ACE Limited (identified in the request as Chubb Ltd) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The filing registrant was ACE Limited, a global insurance and reinsurance group reporting in U.S. dollars. Financial statements are unaudited.
Key financial results and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net premiums written | $3.572 billion | $3.446 billion; up 3.7% |
| Net premiums earned | $3.381 billion | $3.309 billion; up 2% |
| Total revenue | $4.185 billion | $3.808 billion; up 10% |
| Net income / diluted EPS | $973 million / $2.84 | $250 million / $0.73 |
| Net investment income | $544 million | $544 million |
| Operating cash flow | $572 million | $1.003 billion |
| Cash | $715 million | $614 million at Dec. 31, 2011 |
| Total assets / shareholders’ equity | $89.749 billion / $25.431 billion | $87.321 billion / $24.332 billion at Dec. 31, 2011 |
| Total debt | $4.891 billion | $4.611 billion at Dec. 31, 2011 |
The consolidated P&C combined ratio improved to 89.2% from 105.2%; ratios below 100% indicate underwriting profit. Underwriting income was $338 million versus a $103 million loss. The P&C loss ratio was 56.9% versus 73.7%. Net income included $260 million of net realized investment gains, including substantial fair-value effects from variable-annuity guarantee reinsurance.
Investments totaled $56.792 billion at quarter-end, including $43.468 billion of available-for-sale fixed maturities at fair value. Average fixed-income market yield was 3.0%, compared with 3.5% a year earlier. Debt was 16.0% of total capitalization; debt plus trust preferred securities was 17.0%.
Material changes and management commentary
- Catastrophe losses excluding reinstatement premiums were $19 million, versus $415 million in Q1 2011. Prior-period reserve development was favorable by $93 million in both periods. Excluding catastrophe effects and prior-period development, the loss ratio improved to 59.5% from 61.0%.
- Insurance–Overseas General premiums written rose 8% and earned premiums 9%; the segment moved to $122 million of underwriting income from a $98 million loss. North American underwriting income rose to $164 million from $68 million. Global Reinsurance premiums written declined 16% amid competitive conditions, though the company expected its growth rate to improve relative to Q1 over the rest of 2012.
- Life premiums written increased 12%, mainly reflecting the Korea and Hong Kong acquisitions. Life underwriting income was $103 million, up from $92 million. The segment’s net income included $231 million of net realized gains, principally associated with variable-annuity guarantee liabilities and related hedges.
- ACE continued reducing exposure to U.S. general-market workers’ compensation where pricing did not meet underwriting standards. Management cited stronger retention, increased new business, and improved pricing in many property classes.
- Combined Insurance sales in the U.K. and Ireland were suspended while ACE reviewed its sales model and processes in response to regulatory changes. It planned to seek approval to resume sales in 2012 and to integrate European operations; sales in a small Spanish branch were to cease indefinitely.
Outlook, liquidity, risks and unusual items
- No formal full-year earnings or premium-growth guidance is provided. Management said operating cash flows should cover outflows through 2012 under most loss scenarios.
- Operating cash flow fell year over year, in part because of insurance and reinsurance balance payments, including return of $141 million of previously received cash collateral. The filing said some remaining collateral could convert to non-cash collateral and reduce future operating cash flows.
- Credit facilities totaled $2.4 billion, with $1.9 billion used to support letters of credit; all financial covenants were met. The company reported $1.4 billion of reverse repurchase agreements outstanding. These funding sources depend in part on counterparties’ ability to perform.
- Variable-annuity guarantee liabilities are model-dependent and sensitive to equity markets, interest rates, credit spreads, lapses, annuitization and mortality. ACE recorded $456 million of gains from the decrease in reported GLB liabilities, while equity hedging derivatives generated $231 million of losses. Management reported no material change to actuarial or behavioral assumptions during the quarter; most covered policyholders were not yet eligible to claim living benefits.
- A 100-basis-point interest-rate increase was estimated to reduce book value by approximately $2.1 billion. Modeled 1-in-100-year net losses were $1.746 billion for U.S. hurricanes and $777 million for California earthquakes; the filing cautions that modeled outcomes are uncertain and may differ materially from actual losses.
- ACE disclosed ongoing business-practices litigation for which damages and potential loss could not be reasonably estimated. Management did not expect the matters to materially adversely affect consolidated financial condition, but said an individual reporting period could be materially affected. An Ohio matter was settled for $1.97 million and dismissed with prejudice. The IRS settlement of specified 2005–2007 tax issues was expected to have no net operating-results impact.
- ACE retrospectively adopted revised insurance acquisition-cost accounting, reducing retained earnings at January 1, 2011 by $139 million and reducing Q1 2011 net income by $10 million. Prior-period segment results were also reclassified for organizational changes, with no effect on consolidated results.
Important facts for investors to verify
- How much of the earnings increase is attributable to catastrophe comparisons and volatile GLB/derivative fair-value movements, rather than recurring underwriting performance.
- Reserve adequacy and the durability of favorable prior-period development, especially in long-tail casualty and workers’ compensation lines.
- Variable-annuity guarantee exposure, model assumptions, claim limits, and hedge effectiveness under severe market and policyholder-behavior scenarios.
- Reinsurance recoverable collectability, collateral requirements, and the effect of collateral changes on operating cash flow and available liquidity.
- Progress on Combined Insurance regulatory remediation and sales resumption, as well as developments in the unresolved business-practices litigation.