Ace Limited (ACE)

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ACE Limited (ACE)

Q4 2008 Earnings Call

February 4, 2009 8:30 am ET


Helen M. Wilson – Director, Investor Relations

Evan G. Greenberg – Chairman, Chief Executive Officer

Philip Bancroft – Chief Financial Officer

Brian Dowd – Chairman, ACE USA

John Keogh – Chief Executive Officer, Overseas General

Timothy Boroughs - Chief Investment Officer


Jay Gelb - Barclays Capital

Brian Meredith - UBS

Thomas Mitchell - Miller Tabak & Co., LLC

Matthew Heimermann - J.P. Morgan

Jay Cohen - Banc of America/Merrill Lynch

Josh Shanker - Citigroup

Steven Labbe - Langen McAlenney

Mark Lane - William Blair & Company, LLC

Ian Gutterman - Adage Capital

Vinay Misquith - Credit Suisse



Good day and welcome to ACE Limited fourth quarter year end 2008 earnings conference call. (Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Helen Wilson, Director of Investor Relations. Please go ahead, ma'am.

Helen M. Wilson

Thank you and welcome to the ACE Limited December 31, 2008 fourth quarter earnings conference call.

Our report today will contain forward-looking statements. These include statements relating to general economic and insurance industry condition, our financial outlook and guidance, our investments in our variable annuity reinsurance business, business strategy and practices as market conditions evolve, competition, our stock price in the capital markets, pricing and exposures, losses and reserves, 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 will be available for replay for one month.

All remarks 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 speaker. First, we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft, our Chief Financial Officer. Then we'll take your questions. Also with us to assist with your questions are several members of our management team.

Now it's my pleasure to turn the call over to Evan.

Evan G. Greenberg

Good morning. The fourth quarter was a difficult finish to a difficult year for all financial services companies, ACE included, as economic conditions worsened and financial markets suffered the worst period we have experienced in many decades.

Given this environment, on an operating basis, ACE had a good quarter. Our property, casualty and accident and health operations performed well. Our life reinsurance business did not.

After-tax operating income in the quarter was $624 million or $1.87 a share. For the year, operating income was $2.6 billion, down about 4% from prior year. Our combined ratio for the quarter was just below 87% and, in our judgment, simply an excellent result. We had good contributions from both underwriting and investment income.

Net income in the period was $20 million, impacted by other-than-temporary impairment losses of about $440 million. Our portfolio is of high quality and over 94% fixed income related. About twothirds of the OTTI is related to interest rate spreads, not true credit impairments, and in our judgment, the vast majority will recover in time.

Our investment portfolio is conservatively constructed and appropriate for a global company like ACE that invests its U.S. dollar holdings from a number of jurisdictions, both U.S. and not. We have provided you with more disclosure around our portfolio composition in our supplement, and Phil will provide more detail.

You know ACE is unique in that we are one of the few truly global P&C companies, and this has been and is a tremendous source of strength and opportunity. As I have said many times, we're also an underwriting company. We take risk and accept its attendant volatility as long as we understand the risk and are paid an adequate price to take it. In this quarter, we experienced the volatility that can accompany the business activity of a global risk-taking organization.

Our book value declined in the quarter by 6% and 10% for the year. The decline in the quarter is attributed to investment portfolio related losses - which, again, we believe were largely transient - foreign exchange losses, and a realized fair value-related loss associated with the GMIBs and our life re business.

To put this in perspective, even with this year's market and economic conditions, our book value has grown at a compounded annual growth rate of 12% the last five years. Our long-term shareholders benefit from the fact we're a global, disciplined, risk-taking organization.

Our variable annuity reinsurance business had a difficult second half of the year, the fourth quarter in particular. As you know, this is a cat-like portfolio, though a different kind of CAT. It has two unique characteristics - duration and potential for reversal of loss. In our original models when we price the business, this kind of event is a 1 in a 100 years. Even with this kind of second half, we earned $107 million of operating income in '08 on this portfolio, though we produced about $400 million of net loss, which is within our range of tolerance for an infrequent and large cat.

Our current projected future annual operating income run rate is between about $120 and $140 million, so the payback period can be reasonably quick. During '09 we can experience more volatility given equity and interest rate markets. Again, Phil will provide some more detail around this point.

Operating income in the quarter benefited from positive prior period development of about $250 million pre-tax, which included a $70 takedown of a reserve on a single large structured transaction that expired during the quarter. $160 million of the prior period was short tail related and about $45 million of this is from '04 and '05 cats and other prior cats.

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