Good day. Welcome to the ACE Limited third quarter 2013 earnings conference call. Today's call is being recorded. To ask a question over the phone lines, you can press star one on your telephone keypad. For opening remarks and introductions, I would like to turn the call over to Helen Wilson, investor relations. Please go ahead.
Thank you. Welcome to the ACE Limited September 30th, 2013 third quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to company and investment performance, guidance, 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 supplement, which are available on our website for more information on factors that could affect these matters. This call is being webcast live, and the webcast replay will be available for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments. I'd like to introduce our speakers.
First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Philip Bancroft, our Chief Financial Officer. We'll take your questions. Also with us to assist with your questions are several members of our management team. It's my pleasure to turn the call over to Evan.
Good morning. As you saw from the numbers, ACE had another record quarter. Our earnings were driven by exceptional underwriting results and very strong premium revenue growth globally in our P&C and A&H lines of business. We delivered strong returns for shareholders. After-tax operating income for the quarter was $857 million, up nearly 25%, or $2.49 per share, both records for the company. Our operating return on equity was 13% for the quarter, while per share book value increased about 3.5%. Our underwriting results in the quarter were simply excellent. We produced $558 million of total P&C underwriting income, up 67%, and our P&C combined ratio was 86.5. We benefited, of course, from a quarter with relatively light CATs versus what we planned, though losses were modestly higher than last year.
It's interesting to observe that if you back out the income we earned because CAT losses were lower than planned, our after-tax operating income was $2.21 per share. We aren't relying upon low CATs to produce good results. Our business is broad-based, healthy. Said another way, our current accident year underwriting was a substantial contributor to our overall results in the quarter. Current accident year underwriting income, excluding CATs, was up about 180% over prior year with a combined ratio of 89.8. This was over six and a half points better than the third quarter last year, which was impacted significantly by drought losses in our crop insurance business.
The current accident year results also reflect the growth globally in our P&C and A&H businesses, as well as continued margin improvement in North America as a result of better pricing and mix of business and margin improvement internationally as a result of product and geographic mix. Turning to premium growth, global P&C net premiums in the quarter grew 9%. Global P&C is a term we are introducing for ACE that includes North American P&C, excluding agriculture, Overseas General , and Global Reinsurance . Crop insurance is a distinct business where revenue is much more affected by such things as commodity prices and how we share premium and loss with the government. This can be volatile from period to period and have nothing to do with the underlying health of the business. In the quarter, foreign exchange was a factor and impacted global P&C net premiums by 1.7 points.
On a constant dollar basis, global P&C net premiums grew over 10.5%, with growth coming broadly from all regions of the world, North America, Asia, Latin America, and Europe. In North America, retail, commercial, and specialty P&C net premiums were up over 9%, while our wholesale specialty business was up nearly 15.5%. Net premiums for our agriculture business were down, in line with our expectations. Internationally, retail commercial P&C premiums were up 10% in constant dollars. We saw growth in every territory, with Latin America leading the way up 20%. Asia Pac was up 8% and Japan was up 11%, while both the U.K. and the Continent were up 4%. In our global A&H business, net premiums were up close to 5% in the quarter in constant dollar.
We had strong results in our international business, which was up 10%, led by Asia and Latin America, with growth of 14% and 11%. Our global personal lines business continued its strong growth momentum in the quarter, particularly internationally, where net premiums were up 90%. Again, these results reflect the contribution from our acquisitions in Mexico, without which we had growth of about 22%, quite strong. International life insurance revenues were up over 15% on a constant dollar basis, with growth coming mainly from our operations in Asia. Lastly, net premiums in our global re-business were down 2%, after adjusting for a one-time large transaction from the prior year. The reinsurance market has an abundance of capacity, as we have discussed on prior calls. As with all of our businesses, underwriting discipline is more important than market share.
I want to say a few words about the current market environment. Our commercial P&C business in the U.S. continued to benefit from a better pricing environment, with another quarter of rate on rate increases. Overall, North American commercial P&C pricing was up about 3.5%. While the rate of increase for property-related pricing is flattening out, casualty related pricing remained favorable this quarter. Let me add some color around retail versus wholesale. In our U.S. retail business, property and casualty related pricing were each up 3.4%. We saw good results in risk management related lines where pricing was up 6%. Professional lines, E&O, D&O were up 4.3%. General casualty and specialty were up about 4.8%, while medical professional related risk pricing was down 4%. Excluding one large risk management transaction we wrote last year, new business grew 6% year-over-year in U.S. retail.
Our renewal retention rate as measured by premium was 94%, which is quite strong. On the U.S. wholesale side of our business, rates were up 3.6% overall, with property up less than 1% and casualty related lines up 6.5%. Internationally, the retail commercial P&C rate environment remains competitive but reasonably stable, with rate growth essentially flat in the quarter overall. Rates internationally varied by class and by territory, but were mostly up or down 1%-3%. My colleagues and I can provide further color on market conditions and pricing trends. In summary, again, we had all-time record earnings. We are firing on all cylinders and continuing to achieve strong, broad-based growth despite the economic and geopolitical headwinds we are confronting in all regions of the world. We have a clear strategy and a strong ability to execute.
Rest assured, we are impatient with ourselves and striving for constant improvement. With that, I'll turn the call over to Phil, we'll be back to take your questions.
Thank you, Evan. As Evan mentioned, we had an excellent quarter with record operating results. Cash flow was strong at $928 million. Cash and invested assets grew by $740 million to $61 billion. Tangible book value per share grew 3.9%, and total capital now stands at over $34 billion. Net realized and unrealized gains were $55 million pre-tax, which included a $47 million gain from the investment portfolio and a $43 million gain from our variable annuity reinsurance portfolio, partially offset by $30 million of foreign exchange losses. Investment income was $522 million and was in line with our expectation. Our current book yield is 3.6%. Current new money rates are 2.9% if we invested in a similar distribution to our existing portfolio. We estimate the current quarterly investment income run rate will be approximately $525 million with some marginal variability up or down.
Our net loss reserves were up $500 million. We had positive prior period development of $210 million pre-tax, principally from long-tail lines and from accident years 2008 and prior. This included $60 million of adverse development for legacy environmental liability exposures at our runoff Brandywine operation. We've changed our review process. We now conduct our environmental review in the third quarter and our asbestos review in the fourth quarter, rather than both at the same time. After-tax CAT losses were $70 million, comprising $24 million from development relating to second quarter events, primarily the European and Calgary floods, and $46 million of third quarter CAT losses from a range of worldwide weather events. The combined ratio in our North American agriculture segment was 92.3%.
We have increased the full year loss ratio this quarter for our crop insurance business by approximately two points, and that revised view is reflected in the third quarter's combined ratio. While yields per acre are projected to be at or above historical averages, commodity prices, mainly for corn, have dropped substantially, and that's creating additional loss exposure. We expect a combined ratio consistent with the historical average of just below 90% for the fourth quarter of 2013. The company updated its July guidance for full year 2013 to account for the positive prior period reserve development, lower than planned CAT losses, and better current accident year results excluding CAT losses in the third quarter. The range is $8.65-$8.90 per share in after-tax operating income for the year. This includes estimated CAT losses of $95 million after tax for the fourth quarter of the year.
Guidance for the balance of the year is for the current accident year only. Now I'll turn it back over to Helen.
Thank you. At this point, we'll be happy to take your questions.
If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll go first to Amit Kumar of Macquarie Capital.
Thanks. Good morning, and congrats on another strong quarter. Just two quick questions. First of all, going back to the comment on pricing on the international side, I think you said rates are sort of up or down in the 1%-3% range. Could you just sort of expand on that comment? I recall you mentioned that even in the past quarter. Is it more of a loss cost issue, or is it competitive players?
The 1%-3% is really competitive environment. Frankly, there are plenty of lines and plenty of territory that we think could use more rate.
If rates were higher in some of those areas, we'd write more business. We're discriminating between class of business and territory. As we do portfolio management between cohorts within that, where we find rate adequacy, we'll write the business. Other than that, we're walking away from plenty of business. By the way, that 1%-3% is the rate that we observe on our book of business.
Got it.
We're walking away from business where there is just substantially more rate differential than that. If you want, for just a moment, let me ask John Keogh to add a little color around for you.
Sure.
Why don't I maybe give you just a sense of how that would look around the world, because obviously, different markets are behaving differently at any point in time. I think I said last quarter, the one place outside of North America where we are seeing some rate improvement is the U.K. market. I think there, particularly with the low interest rate environment, you are seeing some discipline, particularly in casualty lines, to push rates up. On the continent, it's pretty stable. Has been for a number of quarters in terms of the rate environment there. Where we're seeing the most pressure and the most competition would be Latin America and Asia in general. Particularly on property in Asia.
I would note that as property rates are softening in Asia, that's after several quarters of significant rate increases following the catastrophes that took place out there the last couple of years. There you're seeing prices start to come off after several quarters of rate increases.
Got it. That's helpful. The only other question I have is sort of the broader discussion on the acquisition pipeline. Evan, this is for you. In terms of the pool of acquisition opportunities that you feel would meet your return targets, I guess, within the first one to three years, what region would be more likely, more attractive going forward from here?
It really isn't a region specific. It really is a target specific, a company specific, where you're looking at that. I don't notice a trend by region or by country.
Okay. The reason I was asking is I think someone recently mentioned the Scandinavian countries, and I don't know if you had a view on that or not.
Well, we have a business in Scandinavia that is doing quite well. The Scandinavian market overall is a reasonably closed market. It's not overly big, and it is kind of off by itself. It has a few large competitors who do quite well in the marketplace. It's not an overly dynamic market. It's not like you're going to find a lot of opportunity roaming around Scandinavia.
Mm-hmm. Got it. Okay.
It's not like you're going hunting in Scandinavia.
Mm-hmm. Yeah, I've never gone hunting there. I know the reason why.
It's very company specific.
Got it. Thanks for the answer. I'll stop here.
Welcome.
We'll go next to Mike Zaremski of Credit Suisse.
I guess another question on pricing. Property pricing levels sound like they continue to moderate. Should we expect the same from casualty lines given that investment yields are up from their lows? If I look at industry-wide casualty related loss ratios, they don't look too bad. Maybe we could also get some commentary on the reinsurance rate outlook. Thank you.
Yeah. Your comment on interest rates, before Congress, all the congressional antics, shutting down the government may have been more applicable. As you know, a lot of the improvement in interest rate has given back the last two months. Interest rate levels, when you got a 10-year treasury bouncing around the 2.5% mark, I think you can hardly call that robust. Our reinvestment rate's about 2.9% on our distribution versus a portfolio rate of 3.5%. I say that about ACE because that's pretty reflective of the industry. Hardly are interest rates supporting right now income statements substantially. The casualty rate environment, casualty rates, in my judgment, in many classes, are still not adequate to produce a decent ROE on the business. When you look at combined ratios and you translate it to an ROE, they're not decent enough.
At the same time, trying to project loss cost trends and believe that the recent past is an indication of the future, for ACE, we don't believe that's a prudent way to view the business. All that together says to me, if you're a responsible underwriter, you're going to continue pressing for rate, because on an overall basis, portfolio needs it. That's not every class, that's not every cohort within class. The better your underwriting insight and ability to portfolio underwrite, the more advantage you can take of the current rate environment as rates are rising. In short, I don't expect casualty rates to follow property at this moment. I don't see it in the trades I observe.
Secondly, even with that said, as you can see, ACE is growing well within many lines, and I think that's because we can find more opportunity within the current environment.
Got it. Lastly for Phil, quick numbers question. The CAT load guidance for the rest of the year, $95 million, is that a full quarter fourth quarter, or is that reflective of experience through this time in October? Thanks.
It's the fourth quarter. It's the full fourth quarter.
Thank you.
We'll go next to Michael Nannizzi of Goldman Sachs.
Thanks. Just I guess in North America, Evan, what are the competitive dynamics or the strategy you're employing that has led to the recent run of growth? Is one particular class of business much more attractive than it has been in the past, or is it more of a broad-based experience?
It's very broad-based. The way we think about things, we write almost 200 lines of business. We subclass our business and respect each individually and really focus on it. We're seeing growth across a broad array of casualty and physical lines related business. At the same time, with years and years of practicing it, our marketing and sales strategies, and I distinguish the two, are so focused on different cohorts of the business population, from very large accounts, we call risk management, to upper middle market, to the middle market, to the lower end of middle market, to micro. Whether it is ACE USA, whether it is what we call commercial risk, a separate division of the company to focus on the middle and lower middle market, whether it is the Westchester that focuses on middle or upper middle.
You take portfolio management and the insight that we continue to work on to gain on each line of business. You focus that line of business on different customer cohorts, both by size, as I was just explaining, and within that, the occupancies or the classes we like. Then you spread that on a sales strategy across geography, because you got to dig deep within each geographic zone. We know our minds, and we have a clarity about it, and we think we're generally right, and that's what's producing that.
Got it. I guess to follow up on that, we've been near double-digit growth in North America P&C here for the better part of a year, and I think including this quarter, although I'm not sure you said it explicitly, but rate in excess of loss trend. The underlying loss ratio looks like it's about flat. I don't know if there's some noise in there from a comparability perspective, but obviously margins are great as a starting point. When should that rate in excess of loss trend combined with premium growth start to roll through?
Okay. Last year, we had about a half a point worth of benefit in loss ratio that didn't repeat this year.
Okay.
On a normalized basis, it's probably about a half a point better, number 1. Number 2, you heard my comment about loss trend. That sure, maybe on an observable basis, if you're looking at the past, you could say rate is exceeding loss cost trend. That's not how we think about it. We look at more historical loss cost and casualty, the decisions you make stick with you for a very long time, and we're not optimists, and we're unwilling to believe that a more benign loss cost trend of recent past is what will endure forever into the future. Sure, as you book your loss ratio, you might say the first two or three years of the paid pattern is going to be at the current trend.
After that, if you're prudent at all, you're going to revert to the mean and the loss cost trend you're picking.
Got it. Okay. The last quick one.
If in the future, that proves to be conservative, then it will show up in your reserves and in your reserve studies, and that becomes prior period.
Understood.
Who cares whether it was current or prior, just run your company conservatively.
Got it. Great. Thank you. Last one. Do you hedge commodity prices? You mentioned the commodity price change since probably February. On the crop side, is that an exposure that ACE hedges?
That's a good question. Modestly. We hedge very modestly. Remember, we take a longer-dated commodity risk exposure, in essence, from March, because that's when the dance begins, till the end of October is kind of the commodity price exposure for us, because that's when the government ultimately prices for loss. Takes an October average. We do a little hedging, but modestly. We do buy reinsurance, as you know.
Right. You'll be able to push some of that loss onto the reinsurers then.
Well, you say loss. Let's be careful about that statement. We historically run the book. It's historically run below a 90 combined. What we're saying is because of commodity prices and what we see, we're raising it to a 92 combined. That's not a loss. That's an eight-point underwriting gain. That's still a very good result, but a more conservative result and a little less than it's historically run in the average. We're not foisting a loss onto reinsurers.
Understood. Lesser than normal econ. I understand. Okay. Thank you very much.
You're welcome.
We'll go next to Jay Gelb of Barclays.
Thank you. Good morning. Evan, the 12%-13% return on equity profile that ACE is generating currently, how would you put that in perspective relative to where we are in the cycle?
Well, our objective is to achieve a 15 over the cycle. We're running 12 and change for the quarter, for the year, and around 12.5%. Interest rate, I think we've said before that something like every 100 basis points of interest rates has a two-point impact on ROE. We're below what we would say is our objective over a cycle. Interest rates won't remain where they are forever. Our portfolio mix of business and our geographic spread and how we see our strategy to continue to build competitive advantage. I am a firm believer in the 15 over a cycle.
Your acquisition strategy will help drive it there?
Well, the acquisition strategy is simply to complement what we're doing organically. While we have our eyes open for opportunity and we're vigilant and we're constantly looking, what we can believe and what we look at fundamentally is what we can deliver organically. That's what's in our hands with both what we've built and what we've integrated into the company through acquisition. Acquisition is a part, but not all of it. Remember, we showed a number, I think, last year, and don't hold me to it exactly, but that roughly, if you looked back on the last seven years, 75% of the value we created or more came organically. The balance came through acquisition.
On a separate topic, there's a move by FASB to meaningfully change the financial accounting standards for property casualty and life insurers, and it seems that that could cause some meaningful dislocations. I was wondering if ACE could provide their view on that issue.
Well, I'm going to ask Phil to embellish on this, but we're very active in discussion with FASB. For me, accounting should truly mirror economic reality. Any improvement to what we have today ought to create better clarity and help to make the financials more insightful for investors, and investors to make decisions, because it mirrors an economic reality. It's so interesting to me that the number we use and that our investors use, and that we all find meaningful, is operating income, because it's non-GAAP measure. It best mirrors what we think is the true picture. That says something about accounting. When I look at the changes that FASB is suggesting right now, I get the theoretical.
That is divorced from practical reality and what investors really use to judge and what management really uses to judge one company to another, or the health of a company. The insurance accounting as it stands today, has been around a long time. It's been tested through all kinds of environments. It's reasonable. I don't know what kind of problem we're trying to chase here by making changes. The notion of it, well, it's driven by convergence with IASB. Well, IASB has no insurance accounting standard right now. I would suggest to them that they adopt what has been tried and tested, and that is U.S. insurance accounting. Finally, what I'd say is the notion of fair valuing all, and that that somehow is the best indicator of value, particularly for a buy and hold company.
Also the notion of introducing more volatility because you're going to try to predict long-term cash flows on businesses that are currently not stable, in my mind, is imprudent. I don't know whose benefit you're ultimately serving except a bunch of academics. Phil, that was a mouthful. Do you want to add anything to that?
I don't know if I can add anything to that. I would say, though, that I'm working actively with my peers and other companies to meet with both the SEC and the FASB to express that view that Evan just talked about. We're also working to have our investors understand the issues so that they can voice their opinion as well. We all feel very strongly about it here.
Yeah, you can tell I do feel a little passionate about it.
Thank you for your thoughts on that.
You're welcome.
Welcome next to Greg Locraft of Morgan Stanley.
Good morning.
Hi. Good morning. Great quarter.
Thank you very much.
This may be one of the last times we talk about guidance at ACE, and I'm certainly not going to miss it. Can you sort of educate us? How are you going to talk about guidance going forward? Are you going to give none? Are you going to give some, but not the overall EPS? What are you going to do when the fourth quarter's reported?
Boy, I don't want this to turn into a headline across Bloomberg, I know it will. We're just going to end up trading one hell for another. We intend that we are not going to provide guidance, period. That you will do your work, you know enough, and we will report. At this moment in time, where we are is we will not provide guidance, period.
As we've said, we might give elements like our investment income run rate and those things that might be helpful, that's where we are.
Okay. Sounds good. Thanks. Congrats again.
Thank you very much.
We'll go next to Vinay Misquith of Evercore Partners.
Hi. Good morning.
Good morning, Vinay.
The first question is on the crop insurance business. Just curious, what were the sessions to the federal government this quarter? Looking at the premiums for the year, that's about $1.4 billion. If crop prices stay at these levels, what do you estimate you're going to have sort of next year in premiums? Do you think it's going to be lower?
Yeah. To answer it simply, the premium would be lower. The premium, I think is frankly, for all the businesses that we engage in, I think the premium is the least effective means of determining the health of the business when it comes to crop insurance. It's not indicative of ultimate profit and loss of the business, and even quantum necessarily of profit, the way it works. Your premium moves around from period to period, not just based on commodity prices, but how you share risk, something called the SSAP, which we're really not going to get into today. That is the area that governs the calculation between the government and the insurer of how you share premium because of loss experience. Last year, ironically, premium goes up in the third quarter substantially because we're going to have more loss.
On the other side of the coin, we're going to see a better premium growth versus last year at this time, in the fourth quarter, because of the same anomalies around a drought environment. It just is not indicative period to period. Yes, to answer your question, if commodity prices stay where they are, you'll price off of that in March, and premiums will be lower. When we think about underwriting profit, they really don't line up exactly.
Okay. That is helpful though. Okay.
No conclusion.
I thought. Well, because the simple math, I thought, is that you target, say maybe a steady below 90% combined ratios. Say that you target that 89% combined. If the top line's down 5%, I would think that the bottom line will also be down 5%, but maybe I'm being too simplistic about it.
You're being too linear in how you think about that. Understand that 89% is over a period of time. You can be worse one year, better another year. Also remember, if you start commodity price when you price a contract at a lower than historic average, you actually have reduced exposure to yourself to some degree. You have less exposure to falling commodity price. You still have the exposure, but less so. You start at $5 corn versus $4 corn. Well, your exposure just changed too. All that has to go into how you think about this.
Sure. Fair enough. Thanks.
You're welcome.
The second question was on growth. You've grown a lot in North America, and probably Europe was hurt by slow economy. Do you expect growth to re-accelerate in Europe and maybe to slow down a bit in North America as pricing slows down here?
Well, Vinay, first of all, exposure growth. We had exposure growth, which comes from economic activity of a couple of points. I do expect that Europe will slowly pick up. I don't think we're going to feel Europe much different next year than this year. Difference between a half a point down economically and a half a point up isn't much. What I'd tell you is, the U.S. economy, if it grew through the second quarter, was projected to grow for the year roughly 1.8%. Remember that sequester scrubbed about a point or more off of that. Next year, you ought to see the U.S.
economy on an absolute sort of apples-to-apples basis grow closer to the 2.5%, somewhere between 2.5%-3%, depending on what our colleagues in Washington do, whether they help it, hurt it, or at least do us a favor and be neutral. I don't expect that much of a difference. I do think that the pricing environment is ameliorating, is moderating. property is flattening out. casualty, you're getting rate on rate, but the rate is not accelerating. It's leveled out. You do have to take that into consideration when you look forward into growth rate. We've had good growth, and I expect that we'll continue to have reasonable growth.
Sure. Fair enough. Thank you.
You're welcome.
We'll go next to Thomas Mitchell of Miller Tabak.
My first question is sort of a big picture, which is that for many, many years, casualty lines underwriters were able to plug in interest rate factors, yields on the cash received and not paid out for a number of years that were two or three times or even more what they are now. In the process of underwriting and sort of looking out with the potential that interest rates may move up by another one and a half or two points or more over the next two or three years. How would you anticipate, if you would, changing your own underwriting approach to take that into account? Secondly, how would you anticipate the rest of the industry responding to that kind of change?
I'll answer your question very simply. It's not a long answer. We don't cash flow underwrite here. We don't consider interest rates and the investment income we make. We consider only to make an underwriting profit, flat and simple. There's really nothing more for me to say about that. How the balance of the industry will react, good underwriters will do the same. Mediocre underwriters will think differently, and they will double down on risk. Oh, you can project the loss cost, and at the same time, you can project interest rates?
Very good answer. I like that. The second thing I had in mind, if this gets too complicated, you can put me offline. Your retention in the third quarter in the crop line was about 55% this year. It was about 80% last year. Is that something that you decide, or is it in that complicated formula?
It's in that complicated formula. It strictly has to do with how we share loss with the government. Just very simply, when you're going to have a loss year, as you do, in the sharing, how it is between government and private sector, it flows through the premium line. We got additional premium because we were paying additional loss.
Got it. Okay, thank you very much.
You're welcome. It wasn't too complicated for me.
We'll go next to Brian Meredith of UBS.
Yeah, thanks. A couple of questions here. First, Evan, you gave us what the acquisitions in Mexico kind of did for the global personal lines business. I wonder if you can give us what was the benefit in the overseas segment, not only from a premium perspective, but how they're looking from a profitability standpoint. Do they add to the profitability to the company this quarter?
Yeah. Overseas gen on a constant dollar basis grew 17%. Excluding the acquisitions, it grew 7%. They did contribute to the growth. The underwriting, these aren't huge businesses. They're good-sized businesses. We made an underwriting profit in both companies, and that's reflected in there. It's not a huge part of it, but everybody contributes.
Great.
These acquisitions are on target or ahead. Very early days, but on target or ahead. We are really pleased with what we see and how it's working. There is more value than we originally imagined, and my colleagues are more confident and more enthusiastic about it today than we were at the time we actually made the acquisitions.
Great, thanks. My second question is Combined Insurance in the U.S. Can you kind of give us an update of what's going on there? Also with respect to Combined Insurance, what do you think the kind of challenges and opportunities that the Affordable Care Act actually brings to that business?
Yeah. Sure. Let me dissect this a little bit for you. Combined was down in the quarter. I'm going to take North America because I think that's the main action of Combined, and that's the size and scale of Combined. Most of the business is there. It was down about 3.4%. Last year, we had a one-time benefit of about $12 million. You take that out. I'm going to talk a little more about that. The core of Combined was up 1% in the quarter. That's the agency business of Combined. Our agent count in North America, I am feeling good about Combined. I'm not feeling good about it's published. I'm feeling good about what I see as the underlying health that really is building, and I'm going to explain it like this.
The agent count is up 40% in North America to about 2,500 agents. The annualized new premium, somebody buys a policy, they pay their premium over time in the year. They don't pay it all at once on these customers. The annualized new premium is up 40% over prior year. It does take time to show in the booked premium because the quantum of that new premium has to grow to a size that it overcomes the normal lapse rate you would see on the renewal book that is large. Overall, you're now seeing the core growing at 1%. The one-time benefit we had last year of $12 million, what we also have this year is they have a modest small book of university health insurance business, and that business we're getting is coming off the books. It made really no profit.
It's competitive, the Affordable Care Act hardly made it interesting. We're just shedding that, and that is having noise on combined revenue growth. Plus the U.K. that's shrinking, as we've talked about, has that impact. I see the power of combined building, I am confident that that is going to show itself. I feel good about the fundamentals of it. The product we're selling, finally, to answer that, it really doesn't run up against Affordable Care Act. It's more about loss of time insurance for people who work for employers who don't have lost time benefits for employees. That's the core of what Combined sells.
Thank you.
You're welcome.
We'll go next to Meyer Shields's Keefe, Bruyette & Woods.
Good morning. Evan, can you talk a little bit about how you balance your property reinsurance by, I'm thinking specifically considerations of opportunistic pricing versus longer-term relationships?
Well, we're a very large reinsurance buyer. Counterparty credit quality is the very first consideration, and that somebody is there to pay, particularly as you look and you're talking property, and you're thinking probably less on a risk basis and more on a CAT basis. The further you go out on that tail, well, the bigger that event is for the industry. I can tell you, counterparty credit, very, very important to us. We do recognize long-term relationship. At the same time, we hardly take one for the team. We have to be equipped to compete in the marketplace. Our cost of goods sold has to be competitive for us to be able to compete on the front end. We balance that with relationship, and we expect that reinsurers who play it smart, we're there for the long haul. We're good underwriters.
I would suppose that reinsurers, and I'm in the reinsurance business, what's more important to me than price is a cedent's ability to underwrite. The better the underwriter, usually the sharper they are in reinsurance negotiation. On the other hand, the more likely they are to produce a book of business that is sound to the reinsurer. ACE has a reputation as a good underwriter, and as consistent and long-term, and willing to do the right thing in both pricing and exposure management. I expect reinsurers to recognize that, and that I build into any of our thought about long-term relationships.
Okay. Thank you.
You're welcome.
If I can switch gears really quickly, you talked about how some of the longer-term interest rate increases faded, and that's obviously true. As Berkshire sort of assumes a bigger role in primary specialty insurance domestically, as they focus on equity returns instead of fixed income, do you expect that to actually meaningfully affect the overall market over the next three to five years?
You know what? I don't expect one new carrier to what is already a dynamic and large marketplace to have a disproportionate impact on the business. It takes a long time to build an insurance company that can compete on a national basis, that can write the lead primary layers, that can manage all kinds of size of customer and different cohorts of customer needs, both domestically and in a broad way. Your best day is the day you opened. After that, it is a grind it out, day in and day out. Anybody entering this business, whoever you are, I wish you luck. Welcome.
Okay, great.
I hope you like the water.
That's very helpful. Thank you.
We'll go next to Jay Cohen of Bank of America.
Yes. Thank you. Evan, Willis just announced their new platform in London, Willis 360, and of course, Aon has its own platform. Can you talk about the impact that these ventures could have on the business and maybe your participation in some of these ventures?
I don't know the final detail of the Willis program, and so I can't comment on that specifically. I'll make a couple of general comments. One, if it involves ceding underwriting control and underwriting decision-making on a risk-by-risk basis to somebody else, and you're ceding your fate. I know how that ends. It only ends one way. It's just a matter of time. We've seen that story plenty of times. It's just new bottle, old wine. If that's the case. Number two, I assume that it may have an impact. Somebody has to put their phone on mute. It may have an impact on smaller following line players, squeeze them. Number three, I haven't noticed a dearth of capacity in the marketplace. While I hear it's going to serve clients' interests, I really wonder what that means.
Number 4, well, if it's an easier way of doing business, it therefore is more efficient, Does the broker make more money from this? That's what I got to say.
Thanks for the response, Evan.
We'll go next to Ian Gutterman of BAM.
Hi, good morning, Evan. I guess start out to follow up on the crop. Can you tell us just, in the elevated loss ratio you're assuming now, what crop price is that assuming? Is that spot, or are you assuming maybe we drift down a four and a quarter to be conservative? I'm just curious sort of if price keeps going lower in the last few days here, if Q4 could be a little worse.
Ian, I don't want to give you a specific point estimate number, but I'm going to answer this way to you. The way you decide the commodity price for adjusting loss, the government comes back to you with a number, and they use the October average for corn-
Right
For soybean. It's the October average, which as of two days ago, I don't watch it, was 441 for corn. I don't watch.
Right.
It can change to four and a quarter.
Okay. Does that.
That makes sense. Sure.
Okay.
Four and a quarter.
Are you waiting for me to say something else? I think I answered your question.
Okay. I'm sorry. Well, let me try to clarify a little bit. At 441, it's right on the margin of whether we get claims or not, right?
No.
If it moves a little bit either way.
Buddy, no. Whoa. Don't say that.
Okay.
What was the yield versus historic yield? What's the deductible that each farmer picks?
Right.
You got a whole lot of stuff that goes in here. You can't guess that.
Right
because I can't.
Well, I guess I'm saying for an average farmer, if they had a normal yield and a 20% or 25% deductible, then they're right on the cusp. Right? You may end up having zero claims, or you may end up having a lot of claims.
You'll make your own decision.
Okay. Fair enough.
It varies by crop, by state, and so you're putting a rule of thumb national average. That's not how ultimate profit and loss gets calculated, right?
Sure.
It's farmer by farmer. Then it aggregates by state. One state might produce a worse than average or even a loss while another state produces a bumper. How does that play into the profit and loss and the sharing with the government? You now get into all that.
No, fair enough. Okay. I'll move on. The reserve releases in Overseas General-
Buddy, I can't figure it out right now, so with precision, so you can't.
That's all right. I understand. I thought I'd try. The Overseas Genera l reserve releases are usually elevated Q3, which as I recall, is an annual review. I'm just kind of curious, any specific lines that drove the higher releases versus the first 2 quarters or is that just sort of normal review process?
It was normal review process. As you can imagine, it's casualty more than short tail lines. It's fundamentally for years 2008 and prior.
Got it. Okay. My last one is-
Phil is going to-
Oh, sure.
I'm just going to say we'll have all the details in the 10-Q that'll come out shortly.
Got it. I'll be patient. My last one, I think it was maybe it was Brian's question when you said you were more excited about Mexico now than when you entered into the transaction. I was hoping you could expand upon why.
Well, it's the franchise. It's two or three things. The quality of the people. We've spent a lot of time with them, and we have a lot of confidence in that. We know them better. They're good operators, number one. Number two, the quality of the franchises is deeper with greater possibility than when we even first imagined. Number three, with that, the power of our strategies to take what is large distribution that each one had been driving on a monoline basis, and given the power of what we bring to the table
Being able to drive through that distribution on a multi-line basis and cross-selling, the opportunity we see there is just more significant, and we're more optimistic. The beauty is that optimism is flowing to us from the ground. The ACE people in Latin America, the ACE people in Mexico, our new ACE colleagues, are all very clear believers and have clear focus on it. The way we're seeing execution go right now and integration go, and the cultural compatibility and the back-and-forth understanding, that is gratifying to us and giving us more confidence in that. When I add it all up, and then our ability, I'd add one more thing. Our ability to help them do what they've done well, but do it better in flat-out automobile underwriting in Mexico. We're already seeing impact and benefit to that. The power.
We see glimpses of the power of that. I add all that together, and that's what gives me the confidence and what's behind the statement I made.
This sounds exciting. I look forward to hearing more about it. Thanks, guys.
Come on down and see us.
Okay. Operator, I believe it is time for just one more person to ask questions, please.
Yes, ma'am. We'll go next to Paul Newsome of Sandler O'Neill.
Good morning. I apologize if you already account for this, but I did notice the cash flow looked like it fell year-over-year. I apologize I had to jump off the call quickly, but can you address that at all?
Our cash flow for the quarter was $928 million, as I said in my opening remarks, which is a very strong cash flow number. When you compare it to last year, the number was about $1.6 billion, but it was just a timing issue because of the crop losses last year, the payment of the premium, the remittance of the premium delayed to the fourth quarter. There's just that one anomaly.
It's the opposite.
Nope.
That's clear.
Let me make this clear. Last year's third quarter was higher because we didn't pay the government last year until the fourth quarter. This year, we paid it in the third quarter. This is a much more normal quarter.
Okay. Thank you very much for the comment on the accounting. I think it's a bit of a train wreck, so I appreciate at least one management team taking a stand on what I think is an important issue.
You got it, bud.
All right. Thank you everyone for your time and attention this morning. We look forward to speaking with you again at the end of next quarter. Thank you and good day.
That does conclude today's conference. We thank you for your participation.