Analysts, Investors Flunk ACE's Best

By Susanne Sclafane

NU Online News Service, May 1, 4:14 p.m. EST?ACE Limited, despite posting its best quarter on record, saw its stock price tumble in early trading today.

Shares for the Hamilton, Bermuda, company dropped 10 percent below yesterday's closing price even as ACE reported first-quarter operating income of $216 million, or 77 cents per share, "a new high for ACE," according to Chairman and Chief Executive Officer Brian Duperreault.

First-quarter operating earnings grew roughly 32 percent over first-quarter 2001, when operating earnings came in at $164 million.

During a conference call this morning, Mr. Duperreault and other executives also reported that nearly all of the company's diverse operations performed as expected or better. The only exception was ACE's Lloyd's operation, which produced nearly a breakeven result for the period compared with an $8.4 billion operating profit a year ago, Mr. Duperreault said.

He said that the quarter was an important one for ACE, noting that the bottom-line profits came after three successive quarters of significant losses. He also reported that the consolidated combined ratio across all of ACE Limited's operation, which came in at 93.1, was the best combined ratio posted since ACE acquired CIGNA's property-casualty operations in 1999.

But Mr. Duperreault and company spent most of the question-and-answer period of the call addressing a tense group of analysts who delivered some negatively-worded questions about growth and earnings prospects.

At some points, executives present on the call even phoned other off-site ACE executives to drag them into the mix in an effort to clarify the earnings picture.

"The issue is that they just did not grow as much as we expected," Paul Newsome, an analyst for Lehman Brothers in New York told National Underwriter later, noting that most of the focus of the analysts' concern was on premiums.

"They did have a good quarter," but it wasn't where analysts and investors thought extremely good and extremely aggressive companies should be at this point of the cycle, he said, noting that that "top-tier" companies, like XL Capital, for example, had premium growth of more than 40 percent.

"Here, [for ACE], the growth was 22 percent or 30 percent," depending on how you calculate the growth rate, he said.

During the ACE conference call, executives repeatedly discussed how to calculate it and stressed the distorting impact of "LPTs," or loss portfolio transfers, on the premium growth figures, in an attempt to address analysts' concerns.

According to Mr. Duperreault and other executives, ACE wrote three LPT contracts that generated $250 million in premium in the first quarter of 2001.

Essentially, in a loss portfolio transfer, the assuming insurance company agrees to take on and settle out the incurred losses of another insurer or self-insured in situations where, for example, the ceding company may want to exit a certain line of business.

Noting that no LPTs were written in first-quarter 2002, and that premiums for the three contracts written in first-quarter 2001 were accounted for as written and earned in that quarter, he said the contracts throw off a typical quarter-to-quarter comparison.

Although reported results show gross written premiums rising only 22 percent (to $3.1 billion), net written premiums rising only 15 percent (to just under $2 billion), and flat net earned premiums (at $1.4 billion), he said that growth figures would be higher, ignoring the impact of the LPTs. Excluding the impact of the three contracts, he reported that net earned premium growth would have been 22 percent, and that gross and net written premiums jumped about 34 percent.

ACE executives also said that there is a growing demand for LPTs as other insurance companies continue to seek to withdraw from certain markets.

Analysts also had anticipated earnings per share about five cents higher than that 77 cents that ACE reported.

Mr. Duppereault noted that "a very important item" affecting earnings per share was a nearly 12 percent increase in the number of shares ACE carried for the period as a result of its October 2001 share offering. "While we enjoyed good growth for the period, we were not able to fully deploy the capital in only one quarter," he said, reporting that the earnings-per-share impact was about 4 cents per share.

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Analysts, Investors Flunk ACE's Best

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