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ACE Limited (ACE)

Q3 2010 Earnings Call

October 28, 2010 08:30 am ET


Evan Greenberg - Chairman and Chief Executive Officer

Phil Bancroft - Chief Financial Officer

Brian E. Dowd - CPCU, CEO, Insurance, North America

John Keogh - Chief Executive Officer, ACE Overseas General

Helen M. Wilson - IR


Ian Gutterman - Adage Capital

Matthew Heimermann - JPMorgan

Jay Gelb - Barclays Capital

Brian Meredith - UBS

Larry Greenberg - Langen McAlenney

Jay Cohen - Bank of America Merrill Lynch

Tom Mitchell - Miller Tabak

Gregory Locraft - Morgan Stanley

Vinay Misquith - Credit Suisse



Good day, and welcome to the ACE Limited Third Quarter 2010 Earnings Conference Call. Today's call is being recorded. At the end of today's presentation, we will have a live Q&A session. (Operator Instructions)

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

Helen M. Wilson

Thank you, and welcome to the ACE Limited September 30, 2010 third 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 and guidance, competition and potential acquisitions and their impacts, 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 and 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 G. Greenberg

Good morning. ACE had a very good and very busy third quarter, marked by strong financial performance and a number of announcements related to major actions, taken to further our strategy.

After-tax operating income for the quarter was $688 million or just over $0.02 per share. All of our principal businesses made a positive contribution to results.

Per share book value was up 7% and 15% in the quarter and year-to-date respectively. Our annualized ROE was over 13% for both the quarter and the year.

We had excellent underwriting results in the quarter. The combined ratio was 88.4%, which included net cat losses of $97 million pre-tax and favorable prior period reserve development of about $201 million.

Cat losses were double the amount from last year with about half coming from the New Zealand earthquake. PPD or prior period development was roughly equal with prior year.

Our accident year combined ratio for the quarter, excluding cats, was a very healthy 92%, compared to 93.3% prior year. In accidents, as expected by-line loss ratios have increased, but this was offset by underwriting induced business mix changes.

Phil, Brian and John will provide more detail around the current accident year-end prior period numbers.

During the quarter and in recent days, we announced a number of acquisitions we are making that are consistent with the strategies we described to you during our Investor Day in June. In September, we announced we had signed a definitive agreement to acquire all the outstanding common stock of Rain and Hail Insurance Services, not currently owned by ACE, for approximately $1.1 billion in cash.

As most of you already know, ACE currently owns approximately 20% of the outstanding common stock of R&H, which is the second largest crop insurance underwriter in the country. The transaction makes a lot of sense for a number of reasons. This is a great company and a business we know well and has an excellent track record for producing results.

Rain and Hail was an old franchise. It was established in 1919. It is a pioneer in crop insurance and a great brand, known and trusted throughout the agricultural community for the services it provides. The Company is rich in data. It has granular details on over $2 million farm fields, with some date going back 40 to 50 years.

The business is substantial and has 400 staff and field offices all over the country, serving agents and farmers. It also has considerable distribution, 7,000 agents in small towns in rural communities. They have excellent systems and technology. Also, their transactions are automated, giving it a real strategic advantage.

The leadership and employees of Rain and Hail are simply terrific, hardworking professionals, who take a great deal of pride in what they do. They will make our Company better.

Lastly given ACE's product breadth and capabilities and the reach of those 7,000 agents, who have been asking Rain and Hail for more product, this is simply another opportunity we will capitalize on years to come.

The financial returns are particularly attractive with results that are immediately accretive to our earnings, return on equity and book value per share. We expect to achieve a return on capital in excess of our 15% hurdle rate.

Also in the quarter, we announced that we had reached a definitive agreement to acquire Jerneh Insurance, a top 10 general insurer in Malaysia with a strong presence in both personal lines, small commercial P&C, as well as a respectable presence in industrial commercial P&C. Our agreed price is approximately two times book or about $200 million.

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