ACE Ltd Earnings Call Nuggets: Underwriting Margins and the 2013 Guidance
Jay Gelb – Barclays Capital: Evan, with the rate increases lapping each other now getting P&C rate increases on top of higher rate increases. To what extent do you think underwriting margins could improve?
Evan G. Greenberg – Chairman and CEO: I think they can improve is the short answer, but let me expand on it a little. First of all, we have a very good current accident year combined ratio, as you know. Take away crop. I think it’s its own market. It’s a separate business. When you’re looking at commercial, retail, wholesale business, you better off without that. We have a very good current accident year ex-crop relative to most of the industry. Pricing and underwriting selection has contributed to-date to a modest expansion in margin and trend is increasing towards further margin expansion and I think that will happen. As important or more important, pricing has contributed to our ability to write a substantial amount of new business across a broad set of products at relatively higher rates than our renewals, about 109% plus adequacy versus renewals. So, I do see some margin expansion, but I also see how it is contributing to growth. From what we see looking at the first quarter right now, pricing is as good. It’s very early days, but in January pricing was as good, or better than we saw even in December which was the best month of the quarter and that’s contributing to us, writing substantial amount in the new business, I think growth rates going forward are going to look pretty good too.
Jay Gelb – Barclays Capital: Then just had a couple quick follow-ups for Phil. You said that the investment income run rate is around $520 million that would be down pretty meaningfully from $567 million in the fourth quarter. So, I just – I didn’t know if that included some one-time investment gains or an FX benefit, what’s the difference?
Philip V. Bancroft – CFO: As we said in our press release, we had additional private equity distributions in excess of what we would have expected and we also had a one-time benefit from our contract and insurance contract that is considered a deposit, so the development on that contract was included in investment income. So, as we said in the press release, we had about $42 million of income beyond what we would have expected which gave you run rate last quarter of about 5.25%.
Jay Gelb – Barclays Capital: So, the investment income decline in 2013 probably could be more from being down 3% in 2012, right?
Philip V. Bancroft – CFO: Yes, what I have said is, I think our investment income for the year was $2.180 billion and I think if you multiply that 5.20 as a run rate, you come down about $100 million pre-tax.
Jay Gelb – Barclays Capital: Then on the tax rate Phil. I mean in the past you sort of looked at the 18% range as a baseline given what happened…
Philip V. Bancroft – CFO: It was lower in this quarter, obviously because of the $121 million, but also if you even back out the $121 million as you know it’s lower than that run rate and it’s principally because of where the prior period development and cat losses fell.
Jay Gelb – Barclays Capital: So for 2013 what should we plug in initially?
Philip V. Bancroft – CFO: Well, we really haven’t given you a worksheet on that, but it has been running in the 16%, 17% range.
Jay Gelb – Barclays Capital: In your commentary you said it could be higher so I am just thinking, is that 16%, 17% the right starting point?
Evan G. Greenberg – Chairman and CEO: Just to be specific, I was talking about higher than we had actually in 2012.
Jay Gelb – Barclays Capital: So, we’ll start with 16% or 17%.
The 2013 Guidance
Michael Zaremski – Credit Suisse: So, if I think about the 2013 versus 2012 guidance, and if we strip out reserve changes, the 2013 guidance doesn’t seem to imply any earnings growth on a year-over-year basis and Phil, I know you mentioned a bunch of negative items, higher tax rate, higher amortization expense, negative FX impact. So, if we add up all those items, how much impact do you expect them to have in 2013, versus the old guidance?
Philip V. Bancroft – CFO: Well, I’ve given you, we’ve given you our guidance that has a midpoint of $6.8. So, that’s our implied estimate.
Michael Zaremski – Credit Suisse: So, you’re not able to kind of quantify all those items that you mentioned and how they – do those have a 5%, 6%, 7% impact versus – I know last year’s guidance was $6.85 as a midpoint I believe, so I’m kind of thinking if we’re bullish on – we’re currently bullish or rate increases in the U.S., Europe is a question mark we could talk about. So, you’re expecting higher underwriting margins, I’m just trying to figure out what I’m missing in terms of why the midpoint isn’t going higher.
Evan G. Greenberg – Chairman and CEO: This is Evan. First of all, yes. We have, I’m going to say a few things about it. We have – we don’t give a worksheet, so we’re giving you thematic color around it. We only give guidance on a per share basis and we’re not going down that rabbit hole. That’s going to give you more than we gave you on investment income or talking about tax rate or any of that. What we’ve also done though is we’ve talked a bit about how we see pricing and revenue and margin, and we’ve told you that we expect underwriting income to grow substantially, and that’s going to happen predominantly growth and some margin. And so, then the rest is an offsetting. But then, let me add a little more color to the guidance, because, frankly, at the end of the day, it’s your results that count and we’ve produced pretty good results. Guidance is created, so I give you a little more window into it because you’re not the only one who’s imagining this question. Guidance is created in December as part of our budget process that we go through. Most of the data, particularly around pricing and that is third quarter and maybe a very early fourth quarter-based, but it’s really fundamentally third quarter-based data. From what I know now, we’re biasing towards the upper end of the guidance range; that’s what I see. Pricing is better, growth looks good, and the acquisitions – the acquisitions may produce it, it will be modest – may produce modestly better results. And so, when I add all that up, I think we bias towards the upper end of it. Now, it’s early days. It’s early in the year, and we’ll see how the actual turns out. But I am more bullish than I have been in some time.
Michael Zaremski – Credit Suisse: As a final follow-up, as we all know, crop is a unique business line. From what I’ve been kind of seeing, I guess, drought conditions, and now winter have persisted and the soil conditions are somewhat poor in the U.S. currently. So does that kind of change your expectations or positioning for the 2013 crop year?
Evan G. Greenberg – Chairman and CEO: I will tell you this. In our guidance, we use what we consider to be a normal crop year. We’ve talked in the past about how we think about our selected. When we look forward in a year which is based on a 10-year average, it would include therefore ’12’s poor year, and in that average we did the same thing. When you say soil condition, I want to remind you of something, that up until mid-June last year, it looked like based on soil conditions and moisture and temperature, it looked like we were going to have the best crop year in many, many years. So, if anyone has figured out a way of predicting future growing conditions, I am all ears and listening and by the way, you are in the wrong business.
A Closer Look: ACE Ltd Earnings Cheat Sheet>>