During his April 29 conference call with the investment community, ACE Chairman and CEO Evan Greenberg reported that ACE had a good first quarter on both an operating and net income basis and that all divisions of the company made a positive contribution to results.
While acknowledging the challenging environment due to the global recession, Evan said, “I am quite confident about ACE’s prospects in both the near and long term given our capabilities, our balance sheet, our people and our single-minded focus on staying true to underwriting integrity.”
The following is the full text of Evan’s commentary on our 2009 first quarter earnings.
Good morning. ACE had a very good first quarter and a strong start to 2009. Overall, our company is in good shape and our performance was steady.
We are, of course, operating in a deep global recession, and the financial markets remain difficult. That means a challenging environment for all businesses, including insurers. There was some improvement in both debt and equity market conditions in the latter part of the quarter, and time will tell if this improvement, particularly in equity markets, is transient. That depends on the future state of the U.S. and global economy, which in my judgment, is in turn dependent to a large degree on the health of bank balance sheets and financial markets, particularly in the U.S. and Europe.
ACE’s financial results in the quarter on both an operating and net income basis were quite good, with all divisions of the company making a positive contribution to results. After-tax operating income in the quarter was $669 million or $1.99 per share, while net income in the period was $567 million.
Book value grew in the quarter – up 2%. We continued to be impacted, though to a much lesser degree, by credit spreads and equity prices. Our P&C combined ratio for the quarter was 87.5% – simply an excellent result.
We benefited modestly from prior period development – short-tail related – and this includes a prior year crop insurance adjustment that was positive but much less so than ‘08’s first quarter. While there were a number of natural catastrophes in the first quarter around the globe, our CAT losses were within expectations at approximately $36 million after-tax.
Net investment income was up modestly over prior year but below fourth quarter. Investment income was impacted by both a more defensive investment posture adopted in the fourth quarter and foreign exchange. Phil Bancroft and Tim Boroughs, our chief investment officer, will speak more about that. Let me simply say we are adjusting the tactics around our investment strategy having gained a bit more visibility, and we’ll be putting to work in the second quarter much of the amount of cash built up by our portfolio managers.
Our balance sheet is in good shape, and in my judgment, our capital position is strong. Our return on equity was 18.4%.
I want to make a few comments about growth, pricing and the market environment. Total company net written premiums were up 9%, and, adjusting for the negative impact of foreign exchange, were up approximately 15% – a pretty good performance given global recessionary and pricing conditions. Keep in mind we continued to benefit from the Combined Insurance acquisition, which again improved our growth rate this quarter.
Our P&C businesses, both insurance and reinsurance, grew in the period. This was the first time our global P&C reinsurance business has grown since 2006, with net premiums up 4% over prior year. In fact, on a treaty year basis, our reinsurance premiums are up 23% year to date through April, and this will show up in future quarter growth rates. For reinsurance, growth was due to a combination of firming prices – particularly in the North American and Bermuda markets – as well as companies purchasing additional reinsurance due to capital management requirements.
In the U.S., we saw rates for most lines and particularly risk property move up 5-10%. In Bermuda, we also saw prices improve, with CAT-related lines up 7.5 -15% for U.S. business and flat to up 7.5% for international business. CAT reinsurance pricing is continuing to firm, and in the second quarter so far we are seeing prices up 20-30%. One clear trend across the world that benefited our Global Re business is counterparty security. It is clearly more important to clients, and as a result ACE is definitely benefiting with stronger signings and increased line size.
Turning to the insurance side, P&C pricing during the quarter was generally in line or better than what we contemplated in our ‘09 plans. As I said last quarter, and it still holds true, rates overall are firming, and faster in reinsurance than insurance. In many classes of insurance, rates are flat to up, and where prices are declining, they are doing so at a slower rate.
The balance of first quarter insurance pricing was essentially unchanged from what we reported for January 1, although in April we have seen some further tightening in select classes such as energy, CAT-exposed property and certain areas of professional lines. In general, the larger the risk, the firmer the pricing. Primary or first excess layers are generally firmer than excess layers. It is clear in lines and layers where it is about more than simply capacity – where clients are seeking the service, expertise, balance sheet and presence of a company like ACE – prices are firmer. We are definitely experiencing in our retail business a positive benefit from flight to both capability and safety, and that is showing up in growth rates in certain lines, particularly casualty-related.
At the moment, there are countervailing forces at work in the marketplace – some bode toward continued firming, others keep prices from firming more rapidly and in fact fuel competition. On the demand side, client exposures are down due to recession, and that means less pressure on capital to exposure. Further, because of economic conditions, buyers have less ability to pay for increases and are seeking cheaper alternatives or any alternatives but a price increase. Many are willing to place their business with lower-rated, cheaper capacity. On the supply side, one large damaged company and smaller, newer companies simply in search of market share are willing to cut price.
However, the fundamental truths that portend continued firming remain. I include in that current industry underwriting and investment results, weaker though adequate balance sheets and a firming reinsurance market. In sum, I believe rates will continue to firm as time goes along. How fast, what lines and where, I cannot predict with certainty. But we are patient, and as they do, we will gain share, and that equals growth. In the meantime, again, recession is impacting exposures and clients’ insurance budgets, and this along with FX will continue to place pressure on premium growth rates.
Let me provide a bit more color around P&C growth and pricing. Our P&C net written premiums grew 1% on a reported basis, while on a constant dollar basis they grew 7%. On a constant dollar basis, our global retail P&C business – ACE USA and ACE International – grew 5% while our London and U.S. wholesale business, after excluding crop insurance, shrank by 15%. Wholesale remains more competitive than retail.
In North America, net premiums written increased 2.5%. Retail was up about 3%, with long-tail lines growing and short-tail shrinking. New business was up 20% while renewals were down about 4% – much of that exposure-related due to recession, though also due to our pricing discipline. Our renewal retention rate was 88%. We were able to secure our prices more often on casualty business than short-tail lines, and that’s the flight-to-capability and safety element. Our specialty casualty lines, including excess casualty, construction wraps and environmental, grew 7%. Our risk management was up 4%, our professional lines, including financial institutions, grew 24% and our medical professional was up 12%. Overall, rates in U.S. retail were up about 3% in the quarter.
For U.S. wholesale, premiums were up 29%. Excluding crop, premiums were down 16%. Rates were up 3.5% overall with casualty and property up 4% and 6.5%, respectively. Competition continued unabated in E&S casualty, and we deliberately shrunk our property portfolio, freeing up aggregate for a firmer rate environment later in the year.
For international P&C, retail premiums in constant dollar were up 5% – new was up about 7.5% and the renewal retention rate was 77%. Rates overall in international P&C were up modestly at 1% in the quarter, and all lines and regions were in a pretty tight range. Pricing varied from up 3% to down 1% with a lot flat. Except for Continental Europe, market tone is improving and pricing firming. One or two large damaged players continue to be the exception. For international wholesale, premiums in constant dollars were down 14% as we strove to attain price in a continuing competitive London subscription market environment. Our rates were up 9% – driven by property, energy, marine and professional lines.
Before turning it over to Phil, I would like to repeat a few comments I made last quarter about our political risk and trade credit business as we continue to get a number of questions about our exposure given global economic conditions. Trade credit continues to run in line with our expectations. There is nothing that we have seen to date that is outside of our expectations of loss for the business.
This is also true of the political risk business. We have what we consider to be reasonable levels of exposure in many of the countries that are in the news and that you might be concerned about. We approach this business conservatively and have stuck to the fundamentals. We have no claims of any size reported or pending at this moment. We have a situation watch list and we are constantly reviewing our portfolio exposure.
Again, as I mentioned on the last call, our exposures have been declining in hot spot countries. We hold reserves for this business and reinsurance for the portfolio, and results are tracking with or better than our expectations. Of course, we expect a certain level of loss activity – after all, we are in the business of risk – but we are not concerned with our exposure. Frankly, I just don't see a problem on the horizon in political risk.
I hope that helps. We are planning to record a web presentation on this subject to educate you further, and it will be available in the next 30-45 days.
In closing, I am quite confident about ACE’s prospects in both the near and long term given our capabilities, our balance sheet, our people, and our single-minded focus on staying true to underwriting integrity. We are gaining in the marketplace, acquiring talent and growing our presence, particularly in specialty classes. It’s a long race and we are patient in strategy and impatient in execution.