Business context and reporting period
The supplied filing is ACE Limited’s Form 10-K for the fiscal year ended December 31, 2010, filed February 25, 2011—not a Chubb Ltd filing. ACE was a global insurer and reinsurer operating in more than 170 countries, across North American Insurance, Overseas General Insurance, Global Reinsurance, and Life.
Financial performance and position
- Revenue: Net premiums earned rose 2% to $13.504 billion; total revenues increased 6% to $16.006 billion. Net premiums written grew 3% to $13.708 billion.
- Profit: Net income increased 22% to $3.108 billion; diluted EPS was $9.11, up from $7.55. Fourth-quarter net income was $1.001 billion and diluted EPS was $2.92.
- Underwriting: Combined ratio was 90.2%, versus 88.3% in 2009, remaining below 100% but indicating weaker underwriting performance. Underwriting income was $1.373 billion, down from $1.552 billion. Favorable prior-year reserve development was $512 million, versus $579 million in 2009.
- Investment results: Net investment income increased 2% to $2.070 billion; average invested-asset return fell to 4.3% from 4.6%. Net realized gains were $432 million, compared with a $196 million loss in 2009. Net unrealized investment appreciation was $894 million before tax.
- Cash flow: Operating cash flow was $3.546 billion, up from $3.335 billion. Investing activities used $4.181 billion; financing activities provided $732 million. Cash ended the year at $772 million.
- Capital and liquidity: Total assets were $83.355 billion, shareholders’ equity $22.974 billion, and book value per share $68.59. Total debt was $4.658 billion, including $1.300 billion of short-term debt; debt to total capitalization was 16.7%, up from 14.2%. Management expected the ratio to decline as short-term debt was repaid. The company said operating cash flows should cover most loss scenarios through 2011; credit facilities totaling $2.4 billion had $1.784 billion in use, and covenants were met.
Material changes versus the prior comparable period
- Net income rose from $2.549 billion, supported in part by the recovery in investment gains and higher premiums; 2009 had recorded net realized investment losses.
- The combined ratio worsened by 1.9 percentage points, as acquisition and administrative expense ratios rose and catastrophe losses increased. The reported loss ratio was partly offset by favorable prior-period reserve development.
- Net premiums earned were broadly stable in North American Insurance, increased in Overseas General and Global Reinsurance, and grew 8% in Life.
- Shareholders’ equity increased $3.307 billion. ACE repurchased approximately 4.9 million shares for $303 million and declared $1.30 per share in dividends.
Outlook, management commentary, risks and unusual items
- Management described a softening, increasingly competitive insurance market, with falling prices and broader terms. It reported reduced new business in North American retail commercial lines and London wholesale, while maintaining underwriting discipline.
- Management expected international A&H business to improve through 2011, while Combined Insurance premiums were expected to continue declining. A U.K. sales moratorium remained in place while sales practices and processes were addressed.
- In December 2010, ACE acquired the remaining interest in Rain and Hail for approximately $1.1 billion and acquired Malaysia’s Jerneh Insurance for approximately $218 million. The Rain and Hail transaction generated a $175 million gain on ACE’s previously held interest. ACE also completed the Korea life operations acquisition in February 2011 and expected the Hong Kong transaction to close early in 2011.
- Unusual or non-recurring items included $80 million of North American premium-related adjustments, the $175 million Rain and Hail remeasurement gain, and elevated ESIS net results of $85 million, which management said were primarily non-recurring. Crop settlements affected premiums, losses, and commissions.
- Key risks include catastrophe losses, reserve estimation and long-tail asbestos/environmental claims, reinsurer collectability, investment and interest-rate volatility, and variable-annuity guarantee liabilities. A 5% change in net loss reserves would equal approximately $1.3 billion, according to the filing. The filing also describes regulatory and legal contingencies; management did not expect ordinary-course business litigation to materially affect consolidated financial condition, though an adverse resolution could affect a particular period.
Most important facts for investors to verify
- Confirm the issuer: this document identifies ACE Limited, not Chubb Ltd.
- Assess reserve quality and the sustainability of favorable prior-period development, particularly in light of asbestos/environmental and runoff exposures.
- Separate recurring earnings from investment gains, the Rain and Hail acquisition gain, crop-related adjustments, and other unusual items.
- Track combined-ratio trends, catastrophe experience, and pricing/renewal conditions as the soft market develops.
- Review short-term debt repayment, liquidity at the holding company, and the extent to which subsidiaries can distribute dividends under regulatory constraints.
- Monitor the remaining variable-annuity guarantee exposure and the sensitivity of modeled liabilities to interest rates, equity markets, lapses, and annuitization assumptions.