ACE Limited (now Chubb Ltd) — Form 10-Q Summary
Entity note: The filing is for ACE Limited, the Swiss-incorporated insurance and reinsurance holding company, not under the name Chubb Ltd. It covers the quarter and nine months ended September 30, 2010; financial statements are unaudited and presented in U.S. dollars.
Business context and reporting period
ACE operated across Insurance—North American, Insurance—Overseas General, Global Reinsurance, and Life, serving commercial and individual customers internationally. Management describes a soft insurance market, with continued price competition and pressure on terms and conditions.
Financial performance and position
| Metric | Q3 2010 | Nine months 2010 | Comparable 2009 |
|---|---|---|---|
| Net premiums written | $3.295bn | $10.286bn | $3.155bn; $9.994bn |
| Net premiums earned | $3.422bn | $9.932bn | $3.393bn; $9.853bn |
| Total revenues | $3.888bn | $11.597bn | $3.681bn; $10.803bn |
| Net income | $675m | $2.107bn | $494m; $1.596bn |
| Diluted EPS | $1.97 | $6.18 | $1.46; $4.73 |
| Combined ratio | 88.4% | 90.2% | 88.1%; 87.8% |
| Operating cash flow | Not separately stated for quarter | $2.775bn | $2.332bn |
Q3 and nine-month net income increased 37% and 32%, respectively. Premium growth was modest: written premiums rose 4% in Q3 and 3% year to date; earned premiums rose 1% in both periods. Nine-month underwriting performance weakened as the combined ratio increased 2.4 percentage points. Net investment income was $516m for Q3 and $1.538bn year to date, up 1% in each comparable period.
At September 30, total assets were $82.388bn and shareholders’ equity was $22.845bn, compared with $77.980bn and $19.667bn at year-end 2009. Cash was $487m; investments totaled $50.971bn on the balance sheet. Total debt was $3.313bn, and trust preferred securities were $309m. Debt-to-total-capitalization was 12.5%, or 13.7% including trust preferred securities. Unpaid losses and loss expenses were $37.742bn gross and $24.992bn net of reinsurance.
Cash from operations exceeded investing outflows of $2.668bn; financing outflows were $282m, including $323m of dividends paid. Credit lines totaled $2.5bn, with $1.3bn used to support letters of credit. Management said operating cash flows should cover outflows under most loss scenarios through 2010; all financial covenants were met. Restricted assets totaled $12.948bn.
Material changes versus the prior comparable period
- Net realized gains were $127m for the first nine months, versus losses of $569m in 2009. Q3 still recorded a $50m realized loss, though lower than the prior-year $223m loss. Nine-month net OTTI recognized in income fell to $55m from $364m.
- Favorable prior-period development was $205m in Q3 and $453m year to date, compared with $203m and $428m, respectively, in 2009. Overseas General’s Q3 reserve release included $239m favorable development in casualty and financial lines for 2006 and prior years, partly offset by adverse developments in more recent years.
- Net catastrophe losses rose to $91m for Q3 and $315m year to date, from $45m and $114m. Q3 losses were primarily related to the New Zealand earthquake; year-to-date losses also included severe U.S. weather, Chile and Mexico earthquakes, and Australian storms.
- Q3 Global Reinsurance written premiums rose 32%, mainly due to a large U.S. workers’ compensation treaty; management said competitive conditions offset much of this growth over nine months. The segment’s combined ratio rose to 74.3% in Q3 from 58.5%, reflecting higher catastrophe losses and a greater casualty mix.
- Equity increased by $3.178bn from year-end, including $2.107bn of net income and $1.311bn of after-tax investment appreciation. Accumulated other comprehensive income rose to $2.110bn from $823m.
Outlook, commentary, risks and unusual items
- Outlook: No specific earnings or premium guidance is provided. Management reported soft pricing and competitive pressure, but cited improving international retail opportunities and stable renewal retention in several businesses. It continued to emphasize underwriting discipline.
- Acquisitions: ACE agreed to acquire the remaining shares of Rain and Hail for approximately $1.1bn, subject to adjustments and closing conditions, with completion expected in Q4 2010. After quarter-end, ACE agreed to acquire Malaysia’s Jerneh Insurance for about $200m and announced a roughly $425m purchase of New York Life’s Hong Kong and Korea life operations. The filing expected total purchase costs of approximately $1.725bn, funded with available cash and/or short-term reverse repurchase agreements.
- Investment and market exposure: ACE transferred $2.9bn fair value of shorter-duration residential agency mortgage-backed securities from available-for-sale to held-to-maturity. The fixed-income portfolio’s average duration was 3.6 years; management estimated a 100-basis-point rate increase would reduce book value by approximately $1.7bn. Non-investment-grade and unrated holdings were about 13% of fixed income investments.
- Variable-annuity guarantees: The GMIB liability was $758m, including a $623m fair-value derivative adjustment; the GMDB liability was $192m. Nine-month GMIB-related realized losses were $180m, substantially associated with falling interest rates. Valuation depends on market movements and policyholder behavior and uses significant unobservable assumptions; management cautioned actual results could differ materially. Q3 model refinements had an approximately $2m favorable net-income impact.
- Legal, tax and regulatory matters: Business-practices litigation included a commercial insurance class action remanded for further district-court proceedings; ACE said potential damages could not be estimated and no compensatory-damages liability was recorded. Management considered a material adverse effect on financial condition unlikely, while acknowledging an individual reporting period could be affected. ACE also established a contingency related to New York workers’ compensation assessments and said it did not expect a material impact. An IRS examination proposed adjustments for 2005–2007, principally transfer pricing and insurance matters; ACE appealed and did not expect a material impact.
- Other unusual items: Q3 administrative results benefited from $52m of ESIS net results, primarily from non-recurring sources. Acquisition costs and expense ratios were also affected by crop settlements and catastrophe-related reinstatement premiums.
Most important facts for investors to verify
- Whether earnings growth is sustainable apart from favorable reserve development, lower OTTI losses, and non-recurring ESIS results.
- Current reserve adequacy, particularly for Overseas General financial and casualty claims, and the scale and persistence of future reserve releases.
- Final purchase prices, closing status, funding, and integration outcomes for Rain and Hail, Jerneh, and the Hong Kong and Korea life operations.
- GMIB valuation sensitivity to interest rates, equity markets, lapses, and annuitization, including the adequacy of hedges and collateral arrangements.
- Investment portfolio credit quality and interest-rate exposure, including mortgage-backed securities, below-investment-grade holdings, and the held-to-maturity transfer.
- Catastrophe exposure, reinsurance recoverability, and the possible impact of unresolved legal, tax, and regulatory matters.