Ace Limited (ACE)

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ACE Limited (ACE)

Q1 2010 Earnings Call Transcript

April 29, 2010 8:30 am ET

Executives

Helen Wilson – Director, IR

Evan Greenberg – Chairman and CEO

Phil Bancroft – CFO

Brian Dowd – CEO, Insurance-North America

Analysts

Jay Gelb – Barclays Capital

Keith Walsh – Citi

Matthew Heimermann – J.P. Morgan

Jay Cohen – Bank of America/Merrill Lynch

Vinay Misquith – Credit Suisse

Ian Gutterman – Adage Capital

Presentation

Operator

Good day, and welcome to the ACE Limited first quarter 2010 earnings conference call. Today’s call is being recorded. (Operator Instructions) For opening remarks and introductions, I’d like to turn the call over to Helen Wilson, Investor Relations.

Helen Wilson

Thank you, and welcome to the ACE Limited March 31st, 2010 first quarter earnings conference call. Our report today will contain forward-looking statements. These include statements relating to economic and insurance industry trends, our financial outlook, competition, and growth prospects, all of which are subject to risks and uncertainty. Actual results may differ materially.

Please refer to our most recent SEC filings as well as or earnings press release and financial supplement, which are available on our Web site 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 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. All things considered, an eventful quarter for natural catastrophes, the continued impact of recession, and competitive market conditions, ACE had a good first quarter and start to 2010.

After tax operating income for the quarter was $579 million or $1.70 per share, while net income in the period was $755 million. All divisions of the company made a strong contribution to the results. We recorded a $149 million in after tax CAT losses for the quarter, which was marked by a large number of significant natural catastrophes globally.

As you know, we previously reported a first quarter loss estimate of $125 million after tax. That estimate for the cohort [ph] catastrophes known at that time has improved. However, subsequent to the announcement, there were a number of additional events, including the storms in Perth, Australia and the northeast United States, both of which resulted in historic levels of flooding. Losses from those additional storms are estimated at $32 million after tax. We’ve included an exhibit in our supplement that sheds more light on our CAT losses both gross and net.

I believe ACE’s level of losses in total demonstrate good underwriting discipline in risk management. It’s worth noting, that of the total CAT losses, global REs [ph] were $29 million, a relatively modest number that reflects what has been our underwriting position regarding non-US CAT RE. Namely, that we are underweight exposure because of inadequate pricing, and in many instances, lack of creditable data.

Some analysts have expressed surprise at the level of our net CAT losses. I would refer you to our 10-K, where we provide disclosure about our catastrophe reinsurance protections. Including the fact that we purchase, in certain regions of the world, drop down covers. Knowing this fact may help you better understand the level of our losses. We benefited in the quarter from positive prior period reserve development in the amount of approximately $96 million, nearly all of which were short tail lines related.

Over $40 billion [ph] of the $96 million would be ’09 year crop insurance adjustment. As you might recall, the first quarter's results typically include a prior year crop adjustment, which in a good year, helps the loss ratio that hurts the expense ratio. Our combined ratio for the first quarter was 92.8%, which was very good.

The underlying health of our business is in good shape as demonstrated by our current accident year combined EX-CAT of 90.2% versus 88.6% last year. The expense ratio was up about three points in the quarter compared to the same period last year, two thirds of which was due to crop profit sharing and CAT reinstatement premiums. Phil will provide more details.

I want to make a few comments about growth, pricing and the environment. Total company net written premiums were up 4%. And adjusting for foreign exchange, they were up 1%, reflecting both the economic environment and insurance market pricing pressures. We are obviously operating in a competitive insurance market. In my judgment, for the industry overall, the CAT losses in the first quarter are an income event, not a balance sheet event, or for most companies, a reassessment of risk event.

As a result, I believe we are going to continue facing competitive market conditions. On the other hand, the economy in general has stabilized and is showing some signs of improvement. With that said, generally speaking for ACE, while there is less opportunity to write new business at an acceptable return, there is still much opportunity around the globe nonetheless, because of our capability with geographic and product.

We saw many of the same competitive trends I’ve spoken about in the past continuing in the quarter. For example, retail insurance perform better than wholesale, while retail growing – with retail growing 4.5% in constant dollars and wholesale shrinking 1%. In the US, retail P&C insurance net premiums grew 6% in the first quarter. And our renewal to retention ratio is steady at around 88%. However, because of our decision to invest and grow last year, particularly in numerous specialty casualty related areas, our available renewal premium in the first quarter was up rather significantly over prior in a number of areas such as professional lines, excess casualty, environmental and construction.

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