ACE Q4 Net Income Drops 96% to $20 Million; $1.2 Billion Full Year

ACE Limited reported net income for the fourth quarter ended December 31, 2008, of $20 million, a 96 percent decline from the $572 million the group posted in the same period of 2007. The company recorded net losses on investments during the period of $604 million. Excluding those losses, its net operating income for the quarter was $624 million.

ACE reported net income for the full year of $1.197 billion, a 54 percent drop from the $2.578 billion it recorded in 2007. Again, the main cause was a significant loss on investments of $1.394 billion, compared to a loss of $134 million in 2007. Income excluding net realized gains (losses) and net of tax was down only four percent to $2.591 billion.

Chairman and CEO Evan G. Greenberg stated: “ACE produced strong operating results in one of the most difficult quarters in modern history for financial services companies. Our core property and casualty and accident and health businesses performed extremely well with total operating income in the quarter of $624 million. The P&C combined ratio was 86.9 percent.

“Net income suffered from other-than-temporary-impairment losses related mostly to interest rate spreads in the period. Book value, which declined 6 percent in the quarter and 10 percent for the year, was impacted by realized and unrealized investment losses, extreme foreign exchange fluctuation and a loss from a fair value increase in the liabilities associated with our life reinsurance business. We believe most of the losses in the portfolio and life reinsurance business will recover in value over time. Even with this year’s decline, our book value has grown at a compound annual growth rate of 12 percent the last five years.

“ACE experienced in this quarter the volatility that can accompany the business activity of a global risk-taking organization. Global presence and risk-taking discipline are our sources of strength, and we are using them to our advantage. In the quarter, we began to improve our price-to-exposure from firming insurance prices and gain market share in certain classes from weakened competitors. While the recessionary conditions are formidable, we are encouraged by government efforts to stimulate the economy.”

Other operating highlights included the following:
— Net premiums written and earned in the quarter were up 8 percent and 6 percent, respectively, over the prior year quarter. Excluding the impact of foreign exchange, net premiums written and earned increased 13 percent and 10 percent, respectively, over the prior year quarter.
— Net P&C premiums written and earned, which include international accident and health (A&H), decreased 1 percent and 3 percent, respectively, over the prior year quarter. Excluding the impact of foreign exchange, net P&C premiums written and earned increased 3 percent and 1 percent, respectively, over the prior year quarter.
— The P&C combined ratio for the quarter was 86.9 percent compared with 88.1 percent for the prior year quarter for the year, the P&C combined ratio was 89.6 percent compared with 87.9 percent for 2007.
— Positive net prior period development in the quarter of $252 million pre-tax included a $68 million take-down of a reserve on a single, large structured transaction that settled in the quarter. The company also incurred a pre-tax charge of $51 million for asbestos, environmental and other run-off (A&E) losses as a result of both internal and external actuarial reviews.
— Pre-tax underwriting income excluding the life insurance and reinsurance segment increased 7 percent over the prior year quarter to $375 million compared with $351 million for the same quarter last year.
— The P&C expense ratio reported in the quarter increased by 1.4 percentage points from the prior year quarter. Excluding A&H, the expense ratio was flat compared with the prior year quarter.
— Operating cash flow was $960 million for the quarter. For the year, operating cash flow was $4.1 billion.
— Reinsurance recoverables decreased $308 million for the quarter largely due to foreign exchange; year-to-date, reinsurance recoverables decreased $437 million.
— Net loss reserves decreased $889 million during the quarter primarily due to the impact of foreign exchange revaluation of approximately $700 million; year-to-date, net loss reserves increased $501 million, and $1.4 billion excluding the impact of foreign exchange.
— Net investment income increased 3 percent over the prior year quarter to $521 million.
— Return on average equity for the fourth quarter was 16.7 percent and for the year was 16.8 percent.(2)
— Book value decreased $1.7 billion or 10 percent from December 31, 2007 excluding the redemption of the preferred shares while book value per share decreased from $48.89 at December 31, 2007 to $43.30.
— Net realized and unrealized losses after tax from our investment portfolio totaled approximately $1 billion for the quarter. This includes $608 million of unrealized losses and $404 million of realized losses. Net realized losses from derivative accounting related to the guaranteed minimum income benefits (GMIBs) of our life reinsurance business were approximately $207 million.

ACE will host its fourth quarter earnings conference call and webcast Today, Wednesday, February 4, 2009, beginning at 8:30 a.m. ET. The earnings conference call will be available via live and archived webcast at: www.acelimited.com. The complete earnings report is also available on the Group’s web site.

Source: ACE Limited