ACE Limited (not Chubb Ltd.) — FY 2013 Form 10-K
Filing and period: The supplied filing is ACE Limited’s annual report for the year ended December 31, 2013, filed February 28, 2014—not a Chubb Ltd. filing or a quarterly report. It reports five insurance and reinsurance segments. Unless otherwise stated, amounts are U.S. dollars.
Financial performance
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Net premiums written | $17.025 billion | $16.075 billion | Up 5.9% reported; 6.9% in original currencies |
| Net premiums earned | $16.613 billion | $15.677 billion | Up 6.0% |
| Total revenues | $19.261 billion | $17.936 billion | Up 7.4%; includes investment and realized gains |
| Net income | $3.758 billion | $2.706 billion | Up 38.9% |
| Diluted EPS | $10.92 | $7.89 | Up from $4.52 in 2011 |
| Net investment income | $2.144 billion | $2.181 billion | Down 1.7%, principally due to lower fixed-income reinvestment yields |
| Net realized gains | $504 million | $78 million | 2013 included significant gains from variable-annuity guarantee liabilities |
| Operating cash flow | $4.022 billion | $3.995 billion | Substantially unchanged |
Underwriting: The P&C combined ratio was 88.0%, versus 93.9% in 2012; below 100% indicates underwriting profit. Management reported a 90.0% current-accident-year combined ratio excluding catastrophe losses. Favorable prior-period development was $530 million (3.7 percentage points of the reported combined ratio), compared with $479 million in 2012. Pre-tax catastrophe losses excluding reinstatement premiums were $230 million, down from $633 million.
Segments: Net premiums earned were $5.721 billion in North American P&C, $1.678 billion in North American Agriculture, $6.333 billion in Overseas General, $976 million in Global Reinsurance, and $1.905 billion in Life. North American P&C, Overseas General, and Global Reinsurance reported improved underwriting income; Agriculture returned to underwriting profit ($89 million, versus a $60 million loss) as crop results improved from drought-affected 2012. Life underwriting income declined to $374 million from $402 million.
Financial position, debt and liquidity
- At year-end, total assets were $94.510 billion, shareholders’ equity $28.825 billion, and book value per share $84.83, up from $80.90.
- Net unpaid losses and loss expenses were $26.831 billion; gross reserves were $37.443 billion. Net reinsurance recoverables on losses and loss expenses were $11.227 billion, after provisions for uncollectible reinsurance.
- Total investments on the balance sheet were $60.928 billion; cash was $579 million. The portfolio was primarily fixed income, with average duration of 4.0 years. Management estimated a 100-basis-point rate increase would reduce fixed-income fair value by about $2.3 billion before tax.
- Total debt was $5.708 billion, including $1.901 billion short-term debt and $3.807 billion long-term debt; trust preferred securities were $309 million. Debt-to-total-capitalization was 16.4%, up from 14.6%. A $500 million note was classified as short-term and due June 2014. Repurchase agreements outstanding were $1.401 billion.
- Cash used in investing was $4.442 billion, including $977 million for acquisitions. Financing provided $391 million, including $947 million of long-term debt proceeds; common-share dividends paid were $517 million and repurchases were $287 million. The company said operating cash flow, liquid investments, credit facilities and reinsurance were expected to meet near-term needs, while noting the holding company depends on regulated subsidiary distributions.
Material changes and unusual items
- Net income growth reflected stronger underwriting results, lower catastrophe losses and $504 million of net realized gains. In particular, the Life segment reported $360 million of net realized gains; variable-annuity guarantee (GLB) fair-value changes contributed materially to those results and are market- and assumption-sensitive.
- In the fourth quarter, ACE recorded a $92 million gain from correcting an error in a market valuation model. Management concluded the adjustment was not material to the consolidated or prior-period financial statements. It also revised lapse and annuitization assumptions, producing a $104 million realized loss and a $64 million realized gain, respectively.
- ACE acquired Mexican insurers ABA Seguros and Fianzas Monterrey for approximately $690 million and $293 million, respectively. The Overseas General segment also included JaPro, acquired in 2012. The 2013 segment presentation split the former North American segment into P&C and Agriculture; comparative periods were recast.
- Accumulated other comprehensive income fell to $1.152 billion from $2.887 billion, primarily reflecting a $1.459 billion after-tax reduction in net unrealized investment appreciation and foreign-currency translation effects.
- A $29 million legal settlement favorably affected North American P&C administrative expenses. A&E and other run-off liabilities generated a $166 million net reserve charge within the year’s otherwise favorable prior-period development.
Outlook, commentary and principal risks
Management said it expected a “good year” in 2014, citing global growth opportunities, including the U.S. It expected personal-lines growth to continue and said stronger agent manpower and sales could support Combined Insurance premium growth in 2014. It did not provide quantified earnings or premium guidance. ACE expected soft reinsurance-market conditions to limit near-term segment growth, while potentially benefiting it as a reinsurance buyer through lower pricing and improved terms.
- Major uncertainties include catastrophe frequency and severity, reserve adequacy (particularly long-tail casualty and asbestos/environmental claims), and the availability and collectability of reinsurance. A 5% change in net loss reserves would equal about $1.3 billion, according to the filing.
- The North American catastrophe program renewed in January 2014 without named-storm coverage; management intended to obtain that coverage no later than July 1, 2014. The temporary coverage gap and catastrophe models’ inherent uncertainty merit attention.
- Variable-annuity GMDB/GLB results are sensitive to interest rates, equity markets, credit spreads, and policyholder lapse and annuitization behavior; ACE had stopped writing this business in 2007 but retained exposure.
- Other disclosed risks include competition and pricing cycles, investment-market and interest-rate risk, foreign exchange, cyber and operational disruption, broker concentration (Marsh generated about 11% of 2013 gross premiums written), regulatory change, and dependence on subsidiary dividends. The filing said no material off-balance-sheet arrangements were identified.
Important facts for investors to verify
- Confirm the issuer and reporting period: this is ACE Limited’s FY 2013 10-K; the request metadata names Chubb Ltd. and “2013 Q4.”
- Assess how much of 2013 earnings depended on favorable prior-period reserve development and volatile GLB fair-value gains, including the $92 million model correction and fourth-quarter assumption revisions.
- Review reserve development and the $166 million A&E/run-off charge, including the status and financial strength of Century Indemnity and the $929 million of affiliate recoverables ceded to it.
- Check the 2014 catastrophe-reinsurance renewal, particularly the named-storm coverage gap and planned July 1 coverage, against updated exposure and PML disclosures.
- Verify the 2014 maturity/refinancing of the $500 million note, credit-facility renewal needs, and whether regulated subsidiaries can distribute capital while maintaining solvency and ratings.
- Evaluate acquisition integration and returns from the Mexican businesses, alongside the increases in goodwill and intangible assets.