ACE Limited (Chubb metadata) — 2012 Form 10-K Summary
Issuer and period: The filing is by ACE Limited, a Swiss-incorporated global insurance and reinsurance holding company—not by an entity identified as Chubb in the filing. It reports the fiscal year ended December 31, 2012; quarterly figures are unaudited. All amounts below are U.S. dollars unless stated otherwise.
Business context and reporting period
ACE operated through Insurance–North American, Insurance–Overseas General, Global Reinsurance, and Life. Net premiums earned were concentrated in North America (45%) and Overseas General (37%); Global Reinsurance contributed 6% and Life 12%. The company reported 17,000-plus employees, $92.5 billion in assets, and $27.5 billion in shareholders’ equity at year-end.
ACE acquired 80% of Indonesian insurer JaPro in September 2012; its local partner acquired the remaining 20% in January 2013. Agreements to acquire Mexican surety insurer Fianzas Monterrey and P&C insurer ABA Seguros were pending regulatory approval and other closing conditions, with completion then expected in the first half of 2013.
Key financial metrics
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Net premiums written | $16.075 billion | $15.372 billion | Up 4.6%; up 6.0% in constant dollars |
| Net premiums earned | $15.677 billion | $15.387 billion | Up 1.9% |
| Total revenues | $17.936 billion | $16.834 billion | Up 6.5% |
| Net income | $2.706 billion | $1.540 billion | Up 75.6% |
| Diluted EPS | $7.89 | $4.52 | Up from prior year |
| Net investment income | $2.181 billion | $2.242 billion | Down 2.8% |
| P&C combined ratio | 93.9% | 94.7% | Improved; below 100% indicates underwriting income |
| Operating cash flow | $3.995 billion | $3.470 billion | Up; cash flow from operations |
| Assets / shareholders’ equity | $92.545 billion / $27.531 billion | $87.321 billion / $24.332 billion | Year-end balances |
| Debt | $4.761 billion | $4.611 billion | Includes $1.401 billion short-term reverse repos and $3.360 billion long-term debt |
The 2012 loss ratio was 65.7% versus 66.0%; the underwriting and administrative expense ratio was 28.2% versus 28.7%. Current-accident-year P&C combined ratio was 97.4%, compared with 98.8% in 2011. The effective tax rate fell to 9.1% from 24.6%, including a $124 million benefit from favorable resolution of prior-year tax matters and statute expirations.
Year-end cash was $615 million. Cash and short-term investments were $2.843 billion combined, though some assets were restricted or held at operating subsidiaries. Total investments reported on the balance sheet were $60.264 billion. Debt-to-total-capitalization was 14.6%, down from 15.8%; debt plus trust preferred securities to capitalization was 15.6%, down from 16.8%.
Material changes versus prior year
- Net income rose substantially, while net premiums earned increased modestly. The 2011 comparison was affected by much larger variable-annuity derivative-related realized losses: net realized gains were $78 million in 2012 versus losses of $795 million in 2011.
- Net favorable prior-period reserve development was $479 million, equal to 3.5 percentage points of the combined ratio, versus $556 million and 4.1 points in 2011. The 2012 favorable development included a $140 million A&E charge.
- Catastrophe losses, including reinstatement premiums, were $638 million pre-tax in 2012 versus $899 million in 2011. Superstorm Sandy accounted for $502 million pre-tax of 2012 losses.
- Overseas General underwriting income improved to $590 million from $311 million, with its combined ratio improving to 89.7% from 94.5%. North American underwriting income declined to $206 million from $431 million, and its combined ratio worsened to 97.1% from 93.8%, partly reflecting U.S. drought losses in crop insurance and Sandy.
- Life reported net income of $235 million versus a $494 million loss in 2011, while life underwriting income was nearly flat at $402 million versus $399 million. Life net realized losses narrowed to $72 million from $806 million, largely reflecting variable-annuity guarantee and hedging movements.
- Shareholders’ equity increased to $27.531 billion from $24.332 billion, including a $918 million after-tax increase in net unrealized investment appreciation. Book value per share rose to $80.90 from $72.22.
Outlook, commentary, risks, and unusual items
Management described improved U.S. pricing, growth in Asia and Latin America, strong retention, and disciplined underwriting as supports for profitable growth in 2013. It expected U.S. commercial P&C to benefit from improving prices, certain casualty lines to see price increases, and property pricing to flatten as 2013 progressed. Management also expected global A&H growth to increase during 2013. These are forward-looking expectations, not guarantees.
- Reserves: Management considered reserves adequate, but emphasized substantial estimation uncertainty, especially for long-tail casualty and A&E claims. A 5% change in net loss reserves would equal about $1.3 billion. The 2012 review increased Brandywine gross reserves by $275 million and net reserves by $146 million; Westchester gross reserves increased $17 million and net reserves $4 million.
- Reinsurance and counterparties: Net reinsurance recoverables on losses and loss expenses were $12.078 billion. ACE remains primarily liable to policyholders if reinsurers fail to pay. Recoverables from affiliates ceded to Century totaled about $958 million; management said they were not impaired but warned of potential loss if Century’s reserves deteriorate and it enters rehabilitation or liquidation.
- Catastrophes and markets: Catastrophe frequency and severity, investment-market changes, interest rates, foreign exchange, and variable-annuity policyholder behavior can create earnings and capital volatility. A modeled 100-basis-point rate increase would reduce the fixed-income portfolio’s value by about $2.2 billion before tax; actual effects may differ.
- Other exposures: Risks include competition and pricing cycles, broker concentration (Marsh generated about 11% of gross premiums written), acquisitions and integration, operational or cyber disruption, regulatory and tax changes, and restrictions on subsidiary dividends. The holding company depends on permitted subsidiary distributions to meet its obligations.
- Unusual and legal items: The company recorded $78 million in net realized gains, but also had $1.120 billion of pre-tax unrealized investment appreciation reported outside net income. ACE reached a $4.2 million settlement in principle in a commercial-insurance class action, subject to court approval, and a confidential settlement in principle with Avery Dennison; other related cases remained unresolved and potential losses could not be reasonably estimated.
ACE reported that it met credit-facility covenants, statutory capital and surplus requirements, and all obligations during 2012. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Confirm the issuer identity and that these results are for ACE Limited’s year ended December 31, 2012, rather than a separate Chubb filing.
- Review the quality and sustainability of the 75.6% net-income increase, including derivative gains, investment appreciation, the lower tax rate, and reserve releases.
- Assess reserve adequacy and the sensitivity of long-tail casualty, A&E, and run-off liabilities to future claims and legal developments.
- Check the collectability and concentration of reinsurance recoverables, particularly the Century-related exposure and remaining NICO protection.
- Evaluate liquidity at the holding-company and subsidiary levels, including restricted assets, reverse-repurchase financing, regulatory dividend limits, and the pending Mexico acquisitions.
- Track the 2013 pricing outlook, catastrophe losses, investment yields, and developments in variable-annuity guarantee liabilities and policyholder behavior.