NU Online News Service, July 25, 1:33 p.m. EDT
The drought in the United States is expected to cause as much as $68 million in third-quarter crop-insurance losses for ACE, says the company's chief executive.
During a conference call with financial analysts today, Evan G. Greenberg, chairman and chief executive officer for the Zurich-based international insurer ACE Ltd., says that while second-quarter results for crop insurance were in-line with expectations, the remainder of the year would likely produce higher loss results.
"There is much discussion about drought conditions in the U.S., in some states quite severe and with a serious impact on crops," says Greenberg. "Based on conditions as they stand now, and given our portfolio mix by state and crop, we will adjust our crop loss ratio for the year up in the range of five points during the third quarter, bringing our crop related business combined ratio to between 93 and 94 percent."
He says about $68 million after tax in estimated losses for Q3 is "our best estimate at this time."
He went on to say that should the current drought conditions worsen and continue until harvest time, "our modeled worst-case loss, based on what we know, would be an additional circa $200 million, after tax."
He emphasized that the company "is not predicting this outcome. We are simply letting you know the outer-bounds of reasonable, worst case."
To put the loss in perspective, he continues, the crop loss would be less than the catastrophe losses for the first six months of this year. He notes that the company remains within its year-to-date current accident year projection.
"While crop is not part of our cat load, these drought conditions are another form of cat," says Greenberg, adding that it underscores the company's risk diversification and risk management.
However, the assurance did little to dampen analysts' interest in how crop-insurance losses would affect the company, which dominated the question and answer session.
Greenberg notes that overall, the crop-insurance business has been a very good one, "but it is a cat business" and subject to occasional losses.
As for ACE's second-quarter performance, the company reports net income was off 45 percent, or $266 million, to $328 million for the quarter. Second-quarter net premiums written increased 4.5 percent, or $177 million, to $5.65 billion.
The drop in net income was due to the combination of mark-to-market losses on investments and the negative impact of foreign exchange.
For the first six months of the year, net income was up 54 percent, or $457 million, to $1.3 billion. Net premiums written rose 4 percent, or $303 million, to $10.44 billion.
The company reports its combined ratio for the second quarter improved 4 points to 88.7. For the first six months of the year the combined ratio improved 9.6 points to 88.9.
Overall, Greenberg calls the company's performance "very good, marked by excellent operating earnings, strong broad-based premium growth and an improving [property and casualty] pricing environment in a number of areas of the world."
He says North America premium pricing increased 4.7 percent and new business obtained higher pricing when compared to ACE renewal book. Average rate increase on retail business went from 2.6 percent in the first quarter to 4.1 percent in the second. Wholesale increases went from 6.6 percent to 8.6 percent in the second quarter.
Rate increases in the United States retail and wholesale were led by property, with rates up 14 and 10 percent respectively. Casualty rate was up 5 percent, excluding workers comp. The company's excess and surplus lines business was up 8.5 percent overall, Greenberg says, adding, "We had positive rate in all E&S classes."
Greenberg cautioned that the economic crisis in Europe and political uncertainties over U.S. fiscal future are challenges to be faced, but otherwise, earnings look good, "except for the notable exception of crop insurance."
"I don't view this as a hard market," says Greenberg. "I view this as a pricing correction. We are hardly in a hard market."
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