cross talk)

Evan G. Greenberg

In terms of size, Brian, you want to talk a stab with that?

Brian Dowd

Sure. I think you’re gonna see some differences. First of all, the first quarter crop this year will be larger, much larger than 2008 because actually winter (??) prices were higher in 2009 than they were in 2008. So the 1st quarter is actually larger, year over year comparison. The 2nd and 3rd quarters, you’ll probably see between a 10% and 15% decrease in premium because the commodity prices for both corn and soy bean, the base prices year over year will be down about 20%-25%. So, we expect to make a little bit of a share but the price will eliminate that. So I would guess you would see 2nd and 3rd premium down.

Matthew Heimermann - J.P. Morgan

Just in round numbers, am I right, that the crop in total last year, was that about 7% of the portfolio? The non-life portfolio?

Evan G. Greenberg

In percentage, we have to go work out premium. We could check it dollars roughly half… (cross talking). Are you talking gross or net?

Matthew Heimermann - J.P. Morgan

You can give me whatever you want. I can improvise.

Evan G. Greenberg

The gross is so much larger than net. Let us come back to you in a few (cross talk). Matt, here is the number.

Matthew Heimermann - J.P. Morgan

All right. Thanks Evan.

Operator

Our next question comes from Thomas Mitchell with Miller Tabak.

Evan G. Greenberg

Good morning, Tom.

Thomas Mitchell - Miller Tabak & Co., LLC

Hi. In this somewhat interesting and turbulent environment, I’m wondering what you’re thinking might be or your thinking process might be about the opportunities to grow your business by aggressively going after people and particularly specialty underwriting capabilities as supposed to possibly the opportunities that exist by larger books of business in the market place with there being so many distressed owners of property and casualty businesses needing to raise capital.

Evan G. Greenberg

We’ll, I’ll answer your question the way it was asked I think. Look, we’re constantly expanding our capabilities in all our businesses where we see opportunity in the specialty classes and even some of the more traditional classes. We brought on quite a number of people globally. North America is where we brought the greatest number but we have brought them globally and particularly in specialty casualty-related classes in particular. We haven’t slow down in investing in our company that way. We’re more discriminating because of the environment but we’ve continued to do that. So we’re not on the back foot in that regard.

As far as books of business, it’s one thing to think about buying a total company than buying a book of business. You know, while we’ll look at everything that comes across, we’re not raising people. We haven’t, at this point, notice any books of business that have been for sale that of interest to our company.

Thomas Mitchell - Miller Tabak & Co., LLC

Thank you.

Evan G. Greenberg

You’re welcome.

Operator

Our next call comes from Paul Newsome with Sandler O'Neal and Partners.

Evan G. Greenberg

Good morning, Paul.

Newsome - Sandler O'Neal and Partners

Good morning. Thanks for the call. I was wondering if you had any thoughts on the speculation that, perhaps some of the of the other Bermudians are increasingly hesitant, if not refusing to write in excess some of the more troubled companies particularly, the company, they may not be names. News called it (Baltimoric) for short.

Evan G. Greenberg

Look, we just make, we tried to be unemotional and just flat about this and I don’t think it’s a Bermudian. I think frankly, you want to put a wider lens on that. It’s all insurers and all major insurers were all taking rational approaches I think to protect their balance sheets and protect their exposure. We’re not gonna write any insurer where we worried operational risk or we worry about balance sheets risk. So therefore, it could prejudice and add exposure to our layer if we’re writing excess and hardly, we gonna end up writing somebody’s casualty or their property and finding it the same time. We were financial guarantee behind the primary layers. That will not happen. And we’re also not gonna write behind any insurer where we don’t have confidence in their ability to manage the business and handle the claims property because again, that could prejudice our later. To us, that’s just rational, fundamental, good risk management and so take it as that.

Paul Newsome - Sandler O’Neill

Has that been for major or minor factor in some of the lines that you have shrunk in of late?

Evan Greenberg

No. But it contributes. I mean just if you have, it is hard to parse the pieces but that is not a major factor. But it is a factor along with all of the other conservative behavior that we are trying to exhibit in terms of underwriting and risk management discipline.

You are constantly asked everyday to do things that you know will impact either the balance or the performance of your underwriting and that is just another one of those factors.

Paul Newsome - Sandler O’Neill

Thank you very much.

Evan Greenberg

You are welcome. Crop was 6% of our net earned premium for P&C and it was 11% of North America’s net earned premium, Matthew Heimermann.

Operator

Your next question comes from the line of Vinay Misquith - Credit Suisse.

Vinay Misquith - Credit Suisse

What do you think will be the impact of the swine flu outbreak on your business?

Evan Greenberg

I do not know. Does the world just have a couple of hundred cases or does it end up with millions of cases? You tell me the scenario and I am not trying to be cute about it but right now if it is what it is there is no impact whatsoever.

So, let us answer it slightly differently. Let us say that since SARS and the bird flu, we have in our enterprise risk management activities do mention and try to manage our exposures across all lines of business on a global basis and we continue to do that since those events and so we try to keep a sense in an extreme event, what are aggregate exposures could look like in absolute terms and relative to percentage of capital etc just you would manage in cat.

So, we imagine a repeat of 1918 where at that time 50 million people were killed. We also look at events like the 1950s that were very severe flu pandemics, but not as severe as 1918 and from everything we can tell on that we are comfortable with our exposures. Now, this is just evolving, just beginning and who knows where it is going. I can tell you we are also we do have a plan in place for disaster recovery and all of our facilities around the world if how we would manage in a business interruption setting where you did have a global pandemic of significant proportions.

Those are in place and people are on alert to implement those protocols. So that is about the best answer I can give you.

Vinay Misquith - Credit Suisse

Alright, so that is great, and I presume that would happen mostly in the life insurance segment, correct?

Evan Greenberg

Probably more in our accident and health, life would be small. I am comfortable with property. We know our exposures and frankly ACE has taken a very conservative position of how much we would offer in terms of business interruption from properties that are denied access, would have been very diligent about that and how much appetite we have for it.

We know when workers’ comp and we have foregone writings. Brian and his team have in areas where for instance hospital or they want you to give event aggregate covers. We will not do that. So, we have really been conservative to limit our exposures.

Vinay Misquith - Credit Suisse

That is great. The second question is on your purchase of reinsurance. We saw that came down this quarter. What is your expectation of that in the future?

Evan Greenberg

I think you got to be careful of that. That is jittery and it goes to mix of business, so depending on what kind of crop adjustment for instance you have in a period that can play with your net to gross. Different lines of business, if we have written more risk management or more loss portfolio transfers, that plays with your net to gross in a quarter.

You also have AOG, the mix between AOG and North America and there the net to gross is different in the total PNC impact shift. So, you got to be careful. There has not been any serious change in our reinsurance purchasing philosophy and we have and how to change really of any consequence in our net retentions.

Operator

Your next question comes from the line of Brian Meredith - UBS.

Brian Meredith - UBS

A couple of questions first is quick numbers question. What was the impact of the combined insurance on the overseas general premium growth this quarter? This will be the last quarter that we will have that long year-over-year comparison, right?

Evan Greenberg

Yes. We will get that for you. Go ahead.

Brian Meredith - UBS

Okay. The next question, given that you have moved a little bit more towards some of the property reinsurance lines. Evan, what do your PMLs look like going into wind season? You are typically providing in your 10-K, how much do you think there are going to be up going into this wind season?

Evan Greenberg

No. We have very clear guidelines about all that and we will not violate any. We watch it very closely, and the only reason you would see global reincrease its writings is because of what we allocated to them. They just had headroom, and at the same time there are some areas, if you heard me that we kind of shrunk in the quarter also because we think we will save some appetite for pricing firming.

Brian Meredith - UBS

Okay, great. And then just one quick for Tim. It looks like and maybe this was just market value, but it looked like you increased your allocation to high yields corporate in the quarter. Is that true? And if so, what is the strategy there?

Timothy Boroughs

We did not. It was probably market value change.

Brian Meredith - UBS

Just market value change up a couple of hundred million dollars?

Timothy Boroughs

Yes.

Operator

Your next question comes from the line of Ian Gutterman - Adage Capital.

Ian Gutterman - Adage Capital

I guess I had missed in the top of the call a little. First can you comment by the P&C net premium, you said that was up 7% constant currency retail up 5%, wholesale down 15%, so it was up more than 7% to get your overall so what did I miss?

Evan Greenberg

Huh? Say that again.

Ian Gutterman - Adage Capital

You said in your prepared comments you said the P&C net premium was up 7% constant currency with the retail up 5% and wholesale ex-crop down 15%. So, nothing was up more than 7% and the total was 7%. It just something was that so the P&C it gives it was more than 7%. I wonder what it was.

Evan Greenberg

Hey, Ian, you got in? We are up.

Ian Gutterman - Adage Capital

Yes. Well how much was crop up I guess what I am asking?

Evan Greenberg

Twenty two.

Ian Gutterman - Adage Capital

Okay. I got it. My other question, can you give us an update on the acquisition you did in the high net worth for [alliances]? I would think there would be a lot of opportunity there given I assume AIG is not a very friendly retail name that that might be a very easy pitch for an agent to put that business in play.

Evan Greenberg

Ian, I am going to let Brian comment a little bit, I just would say it is going along well, but you named them as long as you want and somebody wants to offer Costco prices for Tiffany product. That is can give you a little headwind in what you write.

Ian Gutterman - Adage Capital

Okay.

Evan Greenberg

Brian, do you want to add to that?

Brian Dowd

I would just add that certainly the acquisition is going along probably a little bit better than plan. But remember we started out with just 15 states. So, it is a state by state rollout where we have to file and get all the approvals on and we are up to about I think 18 states now that have our full products and all that.

So, it is a several year project to get throughout the whole country. So, it is on task but it is our plan, our modest and it is on target.

Ian Gutterman - Adage Capital

Fair enough. And…

Evan Greenberg

Ian, we will take the wraps off and highlight a little more and give an update in a couple of quarters as we have a little more maturity going on. It is picking up steam.

Ian Gutterman - Adage Capital

Okay. That is fair. I was just speculating that their brand might be damaged more in a retail line than a commercial line. That is what I was thinking about and the another one, can you give us an update on you combined side just the new sales initiatives that you have been working on and so forth just how is that going?

Evan Greenberg

Yes. I am going to ask that question. First of all, our initiatives are in two parts, revenue and expense. Expense efficiencies are on track and in fact ahead of what we envisioned. We are doing better that way. So, it is really gaining and showing in the bottom line there.

On the initiatives side for growth that is fundamentally on track and what I would say is the new sales model as we continue to roll it out the productivity among agents who have been in areas where we have rolled it out are continued to be very impressive, and that is very good.

What we do find now is when we roll it out there is a disruption a lull between the old going to the new, so you suffer a little and then you overcome that period and growth in that territory really fixed up.

We are suffering from the recession in growth. So, the new initiative is on track and I expect and just to finish I have got now from the recession, is on track and we expect it will be throughout the United States over the next two months and it will be matured and on a run rate that will show growth in the United States first time and quite sometime between the end of the year and early ’10 then we are beginning to roll that out now into the other major matured territories as the year goes along namely the UK and Australia later in the year.

So, that is good and we are encouraged by what we see. But again as I have cushioned all along that takes time and to really show in numbers.

On the other side, recession is impacting the combined. Sales overall are down and lapse rates have ticked up but not materially but modestly about a 0.5% and we are creating more conservation action in place and I think that is transient.

On the other side, the coin recruiting new and quality agents as we roll out the new plan, well that gives us a little wind on our back because there are a heck of a lot more available in the job markets today.

Ian Gutterman - Adage Capital

Okay. So, net-net is just the drag from the economy less than equal or greater the benefit from the new sales model in the short term at least.

Evan Greenberg

Net-net, the recession, because the new sales model has not been rolled out completely and that takes time to roll it out across the country. It is only impart of a country and you change an old culture like combined carefully, a cushion that from the beginning.

So, recession, no, we more than offset is negative that is not overcome by the rest. So, revenue is down from what we have projected. On the other hand, income is essentially on track and has been I had a plan since we bought it and that is because of the efficiency initiatives we putted it was.

Ian Gutterman - Adage Capital

Okay, great, and then just lastly, economic impact on your international A&H business, accordion business?

Evan Greenberg

Yes, good question. It is impacting it. Growth is slowed substantially. And remember something about both the international A&H and combines international. Both of them suffered from foreign exchange so nothing you can do about that.

So, I am going to give you some numbers on the international A&H in currency so you get a sense, and what is impacting it in a major way as a headline is travel as way down and certain countries where we do a lot of travel insurance. There is a negative impact because people are not travelling. They are not going to buy travel insurance. So, that is a temporary but it is a phenomenon, and secondly because and I have said in earlier quarter I said we do sell to a lot of bank customers and credit related customer basis and so with credit down around the world that impacts it.

But in a lot of places we are still growing pretty well. So, overall this would happen. Asia Pac grew around 7% in the quarter. Latin America grew about 10%. Europe still grew by about 4% and Japan was down about 8%.

I expect that to turn around. So, overall, A&H growth was about 3% in the quarter. I expect that international should pick up and be modestly better in the second quarter and we will continue as the year goes along to improve.

Operator

Your next question comes from the line of Matthew Heimermann - JPMorgan.

Matthew Heimermann - JPMorgan

One follow up which was just, it seemed like a lot of people were hesitant to move business following some of the financial distress last fall, kind of this mentality that people did not want to move to the next blowup. At least that was the sense I was getting from risk managers. Do you think that if we do get some stabilization and I know you talked about the fact that people have less financial flexibility and might be looking for deals, but do you expect to see shopping so to speak increase if we do get some stabilization in the macro?

Evan Greenberg

I think shopping has not decreased. Shopping is very intense. You have to distinguish though between window shopping and actually buying, and shopping is always a euphemism. I am looking for a cheaper price and so it is kind yelling boo to the current carrier and we know if the only thing you have to offer is price, there are some guys who were just you are rationally offering cheap prices to keep the business and risk managers are it depends on the risk manager and depends on the line of business.

Shorter tailed business, they are willing to take more risks than in longer tailed business because they say well if this is a counterparty credit problem or they really get distress, I will be in and out relatively quickly. So, that is kind of a calculus that is going on.

Matthew Heimermann - JPMorgan

Okay. With respect to actually moving carriers then ex the window shopping, would you expect that on the long tailed side that you might actually seeing more movement between carriers once…

Evan Greenberg

You heard the numbers I gave about certain lines of business where ACE’s growth rates are I think quite impressive and that is because of that is slight to capability or that is slight to safety and we are winning a lot more first primary or first excess and that is people move in their business.

Matthew Heimermann - JPMorgan

That is fair. Just was trying to get a feel for what inning we were in so…

Evan Greenberg

Well, I think the inning you have to distinguish a couple of things. First of all, do not just think that in the early inning it was simply about bankruptcy or no bankruptcy. Now, as you go along it is not simply just about bankruptcy it is about capability and an excellent to operating and underwriting environment or a damage insurance carrier you are doing business with and I am speaking about anyone, just in general in that class of carrier and I think that more and more is features in thinking of risk managers and that will be some of the more enduring part of the trend.

Matthew Heimermann - JPMorgan

Do you think that the end of this process will be kind of the late inning so to speak will be the capitulation of some of the distressed carriers themselves if their balance sheets are in fact smaller that at some point they actually have to kick business out?

Evan Greenberg

I think when ends up happening at some point underwriting you can only, if you have underwriting behavior that is going to generate underwriting losses they eventually appear. Now, how long the word eventually takes? I cannot predict.

We all know it can be shorter. It can be longer. But in this period given all the changes that have occurred since Sarbanes, you certainly cannot kid yourself the same way you could in the ‘90s and it will show faster and I think that is when companies are forced to take very severe action and rating agencies get involve etc, and whether it is a voluntary capitulation or it is a force one.

Eventually, it comes home and you either have to kick out business. You have to raise prices substantially to make up for your losses.

Operator

Your next question comes from the line of Everett Gong - Riversource Investments.

Everett Gong - Riversource Investments

Just quick question, on the insurance side, I think you have mentioned that you are seeing more attractive terms on the primary and lower layers versus excess. I am just curious if that is pretty much across all insurance lines or is it more some versus others?

Evan Greenberg

More versus others, more it was…

Everett Gong - Riversource Investments

In other words, have you seen that phenomena across all positive insurance lines or is it some lines more so than others?

Evan Greenberg

I know I think I heard you. More long tail lines than short tail lines and it is large commercial. We do not play in the small commercial business. So, if you are asking about areas where we do not participate, I cannot really comment on those. But in the businesses what we participated, it is more on the long tail line than in the short tail lines and it is more important to bigger the account.

Operator

Your next question comes from the line of Thomas Mitchell - Miller Tabak.

Thomas Mitchell - Miller Tabak

I know that this has been discussed at points in the past but now that it looks like the democrats are going to have a solid possibly filibuster-proof majority in the Senate as well as big majority in the house and since Mr. Obama was a sponsor when he was in the Senate of various concepts of fighting tax havens, changing the law on tax havens.

I am wondering what your perspective is on the outlook and whether or not Switzerland will or will not end up being designated as a tax haven if new legislation gets some traction.

Evan Greenberg

First of all, I think as you notice from the G-20, so you have to really distinguish I think between emotion and theater within congress and reality.

Number one, at the G-20, it was agreed that really the ones who will dub tax havens or not is the IMF and that the IMF will publish a list of that and they now have on their list, let us see, they have black, gray, and white.

Switzerland falls into the gray, pending implementation of a law that really surrounds and all of this is about tax evasion for tax evasion for individuals and greater disclosure so that countries one to the other can find their tax evaders.

And the noise is all around that and Switzerland is working to implement the law that will satisfy IMF and others requirements and so there you go.

On the other side, and that is where congress is aiming most of their effort to do with the notion of tax evasion and offshore centers. The notion about insurance, so let us get specific to insurance and by the way, will congress pass laws that step on current tax treaties and violate them. Well, unlikely that is not their track record and current legislation that has been kicking around related to insurance clearly violates treaties and there has been opinion out on that I do not believe that [59.19] and others will easily pass anything that will go in that direction.

Operator

You have a follow up question from the line of Brian Meredith - UBS.

Brian Meredith - UBS

Great, thanks. One last quick for you Evan. One of the big advantages that I think AIG had was amount of limits they can actually put out there per account, and I guess I know you have increased your limits and certain lines of business, which is your kind of view here going forward as far as increasing limits? Do you have the capacity increase limits and how do you kind of think about that?

Evan Greenberg

Well, I think about it at this way. If I like the pricing environment, we will have the appetite to take more and to put in place reinsurance treaties that would increase our capacity. But it given the current pricing environments and the terms we are happy with both our retentions and with the gross amounts that we offer.

Brian Meredith - UBS

So, increasing limits would necessarily take increase your ability to pick up market share right now?

Evan Greenberg

Modestly, and it would not increase, and if you just increase your gross limit what you are going to make a little bit over ride for the counterparty exposure? That does not make a lot of sense. Also remember there is a trend that is occurring in the marketplace and that is clients and brokers are reticent to put too much limit with any one carrier.

They see that lesson from you said AID from AIG and there was too much concentration and so they are going out of their way to go the other way. That is the trend in the market.

Helen Wilson

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

Operator

That does conclude our call. Thank you for your participation.

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Source: ACE Limited Q1 2009 Earnings Call Transcript
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