丘博保險集團 (CB) 2010 Q1 法說會逐字稿

Good day and welcome to the ACE Limited first quarter 2010 earnings conference call. Today's call is being recorded. (Operator Instructions)

For opening remarks and introductions, I'd like to turn the call over to Helen Wilson, Investor Relations.

Thank you and welcome to the ACE Limited March 31st, 2010 first quarter earnings conference call. Our report today will contain forward looking statements. These include statements relating to economic and insurance industry trends, our financial outlook, competition and growth prospects, all of which are subject to risks and uncertainties. Actual results may differ materially. Please refer to our most recent SEC filings as well as our earnings press release and financial supplement which are available on our website for more information on factors that could affect these matters. This is being broadcast live and will be available for replay for one month. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

Now I'd like to introduce our speakers. First we have Evan Greenberg, Chairman and Chief Executive Officer, followed by Phil Bancroft, our Chief Financial Officer. Then we'll take your questions. Also with us to assist with questions are several members of our management team. Now it's my pleasure to turn the call over to Evan.

Good morning. All things considered, an eventful quarter for natural catastrophes, the continued impact of recession, and competitive market conditions, ACE had a good first quarter and start to 2010.

After tax operating income for the quarter was $579 million or $1.70 per share, while net income in the period was $755 million. All divisions of the Company made a strong contribution to results. We recorded $149 million in after tax cat losses for the quarter which was marked by a large number of significant natural catastrophes globally. As you know, we previously reported a first-quarter loss estimate of $125 million after tax. That estimate for the cohort of the catastrophes known at the time has improved. However, subsequent to the announcement, there were a number of additional events including the storms in Perth, Australia and the northeast United States, both of which resulted in historic levels of flooding. Losses from those additional storms are estimated at $32 million after tax. We have included an exhibit in our supplement that sheds more light on our Cat losses, both gross and net.

I believe ACE's level of losses in total demonstrate good underwriting discipline and risk management. It is worth was noting that of the global cat losses, global Re's were $29 million, a relatively modest number that reflects what has been our underwriting position regarding non-US CAT RE, namely that we are underweight exposure because of inadequate pricing and in many instances, lack of credible data. Some analysts have expressed surprise at the level of our net CAT losses. I would refer you to our 10-K where we provide disclosure about our catastrophe reinsurance protections, including the fact that we purchase in certain regions of the world drop-down covers. Knowing this fact may help you better understand the level of our losses.

We benefited in the quarter from positive prior period reserve development, in the amount of approximately $96 million, nearly all of which was short-tail lines related. Over $40 billion of the $96 billion was the '09 year crop insurance adjustment. As you might recall, the first quarter's results typically include a prior-year crop adjustment, which in a good year helps the loss ratio but hurts the expense ratio. Our combined ratio for the first quarter was 92.8% which was very good. The underlying health of our business is in good shape as demonstrated by our current accident year combined ex CAT of 90.2% versus 88.6% last year. The expense ratio was up about three points in the quarter compared to the same period last year, two-thirds of which was due to crop profit sharing and CAT reinstatement premiums. Phil will provide more details.

I want to make a few comments about growth, pricing, and the environment. Total Company net written premiums were up 4%, and adjusting for foreign exchange, they were up 1%, reflecting both the economic environment and insurance market pricing pressures. We are obviously operating in a competitive insurance market, in my judgment for the industry overall, the Cat losses in the first quarter are an income event, not a balance sheet event or, for most companies, a reassessment of risk event. As a result, I believe we are going to continue facing competitive market conditions. On the other hand, the economy in general has stabilized and is showing some signs of improvement. With that said, generally speaking for ACE, while there is less opportunity to write new business at an acceptable return, there is still much opportunity around the globe nonetheless because of our capability both geographic and product.

We saw many of the same competitive trends I've spoken about in the past, continue in the quarter. For example, retail insurance performed better than wholesale. With retail growing 4.5% in constant dollar and wholesale shrinking 1%. In the US, retail P&C insurance net premiums grew 6% in the first quarter. Our renewal retention ratio was steady at around 88%. However, because of our decision to invest and grow last year, particularly in numerous specialty casualty-related areas, our available renewal premium in the first quarter was up rather significantly over prior in a number of areas such as professional lines, excess casualty, environmental, and construction. Our premium growth in North America also benefited in the quarter from our capability to handle complex and fronted business which added to growth in both gross and net. Specifically we wrote a couple of loss portfolio transfer-type accounts as well as a number of large global and risk management type property and casualty accounts. We also wrote late last year as a result of a flight to quality, a couple of large workers comp programs, and these are contributing to our new business growth, as well. Excluding these items, our total new business writings -- were down, even though our submission counts continued to rise.

Pricing for the business we wrote in the quarter was down about 1.25% in North America. In general, pricing on new business was worse than on renewals by about 3%, although it varies by line. Let me give you some renewal pricing specifics. Casualty-related lines -- umbrella excess, environmental, construction, and custom casualty overall was up about 2%. Energy-type property rates were down about 4%. Commercial property and marine was down about 5%. And for risk management business which is GL and Comp was flat. Medical,professional liability pricing was down 5%. Professional lines, D&O, E&O, and FI all blended together, were down about 3.5%.

On the international side, retail P&C insurance grew 5% in constant dollar during the first quarter. The renewal retention ratio was steady for the quarter. Pricing for the business we wrote was down 1%, property was flat, financial lines were down about 3%, and casualty was down about 1%. On the wholesale side of our business, our London-based business shrank 16%, while our US wholesale was down 25%. However, this included a decline in crop insurance premiums of over 30%, offset to some extent by about a 10% increase in other lines, made up predominantly of growth in CAT-related property, increased retentions in our professional liability business, and good growth in wholesale environmental. Our Bermuda-based wholesale business was flat. One last thought on the insurance market environment. Client business exposures that we use for rating purposes were down approximately 5% to 6% in the quarter, particularly client sales related exposures. This obviously impacted premium revenue. As we have said in the past, insurance lags broader economic activity. For our clients renewing in the first quarter, we are rating off a base that begins with their '09 exposures -- both for retro premium adjustments and for calculating current year's renewal.

Turning briefly to some of our other businesses. Global Re saw reasonable growth in the quarter, although it was primarily a consequence of the business we wrote in 2009. Annualized underwriting year premiums written in the quarter actually shrank. Our high net worth personal lines business in the US had another good quarter and is growing rapidly and according to plan. Net premiums were up 43%. We have developed an excellent reputation for underwriting and servicing of this business, and it is contributing nicely to our growth.

Finally, turning to our accident and health insurance business, A&H grew 8% in the quarter, benefiting from foreign exchange. In constant dollars, A&H was essentially flat. A&H growth rates are stabilizing, though it varies by region and business. Growth continues to be impacted by the recession globally -- lower employee counts, fewer travelers, and a slow return or no return to consumer credit. Combined insurance has improved, and growth in constant dollar began to pick up modestly in the quarter. Their new model for modernizing agency in the US is showing the best results in terms of agent productivity we've seen yet. In fact, equaling or exceeding our expectations. As a result, I'm optimistic about the future for our US business, and we are adopting and exporting the model to other markets. For the quarter in combined's other large markets, Australia and New Zealand are doing very well, and growth has picked up. Spain which is small but has good potential is beginning to show signs of improvement and the UK is stabilizing and showing a better trend, while Ireland continues to lag.

ACE International, our other major A&H portfolio has stabilized but is not yet demonstrating real growth. In constant dollar, premiums were down 1% when you include some of the A&H premium that was more appropriately moved to the life insurance division. We have a lot of activity and opportunities in the pipeline, and expect both Combined Insurance and International A&H to continue to improve and resume positive and meaningful growth as the year progresses, particularly in the second half. Lastly, we have received calls about the impact of volcanic ash on our travel accident business. We expect losses to be de minimus.

With that I'll turn the call over to Phil and then we'll be back to take your questions.

Thank you, Evan. Our balance sheet continued to grow stronger in the first quarter. Our cash and invested assets grew by almost $1.3 billion. Our tangible book value per share increased by 5.8% to $49.48, and our operating cash flow was strong at about $820 million.

Operating ROE for the quarter was 12%. Net realized and unrealized gains from our investment portfolio were $574 million before tax. Our investment portfolio was in an overall unrealized gain position of $1.2 billion pretax as of March 31. Included in our realized gain is about $44 million related to the sale of our AGO shares. We have now sold all of our remaining interest in AGO. Our portfolio continues to be predominantly invested in publicly traded, investment grade, fixed income securities, and is well diversified across geographies, sectors, and issuers. The average credit rating remains at AA with over half invested in AAA securities. The duration of our portfolio is relatively short at 3.7 years.

Investment income was $504 million. Income on new cash flow was offset by lower new money yields and our investment income was about flat with last year. The average yield on our invested assets is 4.4% with new money rates around 4%, assuming we invest funds in a similar distribution to our existing portfolio. Net loss reserves were up about $25 million for the quarter. They were impacted by foreign exchange which reduced the growth by approximately $200 million. Our paid to incurred ratio was 92% and has been steady for the past four or five quarters. Our expense ratio is up three percentage points compared to last year. This increase includes the effect of our annual crop settlement which was about half of the increase, and foreign exchange and the impact of reinstatement premiums for this quarter's CAT losses. Adjusted for these three items, the expense ratio increased by about 70 basis points. Given the number of unusual items impacting the expense ratio this quarter, we've included an additional page of disclosure in the supplement.

Financial flexibility at the holding company level remains strong given our operating Companies dividend capacity and low levels of debt refinancing needs over the next five years. Our debt to total capital leverage ratio of 13.6% continues to be conservative relative to our current rating level and our reinsurance recoverable leverage is down to about 65%. With that I'll turn the call back to Helen.

Thank you Phil. At this point we'd be happy to take your questions.

Thank you. (Operator Instructions) We'll take our first question from Jay Gelb with Barclays Capital.

Thanks, good morning. A couple questions for you. First, could you give us a sense of potential exposure for ACE on Deepwater Horizon both on the property and maybe on the environmental side. Second, I was wondering if ACE had any plans to update guidance based on the first-quarter catastrophe experience. And I'll stop there.

No, we will not update -- we don't update guidance now. We will take a look at mid--year and if there is a reason to update it, well, in either event, we will comment on guidance at that time.

As far the offshore rig, look, this is a class of business we write. As you know, as a matter of policy, we don't comment on individual claims. However, what is our policy and has been our practice -- if there's anything material, that could impact us, we will notify you of that. We will put something out about it. So that's all I'm going to say about that.

Is it fair to say, though, that with catastrophe losses already in the first quarter, taking a path of the amount that you estimated for the year and then the second-quarter impact, potentially Deepwater Horizon, it feels like it's getting up there in terms of the CAT load before wind season.

First of all, I think you're mixing chalk and cheese. CAT losses are simply for natural catastrophes. That's wind and flood and quake and everything else going on in the world that's mother nature related, and you wouldn't update your guidance based on that because who knows what the total year is going to look like in terms of catastrophes. Mother nature doesn't schedule them on a quarterly basis to flow in some sort of predictable way. And so, second quarter could be light for CATs, third quarter could be light, you could be right on what you projected for the annual. I don't think you update based on the CAT losses. And something like the rig, no, that's an energy-related loss, and that's totally separate from CAT.

I understand. What type of reinsurance protection outward does ACE have for energy losses?

We don't comment on that.

Okay. Thanks.

Next we'll move to Keith Walsh with Citi.

Good morning, gentlemen. Evan, first for you. Just any thoughts on the Dodd bill that's currently being debated out there in Congress and thinking about the impact on your Company and on the P&C industry, as well?

Yes. The bill right now contains for the industry a provision potentially that would have this new systemic risk regulator viewing P&C insurance as well for scanning for systemic risk. Number two, if they have -- and right now as of last night it appears that the fund, the prefunded fund is -- or post funded -- is out for the moment. But any fund could potentially include P&C insurance. Now they've really diluted it in terms of the parameters under which they would assess and, therefore, the impact on P&C. However, we and most of the major companies in the US, we have come together as a coalition to actively fight this, given that we are highly and well regulated by the states, and we already pay into for systemic and already pay into a solvency fund. And P&C is not systemic. So we're making those arguments to not simply dilute what P&C's characteristic could be if there was a fund, but get us out completely because it's redundant.

Secondly, for systemic let's not have duplication of the fed's oversighting and the state's. Let's be clear within the bill that it leaves it to the states. Even if there is some kind of scanning and oversight by the feds in systemic. That answer it for you?

Yes. Absolutely. Then the second question around the accident and health business. You've got this pretty differentiated franchise from most of your commercial P&C peers.

Yes.

Yet you don't -- you guys don't really do a good job disclosing it in the market. And I'm curious why the disclosure isn't -- the Company isn't carved out separately. You don't give us allocated capital to really measure and value that piece of the business if you want to get paid for it in your stock.

Well, it's a fine line to walk. It's a fine balance of how much transparency you provide and give a roadmap to your competitors of how to think about that.

With all due respect you have Aflac as stand alone out there we could look at.

I understand that, and Aflac is fundamentally a Japanese cancer insurance and other supplement-related business. Next to impossible to get into. And others have. A few others have. I get that. And so it's a fine line, and we make a judgment.

Okay. Thanks a lot.

You may not -- I appreciate you may not love my answer, but I'm giving you our logic.

That's great. Thank you.

You're welcome.

Next we'll go to Matthew Heimermann with JPMorgan.

Good morning, everyone, a couple questions. And I realized nit picking one quarter with respect to the accident year loss ratio is a little bit dangerous. But looked a little bit low relative to where you've been running on in prior quarters and on an annual basis. And didn't know if there was anything unusual affecting that ratio this quarter.

I thought you might ask me that question. It's up, and it's up over prior year. And I think you need to look at it quarter prior year on prior year. Not sequential quarter because there's a lot of seasonality to our business, number one. It is up. It's up more than it actually appears when you adjust for one or two things. Crop insurance -- .

Can I stop you for one second? Because I actually -- I'm getting a ratio that's down versus the prior period. And --

We'll have to take it offline because it is up over --

If you go to page two of the supplement and you look at the adjustments that we make at the bottom of the page, it's actually going in our view from 60.7% to 61.1%.

Okay.

So Matt, we'll just take math calculation offline, okay?

That's fair. Could you go ahead, though, and continue on the underlying movements that you were going to discuss anyway, just to get a little bit more granularity on what's under the surface?

I'd be pleased to to that. It's going up more than it shows, and broadly retail insurance versus wholesale, retail is up significantly more. I say significantly, a couple of points. Wholesale is actually down a little bit. And what you adjust for is crop insurance. We wrote less crop for the current accident year, and Brian could explain why. And crop carries a higher loss ratio with it. So that becomes a mixed change. And by the way, some of the rest of you may notice in our supplement that it looks like casualty is a bigger percentage of our business. It's really not. It's that we wrote less crop that gets booked in property. And if you adjust for that and that's just a matter of commodity prices really that's dropping, I believe. Brian will talk more about it. But anyway, that also impacts the current accident year loss ratio predominantly. That's the main reason.

Okay.

Then in the Westchester, we also wrote more property CAT-related business in the quarter than casualty, and that carries a lower loss ratio. So it's those sorts of things that actually are masking what is -- when you go product by product, cohort by cohort, a higher, an increasing trend in current accident year -- which is perfectly normal and natural given pricing and what we think is enduring trend.

That's fair. And then on the high net worth business, can you just talk to me a little bit about -- granted, that's a small business for you so growth isn't surprising. Could you just discuss maybe how you're attracting new business, and how you're pricing and coverage might vary from some of the more established players in that market.

Sure. And we're not buying the business. With that I'm going to let Brian talk to you about it because this market is not such a price-sensitive market as much they are service and coverage.

Yes. I think that's right. As you correctly point out, it is a pretty modest-size business. We are as we talked about when we acquired this business, one of the things we wanted to bring to it was the scope of ACE. Now the full distribution capabilities of ACE around the country, we've expanded from 16 states to 50 states, and we're utilizing our distribution systems. Remember, this is a business that frankly the vast majority of it is with carriers who really don't want it. We always think about AIG Firemen's Fund had a lot of its business. But in their total market share is probably less than 10%.

So there's a lot of this business available through our distribution system that we get. Frankly, our pricing is very comparable to our peers. It isn't a price game for the most part. It is a service-oriented business, and we have terrific service capabilities in this area. So we're really pleased with where it's going, and it frankly is leveraging the ACE organization to its fullest extent.

And by the way, I invite you to talk to agents out there about the experience with ACE and this business. Our systems are considered the superior gold standard now for supporting agents in doing the business. And by the way, for those of you who qualify, we'd be very happy to quote and underwrite yours. And I think you'll see why people are enjoying putting their business with ACE.

All right. Thanks for the answer and the offer.

A little advertising.

Bye.

Next we have Jay Cohen with Bank of America Merrill Lynch.

Good morning, Jay.

Good morning. Several questions. First, can you tell us actually how big the personal lines business is at this point. Premium wise?

At the end of the year last year, we told you I believe that in the fourth quarter, I put it in our commentary that we write on an annual basis at the end of '09 just shy of about $1 billion of total personal lines, domestic and foreign.

That's great. Another question --

More into specialty personal lines and the US is predominantly the high network.

Two other questions. I'll ask them both and let you comment. First, can you talk about what you're seeing from a loss trend standpoint, specifically claims frequency. Then secondly, are you seeing in the market more acquisition opportunities to consider?

Sure. I'm going to ask Brian to just talk about loss frequency -- loss trend we're seeing, not necessarily that'll split loss frequency and severity -- it really varies by line. And, I'll come back with the acquisition.

One of the things that has continued on the loss frequency side -- we've gone through an extended period where loss frequencies are actually still down, right. The trend is starting to moderate. We saw tremendous improvement in frequencies over the last four to five years and they are starting to moderate. But the frequencies are still lower than historic norms. Severities are starting to climb a bit as the trend inflation starts to occur throughout our book. For the most part, all of our products are performing as we expected on the claims metrics.

That's great. Thanks, Brian.

You want to comment --

I think, the similar observations around the world. There are always certain markets that we observe behaving a bit unusual, be it good or bad. And I would point to some markets and particularly Southern Europe right now where we're noticing a change in the casualty environment. A change in what we're seeing in terms of both frequency and severity of losses on our liability business. But generally speaking, I think that what Brian observed for North America is consistent. As a general observation for the international market, as well.

On the acquisition environment, what would you -- what specifically, Jay, would you like me to comment on?

I think clearly a lot of people look at your balance sheet, and you have a fair amount of capital flexibility. You've made acquisitions in the past. There are opportunities out there. We're just wondering, are you seeing more opportunities coming to you? What's the acquisition environment like for you? Are you getting excited about potentially doing deals, or is it still very much the same?

Excited -- I'm an excitable fellow. The acquisition environment is, first of all, view it globally, and it really varies by the kind of business and the geography. But overall, as a result of the financial crisis, soft market -- the global environment right now has created a lot of I would say a lot of insecurity and potentially a lot of pressure on -- varies by company, a lot of pressure. And with that always comes opportunity. And then it gets down to the bid/ask. It's not simply -- it's not a flow. You don't see a big flow. It's very individual company, individual situation related.

But there's a fairly steady stream. And some of it is things that you would know about that are known situations, and they run their course. And it's a matter of time. And then there are many that you just wouldn't know about. But they are generally along the same themes. And in a word, most of the acquisition environment is presenting itself based on weakness of others, not based on strength.

And money is not burning a hole in our pocket. I have said this. And we do not feel that we have to do something, we're not imagining that 2010 could be a big acquisition year. Could be. May not be. Don't know. It's opportunistic. And, if it doesn't happen in 2010, then there's always 2011. It's got to fit. I just remind you. And I refer you also to our annual report -- our shareholder letter.

The industrial logic has to be there first. It's got to meet our strategy. It's got to advance something we are already endeavoring to do organically -- in either a product or a territory. And it's got to make us better and it's got to be accretive to shareholders, make financial sense. We're not going to kid ourselves. And by the way, accretive is not -- well, you're earning 3% or 4% on new money. So, how about a 6%. No, we're not going to play a game like that. On a risk-adjusted return basis, it's got to be accretive period.

And that bid/ask spread you mentioned where it comes down to, do you sense that's narrowing at all, are people getting more reasonable in what they're looking for for valuations?

It's all over the place, it really is. It's all over the place. There's not one theme for that.

Okay. Thanks.

You're welcome.

Next we'll go to Vinay Misquith with Credit Suisse.

Good morning. On the Chilean loss, I was wondering if you could give us some more color about your primary insurance market share in Chile. Some market sources say that it's about 5% share. But just wondering whether it's more accident and health in that area.

Vinay, it's accident and health, and it's property and casualty. It is both. It is a single -- we don't actually -- I have to tell you I don't know off the top of my head. John doesn't know off the top of his head, our precise market share. We probably wouldn't really get into that. But it's in the single digits. Yes. And it is a mix of both A&H and commercial, and the commercial is more large account commercial than it would be sort of a semi or small business. We had the big one. Loss shows how our portfolio behaved.

So trying to get a sense for if the industry losses rise -- will there be any chance that it could go to the top of the reinsurance cover in that area?

Well, chance. We're -- insurance risk business is always odds. But highly, highly, highly unlikely. Not practical.

Okay. That's great. The second question was on the casualty premiums. And this is on page five. It appears that those premiums are up 10% this quarter year over year. Maybe there was a one-time item. I was hoping you could help us with that, please.

Let me see the page. I think before I speak I just want to look for a second because I think -- you're talking about in the current quarter, you're looking at the $1.381 billion going to the $1.516 billion?

Correct.

And you're asking about the growth in that? Couple of things. There are some one-time items. We wrote a couple of large accounts that would do that. And then as I explained, we are growing, and we grew in specialty casualty-related areas, particularly I went through it -- financial lines, environmental, excess casualty, construction. We increased our presence both in the US and overseas in those areas. We wrote more new business in the first half last year, and that increased our renewal base. And so we grew from that. And though new business writings -- we wrote new business, but new business is down. So the two together between the -- our ability to handle very complex and on the other hand those specialty classes, that's where you're seeing it from.

Okay, thank you.

You're welcome.

(Operator Instructions) Next we'll go to Ian Gutterman with Adage Capital.

Good morning. How are you?

I'm good. You?

Good. Just getting over a little cold here. But just a followup on today's Chile question. There was something I believe was a Chilean government, maybe it was some industry organization, that showed all the CAT players --

$330 million.

Showed you had some really high number, then you had the loss. Can you explain that?

Yes, I can explain that. Though I'm not going to go deep into it. Just to help you with it. It is -- remember that we -- for our own retentions, we don't simply take our retentions locally in a country, but ACE's balance sheet, we pool exposures, so we have internal reinsurance to do that. And so when a government publishes that, what they don't distinguish. So you're seeing the internal reinsurance that may be all sticks to us. You certainly wouldn't see any global RE's third-party business because they don't write it from Chile locally. They would write any of that outside of Chile. I think that tells you your answer.

I guess I'm still confused. You're showing a gross -- I guess you didn't show the gross event. You showed -- okay.

You want to -- if you're not going to take all of your retention locally, then you'll have reinsurance. For internal reinsurance purposes, okay.

Okay. Now I got you.

You got it. Thank you.

Okay. To follow up on Matt's accident year question, I actually do get the math -- it was up year over year. What I want to ask you about is -- and I don't know how closely you've looked at what your peers are reporting, you've been one of the few companies who actually has shown an accident year increase year over year which seems illogical given pricing trends. It seems like most of your peers have shown improvement in their accident years which has been puzzling to me. I don't know if you've noticed that trend or not.

I've noticed.

I'm sorry?

I've noticed.

Yes. What does that tell you about where we are in the cycle? Does that make you concerned that we're starting to get to the point where companies are maybe starting to lie to themselves a bit about their results or just be a little bit more optimistic and maybe that implies that that's going to take a little bit longer for the cycle to play out than we hope?

I'm not in their heads so I can't comment on each company individually. And I wouldn't do that. I wouldn't pretend to guess for them. But I would tell you overall to me, it tells me one of two -- it tells me a couple of things -- first, as you said it, it's certainly more optimistic.

Right.

And it is certainly less conservative than it was. There is no denying it's a weakening of the balance sheet to me. And, as whereas prior accident years may have been booked on a more conservative basis, current is absolutely less conservative, and then it's going to vary by company whether they are deficient or simply adequate. Don't know. Their motivations of whether they're naive, whether they're lying to themselves or worse, I just can't speculate. However, it is not surprising this occurs in every cycle. This is how the cycle works.

Right. Just this idea that it runs smarter this time --.

Until it runs its course, you know my judgment. It turns on the balance sheet. And that's what you're watching.

Yes. Okay.

And no, I don't know that we're smarter this time. We're still human beings, we just have more equipment around us.

Exactly. And my last question is just can you -- crop you said was down 30%. I assume some of that was just price of commodities being down year over year. Did you also cut back market share?

No, no, no, we didn't cut back market share. But farmer Brian is going to give you the second reason.

You look at the first-quarter premium for crop that will increase about $100 million lower in 2010 versus 2009. It's two factors. You look at the commodity prices, and there's also the SSAP adjustment that you have to do based on the profitability of the business. I look at 2010, the first quarter -- the winter wheat prices were about 38% lower year over year. So that amounts to a big portion of the drop in premium. But the second piece which is about half -- is true that when you make a larger profit in the crop business, you have to cede more of the premium to the federal crop insurance corporation, under the terms of the SRA. So, 2009 as a year was a very profitable year. So we made more profit. But you actually see under the accounting adjustment premium to the government at a greater proportion on a higher profit year. And we make that adjustment here in the first quarter.

Okay. That makes sense. So it's not a -- I assume you probably have some concerns about the proposed legislation, but it doesn't sound like it's something that's going to necessarily change your appetite dramatically for the business. It just might be -- if something passes, there's just going to be a little bit less profitable and you have to reengineer the books some?

Certainly we've got to wait and see what the SRA looks like, right. And we'll run all of our models on how best to serve our customers, right. And certainly nothing so far in the first quarter premium has anything to do -- the most of the premium for the year that you're talking about will come up next year. The changes -- the new SRA aren't until 2011. So the 2010 crop year are under the old SRA. So that won't affect it until next year's rate. 2010 premium, though, when you start to see it in the second and third quarter will probably be impacted again because commodity prices are lower and more stable again. So you may see that. If you have the same market share, you would likely see lower premium in 2010 than you would have seen in 2009.

Okay. Makes sense. Great. Thank you.

You're welcome.

I do show we have no further questions at this time. I'll turn the call back over to Helen Wilson for any additional comments or closing statements.

Thanks very much for your time and attention this morning. We look forward to speaking with you again at the end of next quarter. Thank you, and good day.