The insurance “underwriting environment is improving,” with rates on the rise, according to Evan Greenberg, chairman and chief executive officer of ACE Ltd., which reported a sharp decline in net income but a sparkling 87 combined ratio for last year’s final quarter.

Mr. Greenberg noted that fourth-quarter 2008 net income of only $20 million, or 6 cents per share—compared with $572 million, or $1.69 per share a year earlier—was marred by $440 million of other-than-temporary impairment charges (accounting charges related to investments) and poor performance in the life reinsurance business of his Zurich-based carrier.

“The fourth quarter [of 2008] was a difficult finish to a difficult year for all financial services companies—ACE included,” Mr. Greenberg said. But he pointed out that given the turbulence in financial markets and the economic environment generally, “on an operating basis, ACE had a good quarter,” with property-casualty and accident and health operations both performing well.

Overall, ACE’s after-tax operating income—excluding realized losses from investments—fell 10 percent to $624 million in the quarter. Full-year operating income was $2.6 billion, dropping 4 percent from 2007. Mr. Greenberg noted that fourth-quarter operating income benefited from $250 million worth of prior-period loss reserve development.

Commenting on the overall underwriting result—an 87 combined ratio for the quarter, which translates into a pre-tax profit figure of $349 million—he said that “in our judgment, it is simply an excellent result.”

Offering some commentary on current market dynamics to support his view that the “underwriting environment in improving,” Mr. Greenberg said rates firmed throughout the fourth quarter and continued to do so into January.

“Globally, for the business we renewed through the quarter, rates went from minus-6 percent in the third quarter to flat in the fourth quarter,” he reported.

“While still choppy, the overall market is moving and reacting to a need to raise rates, but not as fast as we are,” he said, identifying large-account and catastrophe-exposed property insurance business as well as excess and surplus casualty as areas where prices are still inadequate.

Later, offering more specifics on U.S. business, Mr. Greenberg said accounts produced by retail brokers went from an average rate cut of 3.5 percent in October to a hike of 5 percent in January, while wholesaler-produced business went from a drop of 5 percent in October to a raise of 5 percent in January.

“In North America, we have substantially more opportunity to quote business as a result of market turmoil,” he added. “In those lines where rates are adequate, we are benefiting from the weakness of others by improving our position on accounts—moving into primary lead or a first-excess position,” citing as examples some excess casualty accounts, as well as directors and officers, environmental and medical liability business.

Mr. Greenberg noted that while rate-to-exposure measures are improving in many p-c lines, exposure is declining as a result of the recession. Potentially, “this means better [profit] margins, but not necessarily more premium,” he observed.

Asked to comment on whether pricing discipline exercised by ACE would impact premium volume, Mr. Greenberg said there are “two flavors” of clients—those willing to pay more for quality and security, and those instead going to other carriers to save premium dollars. He also cited a “flight to quality” in lines such as D&O, where service capabilities and long-term market presence matter.

In “pure commodity” lines, however, where “you put up capacity and a price, and there are 20 guys who do it,” clients will just take the lower price. “I understand it,” Mr. Greenberg said, noting that with recessionary pressures weighing heavily on many customers, “they view insurance as another expense, and they want to pay as little as possible for it.”

In those situations, ACE is maintaining price discipline but trying to offer cheaper alternatives—such as policies with deductibles, coinsurance or coverage changes—to keep premiums within client budgets. “You’ve got to recognize the times you’re in,” he said.

Copyright © 2009 by National Underwriter Property & Casualty Magazine.