ACE's (ACE) CEO Evan Greenberg on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: ACE Limited (ACE)

ACE Limited (NYSE:ACE)

Q2 2014 Results Earnings Conference Call

July 23, 2014 08:30 AM ET

Executives

Helen Wilson - Investor Relations

Evan Greenberg - Chairman and CEO

Phil Bancroft - Chief Financial Officer

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

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

Analysts

Jay Gelb - Barclays

Michael Nannizzi - Goldman Sachs

Kai Pan - Morgan Stanley

Cliff Gallant - Nomura

Brian Meredith - UBS

Vinay Misquith - Evercore

Paul Newsome - Sandler O'Neill

Jay Cohen - Bank of America Merrill Lynch

Meyer Shields - Keefe, Bruyette, & Woods

Al Copersino - Columbia Management

Thomas Mitchell - Miller Tabak

Operator

Good day, and welcome to the ACE Limited Second Quarter 2014 Earnings Conference Call. Today's call is being recorded. (Operator Instructions). For opening remarks and 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 June 30, 2014 earnings conference call. Our report today will contain forward-looking statements, including statements relating to company's performance, pricing and insurance market conditions and acquisitions including our tested acquisition in Brazil all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filings as well as our earnings press release and financial supplements, which are available on our website, for more information on factors that could affect these matters.

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

Now I'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 Greenberg

Good morning. ACE had an excellent second quarter. Our growth in earnings was again driven by both strong underwriting and investment income, while achieving good premium revenue growth globally. After tax operating income for the quarter was $825 million or $2.42 per share up 5.7% versus last year's second quarter which itself was an outstanding quarter. Our annualized operating return on equity was nearly 12% for the quarter while book value per share grew almost 4% and now stands at $90.19.

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

All divisions produced outstanding calendar year in current accident year combined ratios in the quarter with our overseas general business in particular producing a standout improvement in results. Growth in earnings was also driven by relatively strong net investment income of $556 million up over 4% and a good result given where interest rates are.

Our strong cash flow has supported our investment income performance. So we'll have more to say about our investment portfolio, cap losses and reserve development. It was a busy quarter in terms of advancing our company strategically. As you saw earlier this month we announced our intention to acquire the large corporate P&C business of Itaú Unibanco in Brazil for approximately 685 million.

The addition of Itaú's business was significantly strengthened our franchise in Brazil where ACE already has a meaningful presence with 19 offices of P&C business that serves large and mid sized corporate clients and a significant A&H business. Itaú’s corporate business is a real franchise in the large corporate space. It has broad national reach and extensive distribution relationships with more than 600 brokers. They have an impressive management and underwriting team and a disciplined technically oriented underwriting culture similar to ours. The combination will make us the largest commercial P&C insurer in Brazil. It brings a lot of talent that when combined with ours makes us that much stronger. One plus one here equals much more than two. We will improve their competitive profile and capability by providing more products for their clients and brokers and international capabilities to serve their corporate clients outside Brazil where many have growing exposures.

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

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

As we said in our announcement, we are paying four times published book value and expect the transaction to be accretive to our earnings immediately. The price is equal the 13 times Itaú’s 015 earnings for a business with the average growth rate has been 22% over the past three years in a country where the insurance industry has been growing 10% and is projected to continue expanding.

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

Finally, there are potential capital and reinsurance efficiencies that maybe realized. We look to close the transaction subject to regulatory approval early next year. In the quarter, we also completed the tender offer for the balance of Samaggi Insurance in Thailand and now own over 93% of the general insurer, which will likely allow us to delist and integrate the company with our existing operations sooner than we originally projected.

As I said before, ACE Samaggi is a great fit to our existing business in Thailand and we see even more potential there than when we first announced the acquisition. The addition of Samaggi increases our presence and our ability to grow throughout the country given its branch office network and Siam Commercial Bank’s retail branch system. The combined operation will turbo charge, our ability to grow each of our focus areas of business: SME; Commercial P&C; A&H and personal lines. ACE is now the largest foreign-owned P&C insurer in Thailand.

Finally in the quarter as I'm sure you saw, S&P upgraded the financial strength ratings of our core operating insurance companies to AA.

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

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

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

Internationally, net premiums for ACE International were up 11% in constant dollars. Asia and Latin America led the way with growth of 19% and 18% respectively, and Europe growth on the continent was 6%, while the UK was 1%. Premiums in our London market based DNS business were down 1%. In Global A&H business, net premiums were up 5.5% in constant dollars we had international growth of 11% led by Asia Pac which was up 22% and Latin America where we grew 17%.

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

For our Global Re business, premiums for the quarter declined 5, inline with market conditions as we demonstrated good underwriting discipline. Reinsurance market is extremely competitive with prices softening and terms and conditions broadening, which on the flip side benefits a major reinsurance buyer such as ACE.

Finally, our international life insurance business which is focused overwhelmingly in Asia and Latin America had a very good quarter with net premiums written up almost 20% on a constant dollar basis.

As you can see, growth was well distributed across the company by territory, product line and customer segment. This is a reflection of the already broad continued expansion and deepening of our business in key growth markets of the world from Asia and Latin America to right here in the United States.

I want to provide just a few quick examples of this growth, as a groups of what I mean by diversity of product, geography, customer and distribution. In Mexico, as a top four insurer our operations have broad capabilities, we underwrite commercial P&C for companies of all sizes, we are the number two surety writer and one of the largest auto writers in the auto writers in the country and we have a significant accident and health insurance business.

Net written premiums were up 10% for the year. Today ACE in Mexico has 76 offices and over 3,500 agents distributing our products. In Malaysia our agency based ACE Jerneh operation grew 16% in the quarter and is up 20% for the year with growth coming from auto, residential and SME small commercial business. We now have 24 branches and nearly 2,200 agents in Malaysia.

In Korea, net premiums in our direct marketing driven A&H business are up 43% year-to-date. Our operations market directly to consumers over television and throughout (inaudible) marketing the credit and affinity based customers. We have over 1,800 telemarketers operating from seven call centers in the country.

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

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

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

For all business in the U.S. casualty related pricing was up 2.5% again essentially as good as we’ve seen year-to-date. And property related pricing was down about 6.5%. As with the first quarter our E&S and middle market specialty businesses continued to secure the highest level of casualty related rate increases. For our larger account retail business pricing for casualty related primary or (inaudible) excess business remains stable and we continue to achieve positive rate in aggregate about as good as E&S. This is the business that requires more than capital and an underwriter to compete and it is a significant amount of our business. As a general statement, competition is greatest when it simply access layer capacity placements.

My colleagues and I can provide further on market conditions and pricing trends when we get to the Q&A. As the year progresses we expect the commercial P&C market to continue becoming more competitive, depending on the line of business and territory. However, as the commentary I gave you illustrates, we’re seeing good growth and continued expansion of our business in the majority of markets in which we operate, both developed and developing. We are a large global company with a significant presence and capability to take advantage of growth opportunities that exist in so many parts of the world. To do this, requires a deep and broad presence in and product distribution and underwriting know how something we have and continued to build. We also continue to make investments including acquisition that plants the seeds for long-term sustainable growth. As a result I am very confident in our ability to outperform over any reasonable period of time.

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

Phil Bancroft

Thank you, Evan. Tangible book value per share grew almost 4% and is up 7% for the year. Cash and invested assets grew 1.3 billion to 64.2 billion and our shareholders equity top 30 billion. Cash flow was also strong at 846 million.

Investment income of 556 million was up over 4% in the quarter. Our strong cash flow has offset the impact of lower reinvestment rates and benefited our investment income. We expect this trend to generally continue.

For the past 12 months alone, our operating cash flow was 4.3 billion. Our current new money rate is 2.6% versus our current book yield of 3.7%. There are number of factors that impact the variability in investment income including the level of interest rates, pre-payment fees on mortgages, call activity on our corporate bond portfolio, private equity distributions and foreign exchange. Therefore, we currently expect our quarterly investment income run rate to be 550 million.

Net realized and unrealized gains for the quarter were 523 million pre-tax principally from our fixed income portfolio due to the decline in interest rates during the quarter. We remain in an unrealized gain position of over 2 billion after-tax.

Our net loss reserves were up 300 million in the quarter and paid to incurred ratio was 90%. Pre-tax catastrophe losses of 80 million were essentially flat with last year and came from 16 different worldwide weather events of various sizes, 60% were U.S. related and 40% were from outside the U.S.. We had pre-tax positive prior period development of $126 million, almost also flat with last year but about one-third coming from long-tail lines and two-thirds from short-tail lines.

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

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

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

The acquisition ratio in our agriculture segment is up 1.4 points due principally to lower ceding commissions from one of our quota share reinsurance contracts that we did not renew this year.

Total capital returned to shareholders during the quarter was $416 million including $240 million of share repurchases and $220 million in dividends. Since we made the announcement of our repurchase plan in last year’s fourth quarter, we have repurchased a total of $700 million through July 21st. We are on track with our program to repurchase up to $1.5 billion.

I’ll turn the call back to Helen.

Helen Wilson

Thank you. And at this point, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question from Jay Gelb with Barclays.

Jay Gelb - Barclays

Thanks very much and good morning. Phil, just on the share buyback, it seems like you emphasized the up to $1.5 billion share buyback. So should we be tinseling in the $1.5 billion as a buyback this year or is that potentially driven more in a direction of the bolton acquisition?

Phil Bancroft

I would just say that we’ve said up to and that’s what we meant. And we'll see how it goes through remaining part of the year. But we've got $700 million of the $1.5 billion accomplished so far.

Jay Gelb - Barclays

I see, alright. Second point was on the life operating income, it seemed to dip in 2Q, will below our projections; just trying to get some perspective on that.

Phil Bancroft

There is really three things going on in that, one is of course our Re business is running off, as you know. We also announced in the last quarter for example a one-time reserve benefit of about $6 million or $7 million. We also had a one-time reserve release in our U.S. operations of about $6 billion in the second quarter of last year. And then thirdly, we're continuing to make investments in that business and there are not all capitalizable right. So there is some gap strain as we continue to grow.

Evan Greenberg

This is Evan. The international life had growth in earnings in the quarter. But I’d still say if the international life where we’re continuing to make the investments for growth and that dampen what could have been even stronger income growth.

Jay Gelb - Barclays

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

Evan Greenberg

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

Jay Gelb - Barclays

Helpful, thank you.

Operator

Our next question comes from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Thanks. I just had a couple of questions on the Brazilian business if I could. Just trying to understand a little bit about what construction of that business was before you bought it in terms of how much was retained, how much was seeded and how you plan to run that business as it comes on to your book? And just trying to square some of your comments about ROE in terms of whether or not you plan to allocate more equity, anything on that would help us just as we're thinking about both top line and allocated capital going forward. Thanks.

Evan Greenberg

I am going to give you general statement; I am not going to give you any numbers. They -- it's a significantly gross lined book of business where they had much larger -- their net retention was reasonably low. ACE runs a higher net retention for risk than Itaú Unibanco did. So there is an opportunity to recapture net premium to the extent that we think it is reasonable priced. So I think that gives you a sense that there is that opportunity though we’re not as it’s our usual practice we’re not going into detail of that.

Michael Nannizzi - Goldman Sachs

Okay. Got it.

Evan Greenberg

What you ask me something else there, what else did you want to know?

Michael Nannizzi - Goldman Sachs

Just in terms of capital I mean are you going to see business to your reinsurance sub or are you going to kind of push some capital down just or move some capital over or something just so you can write more net business?

Evan Greenberg

Imagine this, we already have substantial capital in balance because we already have a real presence there. We will be combining the two companies which brings their capital base and our capital base together into one entity. We have freedom. There is also an ability to reinsure internally and we have very good relationships with reinsurers. We’re the large global purchaser that can benefit them as well in terms and conditions. And as I said in the commentary we may actually have the opportunity to dividend capital.

Michael Nannizzi - Goldman Sachs

Got it. Great thanks. And then just really quickly if I could, Phil on the reinsurance expense ratio it looks like it was a bit higher year-over-year just trying to understand there, is that just higher seeming commissions or is there something more kind of one time in nature that caused that to us? Thanks.

Phil Bancroft

During the course of the fourth quarter of last quarter and first quarter of this year we were up to some structured transactions that had higher acquisition costs and those contracts now are earning and so you’ll see a higher acquisition ratio.

Michael Nannizzi - Goldman Sachs

Okay. (Inaudible) would be that that’s something that happened but that’s, could or may not continue, I mean the structure transaction or should we assume that those are structure transactions that all are sick what you expect will remain in place?

Evan Greenberg

It’s just as easy to think of it as, the change mix of business. So it's like your more quote a share than you wrote excess of loss.

Michael Nannizzi - Goldman Sachs

Got it, okay. Thank you.

Evan Greenberg

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

Michael Nannizzi - Goldman Sachs

Yes, that's right, I mean I guess my question more to get to put a point on I was just -- I'm wondering if conditions in the reinsurance market are such that seeding commissions are now higher or?

Evan Greenberg

No, no, no. Look seeding commissions are a bit high, that has not withdrew that though. It's a mix of business change, we watch the gross commissions cohort-by-cohort very carefully.

Michael Nannizzi - Goldman Sachs

Got it, okay. Thank you.

Evan Greenberg

You're welcome.

Operator

And our next question comes from Kai Pan with Morgan Stanley.

Kai Pan - Morgan Stanley

Good morning. Thank you for taking my call. First question is on. Could you please leave a bit more color on the pricing, specially on the international side?

Evan Greenberg

Sure. John Keogh.

John Keogh

Sure. Good morning, Kai. Internationally, I would say on the retail business pretty stable, you look back over the last four quarters the rates internationally have been sort of zero to down 2% quarter-by-quarter. This quarter retail rates internationally down 1% by region. Our UK business achieved a 2% rate increase. The Continent of Europe was flat, Latin America rates dropped 2% and Asia was down 5%. Differently though than retail the one wholesale market, we did see an increase in competition there and saw rates drop 5% in the quarter in our London wholesale business.

Kai Pan - Morgan Stanley

Great. So it looks like the margin improvements, underlying margin Overseas General is not coming from pricing it’s probably more from business mix?

John Keogh

Yes. Let me first start by saying that when you look at our combined ratio this quarter of 89% that’s combined given the construct of our business internationally that we are happy with and one that we are striving to achieve over the long-haul. Already mentioned in the commentary, by Phil, about half of the improvement you see in our margins for international comes from the change of the mix of business so when you look at our P&C business versus our A&H business versus our Professional Lines is more commercial the growth of the better combined ratio of business in that mix over the last year you see running through so roughly half of our improvement comes from that change of mix earning through in the combined ratio this quarter.

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

Thirdly, I would say that the investments we made in places like Mexico and Malaysia and Indonesia in the Professional Lines is more commercial where we like that those business and we brought them and said they were good businesses. We always felt that from an underwriting point of view it was opportunity for us to bring some capability and know-how to improve the underwriting margins in those business and we are seeing that come through now in the combined ratio this quarter.

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

Kai Pan - Morgan Stanley

Thank you so much for that. Similar question on the U.S. side on North America you see the core margin are flat year-over-year, I just wonder is that because of pricing gains you had on these businesses is roughly in line with lost cost trends and do you expect that to going forward to be like keep at this level or you have room for the improvements from here?

Evan Greenberg

I am going to let John Lupica actually because it will come up anyway on the calls, give you more of a sense of the price changes we saw in North America in the quarter. But I'm going to answer your question. Listen in 87 the recombined ratio is world class and it hardly gets better than that. And it bounces around in that range in overtime, it's going to rise in fact. We achieved rate some classes at equal strength, some classes at the head of trend the rate we received and in some classes it's below the rate the trend we received, below trend. So, trend is exceeding rate.

All of our businesses we try to run an underwriting profit. And with that John is going to give you a sense of what the rate change is.

John Lupica

Yes. Kai, I'll just give you a little more color on rate. As Evan has noted we are seeing stability in our casualty rate and we did get another quarter or we start casualty business actually get single-digit rate increases, very similar to what we saw last quarter. As I run through my companies and you look each you will see retail where we write a lot of our large commercial P&C business primary casualty lead layer programs we are getting about 4% rate increase in the quarter and that's pretty consistent with what we've been seeing year-to-date. And our general casualty businesses is evident noted, we are getting about 5% rate increase and that's mixed around some of the lines of business, our excess lines are getting sized, our construction business is getting 10%, our environmental business is getting about 2% and our foreign casualty business we're getting about flat in terms of rate changes.

If you move into the specialty and professional lines that book was up about 1.5% for the quarter. And as I said in the past it's still consistent, the primary market is getting more rate than the excess market where capacity comes into play. We definitely saw the property market get a little softer. Property related lines were down 5% in the large retail business. And our new business year-on-year was flat.

We would like the mix that we put on the book in terms of what we would call targeting our target business. At our E&S space basically saw the same trend; casualty was getting some of our better rates and very consistent with the first quarter and up 5% professional was 4% and our property related lines is down about 6.9%. And again pretty consistent with Evan’s other comments.

Kai Pan - Morgan Stanley

Thank you so much for all the answers.

Operator

Next we'll hear from Cliff Gallant with Nomura.

Cliff Gallant - Nomura

Thank you. I was wondering if you could expand on some of the comments you made at the beginning of the call. You were very enthusiastic about the acquisition, but I was wondering if you could talk just a little bit more qualitatively about your general acquisition strategy? I mean we can understand the math of projected accretion dilution but when you do deals in places like Thailand and Brazil it seems like it’d very hard to successfully execute on those deals long-term. And can you talk about why shareholders feel confident that you can't?

Evan Greenberg

Yes. Long-term we’ve been making acquisitions for eight or nine years now. I think we have a track record of successfully acquiring integrating and improving both the acquired target and our own business in combination number one.

Number two, we actually are informed by all that we learn from each acquisition as company learns and we have quite a cook book that we use literally we call it the cook book. It tells you an every single area of business that when we make an acquisition of how we go about integrating it. We try to behave like a machine in that regard in the execution. Number three we’re present in 55 countries around the world. We’re not tourists in those regions in those countries or in the international business, we’ve been there for many many years. Our home office at the same time is not a provincial location. We have a lot of internationalists who have deep knowledge and experience in all those regions of the world in addition to our people locally on the ground who have a lot of knowledge and a lot of experience.

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

Next, the fact is that growth in the insurance industry, if you look at it around the world and look at the numbers, is coming significantly from the markets where economies are growing, middle class is expanding and business is developing. And those are mostly areas of the world such as Asia and Latin America, that's with the predominant growth is coming from. And you want to grow, you grow where the opportunity is and where they need is the greatest. Of course there is risk around this, as there is risk around any business and by the way you are an analyst in the insurance business and insurance is a risk business.

And we believe that in the acquisitions we make, we get paid to take that risk, everything never goes perfectly and it is, which is my last point and it's not about, does it go perfectly because if you expect, that you're going to fail, you're going to have mistakes, you're going to have things that don't go as well as you expect and it's how did you build yourself to address those. Risks management capabilities here from enterprise risk management to compliance, to legal, to internal audit, to underwriting audit, to actuarial all provide safeguards to an international advisory board that helps with connections and contacts when we need them. All of that is part of your thinking in building a business that you always want to keep safe and I hope that gives you an answer.

Cliff Gallant - Nomura

Thank you.

Operator

And our next question comes from Brian Meredith with UBS.

Brian Meredith - UBS

Yeah, good morning. I have couple of quick questions here for you. The first one just quickly with current future is down 25%, 26%, 27% so far this year, any impact we may expect for the Ag business?

Evan Greenberg

So far, Brian we make no call on it, corn yields, crop yields are also projected to be up and that’s what’s driving price on one hand. And then you have deductibles, you have deductibles in product you got yield that goes the other way as a hedge. You do have prices that come off we have reinsurance, we have futures, contracts that we use in hedging. And so overall as we mix it right now, we are quite comfortable with the pegs that we continue to hold.

Brian Meredith - UBS

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

Evan Greenberg

No top line. We don’t see any top line issues, we are a large political risk and trade credit writer, we understand our exposures quite well to do with Russia and the Ukraine. At the moment we have no development that is of any kind of a warming nature whatsoever to us. And frankly when we look in when we do run more games on political risk and trade credit over the years every year, and imagine scenario planning to us of what could happen or occur as far as exposure in a book of business like that, that has informed us and the kind our appetite for risk and Russia, Ukraine fits right within that appetite.

Brian Meredith - UBS

What percentage of your business is in Russia and overseas?

Evan Greenberg

Tiny, $120 million buck premium.

Brian Meredith - UBS

Got it. This is not much.

Phil Bancroft

And it's doing just fine

Brian Meredith - UBS

Excellent. Thank you.

Phil Bancroft

Thank you.

Evan Greenberg

You're welcome.

Operator

And next we'll hear from Vinay Misquith with Evercore.

Vinay Misquith - Evercore

Hi, good morning. On the international business you have done a great job of improving margins in this quarter is another example. Curious as to how much further you can drive margin up mid terms of the accident your combined ratio ex can, And also some of the impact, I think flat to slightly lower pricing into internationally?

Evan Greenberg

We're not giving any forward views Vinay as you can imagine nice try, but

Phil Bancroft

I don't think should I say anymore.

Vinay Misquith - Evercore

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

Evan Greenberg

Yes, that's why I gave you a sense of ROE okay. And you always have to be careful when we announced acquisitions to (inaudible) and you do it in a public company for instance that we would acquire or where there is standalone statutory numbers you could see what the earnings were and many times analyst make the mistake of just taking those earnings and rolling forward into our EPS for the following year. And you are exactly right, you have purchase accounting the agrees that will impact the earnings in the first few years and then that's offset by growth and other efficiencies you gain.

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

Vinay Misquith - Evercore

Okay, fair enough. Thank you.

Phil Bancroft

You're welcome.

Operator

And next we'll hear from Paul Newsome with Sandler O'Neill.

Evan Greenberg

Good morning Paul.

Paul Newsome - Sandler O'Neill

Good morning congratulations on the quarter. I was hoping you could talk a little bit about your reinsurance strategy as the reinsurance purchase there has been some press reports that ACE was particularly aggressive or maybe changed their stand little bit in the market and I don't know if that’s even true or not. But we would love to have your reaction.

Evan Greenberg

Yeah, we read that in the local in that local rag that you that picked that up. We saw that it's kind of the gossip, printed gossip mill for the business so we saw little aggressive that look. We look what do you know about the reinsurance business, (inaudible) what you know is as a reinsurer you always want to reinsure the best seasons. Those who you think are the best underwriters, who do a good job of in their fiduciary responsibility of producing a decent result for themselves and that they don’t just do it for themselves, they do it on a gross basis, so they protect their reinsurance partner as well. ACE has a good reputation is well known in that way. What you also know if you’re a reinsurer, the best [cedins] are also the toughest negotiators in purchasing reinsurance for the obvious reasons, they’re professional, they understand the business, they think deeply about their transactions. And by the way they’re numerate in how they imagine a transaction and risk reward and what’s something this work. So that’s how that’s interpreted as well ACE as a tough buyer of reinsurance. And somebody may want to use that characterization but I haven’t noticed that reinsurers somehow loss their appetite for ACE’s business, including those in the London market who like the [gross] about it.

Paul Newsome - Sandler O'Neill

So, I guess the broader point, tell me if I am wrong, is that I mean ACE has long said that you are essentially a gross writer and you happy to be there that strategy has not changed at all?

Evan Greenberg

We’re not -- I don’t see us a gross writer. I think were you saying gross line to extreme where we would put out huge capacities and take very low net retentions, look at our net to gross. We use reinsurance appropriately to increase our capacity to our insurers who require a certain limit of liability to be able to risk transfer to us. And number two, we use it to dampen volatility in our business.

Paul Newsome - Sandler O'Neill

Great. Thank you very much.

Evan Greenberg

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

Operator

And our next question comes from Jay Cohen with Bank of America Merrill Lynch.

Jay Cohen - Bank of America Merrill Lynch

Yes, thank you. Most of my questions have been answered, one other question on the investment income. Can you talk about the contribution from alternative assets, was it above normalized level this quarter?

Phil Bancroft

It was higher than we expected. We had estimated our income to be 540 and it turned out at 556 and the majority of that was from PE distributions and we also had higher than expected call premiums on corporate bonds as we call it. So, we’re seeing that run rate, we're expecting to start on ongoing basis with like more normal distributions to be about 550.

Jay Cohen - Bank of America Merrill Lynch

Perfect. Thank you.

Operator

Next we’ll here from Meyer Shields with Keefe, Bruyette, & Woods.

Meyer Shields - Keefe, Bruyette, & Woods

Thanks, good morning. On the structure transactions within global reinsurance, does that also impact the accident year ex that loss ratio the same way it affects the expense ratio?

Phil Bancroft

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

Meyer Shields - Keefe, Bruyette, & Woods

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

Phil Bancroft

Yes. So if you look at page two in the supplement, you'll see and for example in this quarter, we had other expense of $26 million, quarter before that it was $23 million; it runs about that level. And it’s principally the amortization of the intangibles from our acquisitions.

Meyer Shields - Keefe, Bruyette, & Woods

Okay, great. Thanks very much.

Operator

And next we’ll hear from Al Copersino with Columbia Management.

Al Copersino - Columbia Management

Thank you. Actually, Chris asked my question and Evan dealt with that. So thank you very much, I am all set.

Evan Greenberg

You are welcome.

Operator

Moving on, we’ll hear from Thomas Mitchell with Miller Tabak.

Thomas Mitchell - Miller Tabak

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

Evan Greenberg

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

Thomas Mitchell - Miller Tabak

Okay, thank you.

Evan Greenberg

You are welcome.

Operator

And next we’ll hear from [Ian Gutterman with BAM].

Unidentified Analyst

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

Evan Greenberg

Yes. Ian, it is right to say about that. The commercial risk services is middle market business and lower middle market, in fact going all the way down to micro market for us. It takes a lot of work to get that business. You can get it a couple of ways. You can write programs and anybody who come in write someone's program business and that can become very competitive. You can write line slips. Anybody can come in and give a pen to a producer, to an MG, to a wholesaler and put together line slips and that part of distribution could become very competitive.

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

Finally each of those cohorts whether it is micro, whether it is lower middle market, whether it is middle, middle market, whether it is upper middle market, those are very distinct cohorts. And your knowledge of it, your product capability, your technology to distribute efficiently and some of it is no touch to be able to do it right. That takes time and insight to build, both from an underwriting and a technology point of view. So, yes, competition can grow in any of these businesses. But it's not -- and in some of them, it can be instant and as I just gave you an example and whole bunch of it no it cannot be. And you can only see what we have done and the results of what we've done. No one can see the results of what we plan to do or what we are just rolling out. And we've been working on this for quite a while and slowly and patiently building it. And we don't talk about it until it starts to produce and until we start to really see something meaningful. That's what you are seeing now.

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

Unidentified Analyst

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

Evan Greenberg

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

Unidentified Analyst

Got it, got it, thank you. And then under Brazil, can you just talk may be just about the general underwriting environment down there and I guess when I am thinking about is you have an economy that looks like it's headed towards the recession maybe a tough one we have inflation going in the wrong way normally I think that inflation being difficult underwriting environment right loss or going a wrong way and it's hard to get the consumer to pay a whole lot more when times are tough. So how do you navigate that environment or may be to macro is in the deal?

Evan Greenberg

Yes, sure. First of all, we don't make an acquisition or grow our businesses based on 12 or 24 months or a short term simply a short term view. However, with that said, I don't see Brazil in recession, I see Brazil with very slow growth. Brazil is nothing like Argentina. There is a stability to Brazil that is real. I mean Brazil has a resilience, has a deep economy, it has important areas structurally that of its economy that have real strengths, its agriculture, its energy development sector, it’s got a pretty deep financial industry, large consumer market and a growing middle class. So Brazil has a lot going for it, but it has its lousy government policies and an inability to embrace another way of deregulation. It has an important election coming in October and hopefully they do the right thing because that could be tremendous for growth in Brazil. It’s an underinsured market and you’re seeing -- and significantly underinsured and you’re seeing a growing awareness and consciousness for insurance and in the business community and that is developing.

So, I don’t see that inflation is well more under control, price is very high in Brazil and insurance rates reflect that by the way. But inflation has been relatively tame in Brazil. You have nothing like a hyper inflation. So I actually don’t feel bad about the country economically at the moment, though it’s not overly exciting. I am not concerned about that. And as far as inflation it’s reflected within the pricing and the reserving of the business.

Unidentified Analyst

Got it. So, it’s not like we’re heading towards the soft market in Brazil or something like that that we need to be concerned about?

Evan Greenberg

Brazil insurance market is a soft market. Okay?

Unidentified Analyst

Okay, okay.

Evan Greenberg

It has been for the last couple of years. So you got to know that. We make a decent underwriting profit, we have a good mix of business, we know the areas that are -- that really don't make money and we stay away from them. Itaú Unibanco in the large corporate space in spite of soft pricing has done very well; its capabilities have just been superior to others in the market. And we're only going to improve those and I think that has done a lot to help insulate that business. And they've got relationships with the largest, the largest of corporate in Brazil that are very deep and go back a very long way. And I think that provides a resilience to this that will help us ride through that short-term period.

Unidentified Analyst

Got it. Thanks so much Evan.

Evan Greenberg

You're welcome.

Operator

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

Helen Wilson

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

Operator

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

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ACE Limited (NYSE:ACE): Q2 EPS of $2.42 beats by $0.19. Revenue of $4.33B (+8.0% Y/Y) beats by $260M.