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ACE Limited (NYSE:ACE)

Q1 2014 Earnings Conference Call

April 30, 2014 8:30 am ET

Executives

Helen Wilson - SVP, Investor Relations

Evan G. Greenberg - Chairman and CEO, ACE Limited / ACE Group

Philip V. Bancroft - EVP and CFO, ACE Limited / ACE Group

John Keogh - Vice Chairman & COO, ACE Limited / ACE Group; Chairman, Insurance - Overseas General

John Lupica - Vice Chairman, ACE Limited / ACE Group; Chairman, Insurance - North America

Analysts

Jay Gelb - Barclays Capital

Michael Nannizzi - Goldman Sachs

Arash Soleimani - KBW

Vinay Misquith - Evercore Partners

Mark Dwelle - RBC Capital Markets

Tom Mitchell - Miller Tabak

Ian Gutterman - Balyasny Asset Management

Operator

Good day, and welcome to the ACE Limited First Quarter 2014 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) For opening remarks and introduction, I would like to turn the call over to Helen Wilson, Investor Relations. Please go ahead, ma'am.

Helen Wilson

Thank you, and welcome to the ACE Limited March 31, 2014 earnings conference call. Our report today will contain forward-looking statements. These include statements relating to Company and investment performance, pricing and insurance market conditions, all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filings as well as our earnings press release and financial supplements, which are available on our Web-site, for more information on factors that could affect these matters.

This call is being webcast live, and the webcast replay will be available for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

Now I'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.

Evan G. Greenberg

Good morning. As you saw from the numbers, ACE had a very good start to the year. Growth in operating income was driven by strong underwriting and investment income. We produced double-digit premium revenue growth and every division contributed to the good results. After-tax operating income for the quarter was $777 million, up 4% to $2.27 per share, generating an operating return on equity of 11.2%. Book value per share grew almost 2.5% and now stands at about $87.

This was another quarter with excellent underwriting results. We produced $390 million of P&C underwriting income, up 7%, with a calendar year combined ratio of 88.8. The growth in underwriting was driven wholly by current accident year underwriting income which was up 17% before tax, as a result of double-digit growth in earned premium and 0.5 point improvement in underwriting margin. Margin improvement in North America was a result of better pricing earning its way in and mix of business, and internationally as a result of better product and geographic mix.

Catastrophe losses were up modestly over prior year to $53 million pre-tax, while net prior period reserve development was essentially flat with first quarter last year, reflecting favorable development in our global P&C businesses, offset somewhat by negative development from crop insurance as we closed out claims from last season. The adjustment to crop reserves means that 13 crop year ultimate moved to a 97 combined, up from the projected 95 we reported in the fourth quarter.

We produced $553 million in investment income in the quarter, up over 4%. This is a very good result given the persistently low interest-rate environment in which we operate. So we'll have more to say about our investment portfolio and results.

As you saw earlier this week, we completed the acquisition of a majority stake in Siam Commercial Samaggi Insurance, a general insurer in Thailand. Samaggi is a good strategic fit and complementary to our business in Thailand and enhances our overall presence in Southeast Asia. We will launch a tender offer for the balance of Samaggi in the second quarter.

Total P&C net premiums in the quarter grew 12% as reported and nearly 14% on a constant dollar basis. Excluding agriculture which is, as I have stated before, is the way I prefer to view the results, we grew over 11.5% in constant dollars with strong contributions from North America, Asia and Latin America.

In North America, P&C net premiums written were up across the board with retail commercial up over 10%, wholesale commercial up about 11.5% and personal lines up 9%. Internationally, net premiums for ACE International were up 15% in constant dollars. Latin America led the way with the growth of 62%, benefiting from the contributions of our acquisitions in Mexico.

Excluding these, Latin America was up about 7.5%. Net premiums were up 13% in Asia-Pac and 5% in Japan. In Europe, premium growth was essentially flat with the continent up 1% and the U.K. down 2%. Premiums in our London market based – London wholesale market based E&S surplus lines business were up 2% in constant dollars, with strong gains in trade credit, property and [specialty] (ph) lines, offset by declines in aviation and marine.

In our global A&H business, net premiums were up 3.5% in constant dollars. Our international business had growth of 7% led by Asia-Pacific up 17%, Japan up 11% and Latin America up 9%. North America A&H also had a good growth quarter with net premiums up 15%.

Combined insurance net premiums were down about 4% in the quarter. We had an accounting adjustment that benefited combined premiums last year in the first quarter, and adjusting for that, combined premiums declined 2%. On the other hand, new sales at combined were up 16%, a positive trend that continues. And so, for the balance of the year, we project net premiums at combined to grow.

Premiums for our global personal lines and small business division were up 45% in constant dollars or 13% excluding the contribution of ABA Seguros. For our Global Re business, premiums for the quarter were up 10.5% in constant dollars, more than naturally we expected given current reinsurance market conditions. We benefited in the quarter from a few new structured reinsurance transactions written in the U.S. operation. Finally, international life insurance net premiums written were up almost 14% in Asia and Latin America.

I want to say a few words about the current market environment. In the U.S., the insurance market, as distinguished from reinsurance, is stable though the velocity of price increases is slowing. Rates continue to rise in casualty related lines while they are flat and declining in short-tail related. Our E&S and middle-market specialty businesses are continuing to secure the highest level of rate increases.

For our larger account retail business, pricing for casualty related primary or [indiscernible] excess business remains stable, and we continue to achieve positive rate. This is the business that requires more than capital and an underwriter to compete, and it is a significant amount of our business. As a general statement, competition is greatest when it's simply excess layer capacity placement.

The reinsurance end of our business, which is an important but small percentage of our Company, about 3% or 4%, is where the market is most competitive from a pricing point of view. With all that said, let me be a little more specific.

For commercial P&C in North America, beginning first with our larger account retail business ex-USA, professional lines rates were up 4%, larger account risk management business rates were up 3.6%, general casualty pricing was up 1.7%, excess casualty rates were up just over 3%, while property rates were down 2.5%. Rates USA new business writings were flat year on year and our new retention rate as measured by premium was 98% in the quarter with account retention at 85%, both quite healthy.

For our US E&S and wholesale business, professional lines rates were up 4.4%, casualty was up over 5% and inland marine was up almost 7%. Property rates were down about 3%. New business overall on the strength of very strong submission activity was up 11.5% in our E&S business.

The commercial P&C rate environment internationally remains reasonably stable, with retail rates essentially flat overall, with variability of pricing both up and down depending on territory and line of business. By territory, Latin America rates were up 1%, Asia-Pac was down 2% and the U.K. and continent rates were flat. My colleagues and I can provide further color on market conditions and pricing trends later in the call.

As the year progresses, we imagine the market to become more competitive depending on the line of business and territory. We are an underwriting organization with good internal discipline that's been built for long-term sustainable growth. Due to our excellent diversification by product, geography and distribution, there are many territories and lines of business where we operate today that will experience good premium revenue growth. Overall, I believe we will continue to outperform.

In summary, we are off to a good start to the year. Our underwriting and investment income results were excellent and from what we can see, I expect a good year. With all that, I'll turn the call over to Phil.

Philip V. Bancroft

Thank you, Evan. We had an excellent quarter. Tangible book value per share grew 3% for the quarter and operating cash flow was a very strong $1.25 billion. Cash in invested assets grew $1.4 billion to $63 billion. Investment income of $553 million was quite strong. We expect our strong cash flow to offset the impact of the lower reinvestment rate of 2.8% versus our current book yield of 3.7%.

There are a number of factors that impact the variability in investment income including the level of interest rates, prepayment speeds on our mortgages, call activity on our corporate bond portfolio, private equity distributions and foreign exchange. Therefore we currently expect our quarterly investment income run rate to be $540 million.

Net realized and unrealized gains for the quarter were $462 million pre-tax. This includes $56 million of gains from investment partnerships that we account for under the equity method. It is worth noting that some of our peers include these types of gains in investment income and operating EPS and ROE. We do not.

Our net loss reserves were down $105 million in the quarter, primarily due to payments related to last year's crop losses. This is a seasonal impact. Excluding those payments, net loss reserves would have increased $179 million. Our paid-to-incurred ratio was 106% for the quarter. When we normalize the ratio for last year's crop loss payments, the ratio is 93%.

Cat losses were $43 million after-tax from worldwide weather events and we had positive prior period development of $63 million after-tax. $92 million of after-tax favorable P&C prior period development excluding crop was offset by unfavorable crop prior period development of $29 million. The P&C prior period development was primarily from long-tail lines and related principally to accident years 2008 and prior.

The expense ratio in our North American P&C segment was 21.5% compared with 20.1% last year. As we reported, last year included a favorable $29 million legal settlement that benefited the prior year's ratio by 2.2 points. Adjusting for this, North American P&C was actually down 0.8.

Net premiums in our North American Agriculture segment were up as a result of the crop insurance premium sharing formulas with the U.S. government relating to loss development from 2013. In essence, the formulas require insurers to retain more premium as crop losses increase. In addition, changes to our third-party proportional reinsurance in both years also contributed to the growth. Excluding these items, net premiums increased 4 million or 3.2%.

Global A&H earnings for the quarter were ahead of plan but down about 6% on a constant dollar basis from prior year, primarily due to positive prior-year reserve development reported in the first quarter last year that didn't repeat. Excluding year-on-year prior period development and other one-time items, A&H operating income grew in line with premiums.

Total capital returned to shareholders during the quarter was $550 million including $330 million of share repurchases and $220 million in dividends. Since we made the announcement of our repurchase plan in last year's fourth quarter, we have repurchased a total of $436 million through April 28 of a program to repurchase up to $1.5 billion. Earlier this month, A.M. Best upgraded the financial strength rating to A++ (Superior) for ACE's core North American property and casualty insurance and reinsurance companies.

I'll turn the call back to Helen.

Helen Wilson

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

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Jay Gelb with Barclays Capital.

Jay Gelb - Barclays Capital

What drove the crop reserve strengthening in first quarter, that would be helpful, and then what your outlook is for 2014 in that business?

Evan G. Greenberg

Jay, what drove it, we had late traveling, late reporting than normal typical years, claim reporting from farmers. Typically in November, by November or early December you have almost all the claims. This year they came in a little later. We had more claims reported later in December, into late December. And then adjusting them takes a little longer. And the reason they were late and why adjusting takes a little longer, this year crop losses were a matter of not simply yields but commodity price changes, the price particularly of corn. And so, in adjusting for that, you got to apply that change to deductibles, once you know yields, et cetera. And so, the whole development, ultimate development pattern and settlement for claims moved a little later, by let's call it four to six weeks or even longer than that.

We've had another year, when we look back in the records, there was another year like this where it was slower, and again it was when there was a commodity price change causing losses and how the farmers then reported and how long it takes for the guys in the field to ultimately adjust with them. And so, as we have another year like this where there is it is commodity price related, we will be better informed about that as we think about our ultimate development.

But that's about as clear an answer as I can give about it, and when we look at this year, we see an average year. We're booked to an average, what is it Phil, [88.9] (ph)?

Philip V. Bancroft

[88.9] (ph).

Evan G. Greenberg

Is the current accident year. Some of you have – what we can see in your reports have calculated kind of a 92 too. You want to look at how we did the math and we don't think the math is done right. But anyway, it's booked at [88.9] (ph) which reflects that we [indiscernible].

Jay Gelb - Barclays Capital

That's helpful. Thank you. And then just more broadly, Evan, I'm not sure if you're at rims now in Denver or if you – I'm sure you have executives there, what's the tone coming out of the conference this week?

Evan G. Greenberg

I'm in New York enjoying this lovely weather. The tone coming out of there, I'll ask John Keogh and then John Lupica to make a brief comment on it. From what I can tell, the tone is stability.

John Keogh

This is John Keogh. John Lupica and I just got back last evening after a couple of days out with a whole bunch of clients and brokers and I think that's pretty accurate in terms of general tone. I think the expectation for the rest of the year from the clients or brokers we talk to is more the same of what you saw first quarter, generally stable pricing with moderate to slight rate increases across casualty lines and property stable to slightly down.

John Lupica

I would absolutely agree to that. No real dislocation in the market, very stable, very consistent with the expectation that casualty will be balanced, professional lines will be down, certainly in the primary layers, capacity layers may get a little more competitive and the expectation that property [indiscernible] pricing will get challenged.

Jay Gelb - Barclays Capital

That's helpful. Thank you.

Operator

We'll take our next question from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs

So just one question I had, North America P&C, it looks like the loss ratio improved quite a bit year-over-year. Just trying to get an understanding of what drove that. Is it mix? I mean it seems like pricing has been moderating. So is it partially lower loss cost or were there some one-timers in there that sort of clouded that comparison?

Evan G. Greenberg

It is not one-timers, it's a combination of mix and price, and you notice [indiscernible] rates are down in some lines, there are also lines that will have a higher expense ratio to them. So the overall combined ratio, while it's down on a current accident year more modestly than you're seeing it on simply a loss ratio basis. So it's mix and price.

Michael Nannizzi - Goldman Sachs

Mix and price, okay. And then just on the topic I guess, we've had a few folks report already this quarter, I've been seeing the adjustments in the first quarter from others, I mean just trying to understand, is it maybe the geographic profile of your book or some other complexity that has caused this sort of reporting to impact your book specifically?

Evan G. Greenberg

No, we're actually [indiscernible] are the two that are really spread geographically on a national basis, had very good diversification by territory and crop that way. No, there are certain – particularly Iowa corn, very, very stressed this year. On the other hand you take a place like Minnesota or Dakota were excellent yields. So it really varied by state. Iowa was tough, we write a lot of business in Iowa, but the late recording by farmers, their first priority is to get their crop out of the ground, I mean you got to know that, and it isn't like submitting the claim to the insurance companies.

So they're going to get their crop out of the ground, they're going to get it to a place where you're then able to measure yield as a derivative of them pulling their crops, and then the ability to – so they report a little late sometimes, and then the ability to apply the commodity price change in addition to yield and then figure out your profit and loss sharing with the government by state, because you got all crops in there, takes time.

And we just noticed, when there's a price difference driving loss, the commodity price difference, it tends to create a greater lag in the ultimate development. That's all, nothing any more complex than that.

Michael Nannizzi - Goldman Sachs

I see and I guess from an anticipation standpoint, I guess you can't know what that is before you get those farmers' reports or you don't really have an indication of what those potential [indiscernible] might be?

Evan G. Greenberg

We can take a best guess. Look, what are we talking about? We're talking about the difference between a 95 and 97. So of course you make your best guess at it. We brought it up to a combined that we thought reflected the ultimate of [90] (ph) or the 95, so you try to do that but you don't have it all. And so, you can have one or two points or a couple of points of variability around that. You're looking at a cat and so in this case it was $30 million.

Michael Nannizzi - Goldman Sachs

Got it, okay. Thank you.

Operator

We'll go ahead to our next question with Arash Soleimani with KBW.

Arash Soleimani - KBW

Just had a couple of quick ones. What are your thoughts on expectations for the June 1 quarter renewal?

Evan G. Greenberg

In terms of?

Arash Soleimani - KBW

Just pricing.

Evan G. Greenberg

Pricing will, I'm not going to prognosticate the pricing except I know it's not going up.

Arash Soleimani - KBW

And I guess one question I'm trying to get at, you see the pricing obviously declining, there are some expectations for double-digit. I guess one question is, how much further do you think it could go down and still all be somewhat attractive to the traditional players?

Evan G. Greenberg

I'm not going to speak for the asset type of traditional players except my own company and there I'm not going to make a general statement. It really depends on the individual risk. It depends on what layers you're talking about. Are you talking about the dollar swapping layers, are you talking about more middle range where the return periods are shorter, or are you really talking the tail where there is a minimum price you want to be able to take the risk and rates online are generally low anyways to begin with. So it really varies, but I'm not going to – past that, I'm not going to go there.

Arash Soleimani - KBW

Okay, that's fair. And then I know you don't give specific guidance but I just wanted to get some thoughts on just continuing appetite for buybacks versus M&A.

Evan G. Greenberg

Our appetite has not changed whatsoever.

Arash Soleimani - KBW

Okay, fair enough. Thanks so much.

Operator

We'll go ahead to our next question with Vinay Misquith.

Vinay Misquith - Evercore Partners

Growth in the North American segment was really strong. If you could give us some color into what the source of that growth is and how is the competitive landscape and how are you winning the business?

Evan G. Greenberg

I'm going to just start a little bit and then ask John Lupica to talk about it. The growth was very broad-based. Our retail commercial P&C business at the large account end did very well. Our risk management business had an excellent quarter as an example. Our professional lines book had a good quarter. Our E&S business in the Westchester had very strong growth and it was off of the back of both casualty, inland marine and professional lines. Professional lines in particular had a very good quarter in the E&S space. Our small commercial and our personal lines business, both had decent growth in the quarter. Our small commercial business was up double-digit and our personal lines business was up high single digits. So we were very pleased. It was broad-based. John?

John Lupica

And I'll just add onto that, what I've seen, the growth really has come across the board. It was broad-based and it's from years of work and strategy in that and a healthy U.S. market, I'll remind you. Our portfolio management has given us some insight and clarity into our books, a lot of the focus on our high-margin products and really address the low-margin products through underwriting actions like the pricing terms or condition.

As Evan noted, we have made some key investments in businesses like our Private Risk Services, small commercial, our E&S new product, our primary casualty, our global network, all of those businesses are driving our growth and moving the needle for us. And more importantly, we are delivering our Company and are really focused in coordinated way.

So as Evan noted, we've seen U.S. retail up 10%, our E&S business up 13%, our small commercial business we've had a lot of investment over the years of 13%, even Bermuda, our wholesale business on the island is growing nicely. And again it was a result of another quarter of rate increases, 1.8% exposures are up almost 2 points, great account and premium retentions as Evan had noted, and our ability to change renewal positions here and there. So all in all, it was a good quarter for North America. So I hope that helps.

Vinay Misquith - Evercore Partners

Yes, it's helpful. Thank you. Just sort of a follow-up to that. The detentions, that's the amount you keep net, stayed flat year-over-year. That was increasing last year. So curious as to why that stayed flat this year because I would have thought reinsurance pricing has gone down, you might keep more net. So if you could help me about that, that would be great.

Evan G. Greenberg

Vinay, if reinsurance pricing went down, what would I hope [more than that] (ph).

Vinay Misquith - Evercore Partners

So the business mix change [indiscernible]?

Evan G. Greenberg

No, look, the retention when you look at them in aggregate is an amalgamation of each individual line of business decision and the mix between lines, but the point is our reinsurance buying strategy is quite consistent, quite stable and our net retention reflects that stability. We're not fundamentally opportunistic reinsurance buyers. We measure first and foremost, we underwrite to the gross. So we look to make money for our net [indiscernible] reinsurers, and number two, we buy core volatility protection and to protect a limit above our appetite for net retention based on our own risk management. So that's the fundamental first reason that we buy.

Vinay Misquith - Evercore Partners

That's helpful. And just one last thing for Phil, just the numbers question, what's the normalized tax rate for the rest of the year, Phil?

Philip V. Bancroft

So this quarter was a little bit lower than we would have expected because of where our prior period – primarily because our prior period development and where it occurred. If you look at the prior period development, there was very little tax on that and that tends to drive the tax weight down overall. I believe the range that we should be looking at is 13% to 15%.

Operator

(Operator Instructions) We'll take our next question from Mark Dwelle with RBC Capital Markets.

Mark Dwelle - RBC Capital Markets

A small question. In the Life segment, policy acquisition cost ratio was up fairly substantially. I know that's not a real significant item usually but I was wondering if there was any changes in product or mix there that might allow for it. And then while we're on the topic, maybe just a short strategic update on the Life segment. We haven't heard much about it lately, not a lot of growth, nor acquisitions in a while.

Philip V. Bancroft

So on the numbers question, you'll notice that admin expenses went down and acquisition expenses went up, and it's because we made a redress. There were some marketing related admin costs that we felt were more appropriately classified in acquisition costs. So we just made the move. Nothing substantial, no bottom-line effect, just we think a better classification.

Evan G. Greenberg

On the strategic update, our Life business is predominantly, it's made up of – the Life segment as you know is made up of three parts. One is Life Re which we have not been taking new business since '07 and that has been running off. That's fundamentally variable. Annuity business, you have international life and you have combined North America business which is on a life company paper.

So the international life which is I believe what you're referring to, that business is doing quite well. It is predominantly Asia based. So we have a book in Latin America which is more term insurance related. It's not traditional whole life and savings and protection related product. So that is Asia, and there we've got over 35,000 agents now and our agency force is growing at a rate of around 10% to between 10% and 15% a year right now at the moment.

The business is in Vietnam, that is doing very well. In Thailand it is doing well. Indonesia had an excellent quarter and an excellent last year. Hong Kong, since we made that acquisition, it is generating very good growth, best growth it's seen in years and good margins and good income. And Korea which we also purchased which is getting on track, Korea is a more difficult territory, we've been working hard at it and we're seeing good signs of growth and we are getting better our arms around expense control and growing the agency for us and margins we can see beginning to improve. Overall Asia is what's powered that growth. I'm very pleased with it.

The operation in China, we got out of the bank related business which took down revenues but the right thing to do, it really didn't generate any money and we are focused on building agency there and that is on track and doing well. And so we've said that our life insurance business, which doesn't generate a loss now, is generating a very modest profit, breakeven to modest profit, because we are growing it organically, is expected to over the next couple of years of strong GAAP earnings emerge and we see that on track.

Mark Dwelle - RBC Capital Markets

Very good, thanks for the update.

Operator

We'll take our next question from Thomas Mitchell with Miller Tabak.

Tom Mitchell - Miller Tabak

I was wondering the very large placement I guess is cat bond by the reinsurer for the foreign catastrophe insurance, is this – do you think that this sort of thing is more likely to stay in the United States because of the investor pool here or are we likely to see that money going to other large jurisdictions?

Evan G. Greenberg

Are you saying the investor pool for the cat bond market in Florida?

Tom Mitchell - Miller Tabak

Not just in Florida but we assume U.S. investors are more comfortable than foreign investors, I might be wrong with that.

Evan G. Greenberg

I don't think I'm really in a position to answer that question definitively, but I think long-term investors with large pools of capital that have a certain liquidity profile, I think on a global basis are going to be more attracted to this class on the other side of the coin as part of their portfolio diversification, even a small percentage. However, I'll note that the class itself overall is a small investment class, it's not an attack on market relative to any other investment classes. It's a fraction, it's tiny.

Operator

We'll take our next question from Ian Gutterman with Balyasny.

Ian Gutterman - Balyasny Asset Management

I found your commentary on your annual letter very interesting. I was hoping you could elaborate on a couple of points on your view of the markets. The first you talked about commercial P&C, we are in the beginning of a transition market to which means return of a more competitive cycle. I was hoping you could elaborate on that. That read to me as you think would getting down reasonably close to the typical cycle where you are still experiencing. Is that what you're trying to say, and if so, how – or do you think there is a – what do you think the potential is that some others have [indiscernible] that we sort of learn from our mistakes and we have better technology and the cycle is 'dead'?

Evan G. Greenberg

I think what I said there, I take a more nuanced approach to that. I don't think it's black or white. I don't think there's no such thing as cycle at all, and I don't think that we are going to have the kind of swings we saw in the past, in the 90s. Let's say I don't think we're going to see those kind of peaks and troughs. So I think it will be more moderated is my bet. The exact size and shape, I have no idea. No one knows with any real certainty.

And by the way I think it's going to vary, it varies by type of business and class of business. Some businesses, you have a lot of homogeneity, you have millions of individual units of exposure that are more homogeneous, it's more frequency not severity related, lends itself to lots of rich data and predictions, and by the way I think you'll have less cyclical movement in those businesses.

You have so much of our business where it's very difficult to predict trends, it's very difficult to – you don't have the same homogeneity, very difficult to just predict exposure and exact pricing differential and you've got some guys with a lot of data and you've got lots of guys who have no data who are competing. And then you have capital movements in and out of the business that fuel and drive the appetite. On the other side you could say, you know what, there's greater use of actuary, [indiscernible] et cetera and SEC to help ameliorate some of the bad behavior that can occur.

So when I add it all together, I said exactly what I mean and I'm reinforcing it this quarter saying it, and that is, I see the market becoming a bit more competitive. I think that trend will continue. We're seeing the rate, the pace of rate increases moderate in casualty, we're seeing property decrease. I think that trend will continue. I think you have human nature seeing companies who have been outperforming in certain classes and areas of lines of business and guys are scratching for growth, and they're saying, I want a piece of that too, and it becomes a self fulfilling prophecy.

So I don't think cycles have come and gone, and by the way if you manage it right, I think there's where some of your greatest wealth creation ultimately takes place. You're a disciplined insightful underwriter and you're willing to trade share, then ultimately over a period of time you will generate superior shareholder returns and gross input value. Past that, I can't prognosticate the exact shape and size.

Ian Gutterman - Balyasny Asset Management

That's a very thorough answer. Then my only thought on that piece would be, does that suggest, the human nature part suggests that it's going to be hard to sort of execute this what was the [indiscernible] the soft landing where we manage the stock price decreases just as we hit loss trend or do we likely – and leave some more competitive lines bottom out with pricing going below loss trend over the next year or two?

Evan G. Greenberg

Ian, I think the beauty of our business, which is really then becomes your job to separate the cats and dogs, and that is, forget the mean, it's the distribution around the mean. Who knows when to walk away and when to grow based on insight into price, into trend exceeding pricing, and even then you can still play it if you have good margin, but knows when the margin has reached a point that the risk-reward is no longer worth it. Who understands that and has the ability to execute on it, that's the question, not the mean, and that becomes your job.

Ian Gutterman - Balyasny Asset Management

Agreed. And on to reinsurance comments you made…

Evan G. Greenberg

I think our job is hard too.

Ian Gutterman - Balyasny Asset Management

The reinsurance comments you made about how the business model needs to change for cat is, if I can paraphrase, subsidize other lines, I guess, A, how is ACE responding to that, and B, sort of how do you see that actually playing out, because it would seem on one hand that makes logical sense but on the other hand if you're pressured in cat maybe say, not saying ACE but other less rational competitors might say, well, I'm not making money at cat line, let me go try to steal some growth in other areas and maybe it actually gets worse in the non-cat areas?

Evan G. Greenberg

I think that probably – I don't know with any certainty but I believe what I wrote is exactly that, that I believe that it will be a painful, it's a painful adjustment in between, and that ultimately if cat isn't going to subsidize the balance then you're going to have to get the pricing right. But in between that, you're going to have a – you will have what we're already beginning to see, [a messy] (ph) year, more competitive market as people are driving for share and for growth and they are doing it by sacrificing margins. And how are we going to play it? Very simple. We will shrink the business if it cannot earn an underwriting profit, period.

Ian Gutterman - Balyasny Asset Management

Got it. Thank you. Great answers.

Operator

That concludes today's question-and-answer session. At this time, I would like to turn the conference back to Helen for any additional or closing remarks.

Helen Wilson

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

Operator

That concludes today's conference. We thank you for your participation.

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