ACE Limited — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The filing identifies ACE Limited, a Swiss-incorporated global insurer and reinsurer, as the registrant; it is not filed under the name Chubb Ltd. Figures below are U.S. dollars unless noted. Interim results are unaudited.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net premiums written | $4.620 billion | $4.716 billion | $12.809 billion | $12.418 billion |
| Net premiums earned | $4.610 billion | $4.665 billion | $12.250 billion | $11.829 billion |
| Total revenues | $5.172 billion | $5.138 billion | $14.187 billion | $13.249 billion |
| Net income | $916 million | $640 million | $2.760 billion | $1.941 billion |
| Diluted EPS | $2.66 | $1.86 | $8.02 | $5.67 |
| P&C combined ratio | 86.5% | 92.0% | 87.5% | 90.2% |
| Net investment income | $522 million | $533 million | $1.587 billion | $1.614 billion |
For the first nine months, operating cash flow was $2.736 billion, versus $3.025 billion a year earlier. Cash was $768 million at September 30. Total assets were $94.584 billion, shareholders’ equity $28.218 billion, and total investments approximately $60.3 billion. Debt was $5.709 billion, up from $4.761 billion at year-end 2012; debt-to-capitalization rose to 16.7% from 14.6%.
Material changes and drivers
- Q3 net income rose 43% year over year, as lower losses and loss expenses and a lower combined ratio more than offset slightly lower premiums earned and investment income. Nine-month net income increased 42%.
- Q3 net premiums written declined 2.0% as reported, primarily from lower North American Agriculture retention and the absence of a prior-year Global Reinsurance loss-portfolio-transfer treaty. Overseas General and North American P&C premiums grew. Nine-month written premiums increased 3.2%.
- Favorable prior-year reserve development was $210 million in Q3 and $408 million year to date, compared with $236 million and $442 million in the respective 2012 periods. Q3 catastrophe losses, excluding reinstatement premiums, were $80 million, versus $55 million.
- ACE acquired Mexican surety insurer Fianzas Monterrey for approximately $293 million in April and Mexican P&C insurer ABA Seguros for approximately $690 million in May. Acquisitions contributed to Overseas General growth; acquisition-related goodwill and intangible assets were based on preliminary purchase-price allocations.
- Investment fair values were affected by rising interest rates and foreign exchange. Nine-month other comprehensive income was a loss of $1.513 billion, largely reflecting a $1.570 billion unrealized investment depreciation before tax; AOCI fell to $1.374 billion from $2.887 billion at year-end 2012.
Outlook, risks and unusual items
- No specific earnings or premium guidance was provided. Management said operating cash flows should cover outflows under most near-term loss scenarios and reported compliance with credit-facility covenants.
- Management identified market and interest-rate movements, catastrophe losses, reserve-estimation uncertainty, reinsurer collectability, foreign exchange, competition, regulation, and acquisition execution as risks. The filing estimates that a 100-basis-point increase in interest rates would reduce fixed-income portfolio value by approximately $2.3 billion.
- Variable-annuity guarantee reinsurance remains exposed to equity markets, interest rates, credit spreads, and policyholder behavior. The company had ceased writing this business in 2007; its GLB liability was $746 million, and management cautioned that model assumptions and actual experience could differ materially. Market movements generated $608 million of GLB-related realized gains year to date, partly offset by $413 million of losses on associated equity hedges.
- An internal environmental-reserve review increased gross Brandywine reserves by $102 million and net reserves by $59 million. Management cited adverse court rulings, higher estimated future costs, and higher-than-expected payments. Ordinary-course claims litigation is included in reserves; other litigation and regulatory matters were considered unlikely to be material, in management’s view.
- ACE issued $950 million of senior notes in March: $475 million at 2.70% due 2023 and $475 million at 4.15% due 2043. A $500 million note due June 2014 was reclassified as short-term debt. Q3 share repurchases were $21 million; the nine-month total was $233 million.
Important facts for investors to verify
- Confirm the registrant and issuer identity: this supplied filing is ACE Limited’s 2013 Q3 10-Q, notwithstanding the request metadata naming Chubb Ltd.
- Assess the sustainability of earnings growth by separating underwriting results and favorable reserve releases from realized investment and derivative gains.
- Review reserve adequacy, especially Brandywine environmental and other run-off liabilities, and the scale and sources of favorable prior-period development.
- Evaluate catastrophe exposure, reinsurance recoverables and counterparty quality, and crop-insurance retention and reinsurance arrangements.
- Track interest-rate and equity-market sensitivity, GLB valuation assumptions, debt maturities, and actual available borrowing capacity; the filing reports $1.9 billion of credit lines and $1.3 billion used to support letters of credit.