Chubb Limited (legacy ACE Limited): FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing reports legacy ACE Limited’s results, not the combined company. ACE completed its acquisition of The Chubb Corporation on January 14, 2016 and changed its name to Chubb Limited; the acquired company’s results are excluded from the 2015 financial statements.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenues | $18.987 billion | $19.171 billion |
| Net premiums written | $17.713 billion | $17.799 billion |
| Net premiums earned | $17.213 billion | $17.426 billion |
| Net investment income | $2.194 billion | $2.252 billion |
| Income before tax | $3.296 billion | $3.487 billion |
| Net income | $2.834 billion | $2.853 billion |
| Diluted EPS | $8.62 | $8.42 |
| Operating cash flow | $3.864 billion | $4.496 billion |
| GAAP combined ratio | 87.3% | 88.1% |
A combined ratio below 100% indicates underwriting income. Management reported record-low combined ratios and positive net income contributions from all divisions. Net premiums written fell 0.5% in reported dollars but grew 5.1% in constant currency. Foreign exchange weighed on premiums and investment income.
Balance sheet, debt and liquidity
- At year-end, total assets were $102.366 billion, shareholders’ equity was $29.135 billion, and book value per share was $89.77.
- Long-term debt rose to $9.447 billion from $3.357 billion; financial debt was 24.3% of total capitalization, versus 13.1% in 2014. The increase principally reflects $5.3 billion of notes issued in November 2015 to help finance the subsequent acquisition.
- Cash was $1.775 billion; total investments were $66.251 billion, including $10.446 billion in short-term investments. The company held $1.404 billion in repurchase agreements.
- Net unpaid losses and loss expenses were $26.562 billion, down from $27.008 billion. Net reinsurance recoverables on losses and loss expenses were $11.386 billion.
- Operating cash flow declined to $3.9 billion, primarily due to higher net losses paid and income taxes paid. The company said operating cash flows, liquid investments, credit facilities and reinsurance should cover near-term needs under most loss scenarios.
Changes, unusual items and outlook
- Net income decreased 0.7%; total revenues fell 1.0%, while the GAAP combined ratio improved 0.8 percentage points. Net investment income declined 2.6%, including a $49 million adverse foreign-exchange impact.
- Favorable prior-period reserve development was $546 million, compared with $527 million in 2014. This benefit included a $170 million charge for asbestos, environmental and other run-off exposures. Run-off operations had $200 million of adverse development.
- Catastrophe losses, including reinstatement premiums, totaled $322 million pre-tax, compared with $288 million in 2014. Net realized investment losses were $420 million; the investment portfolio also recorded substantial unrealized depreciation, contributing to a $1.926 billion after-tax other-comprehensive loss. Equity declined $452 million during the year.
- The Fireman’s Fund high-net-worth personal-lines business was acquired in April 2015. Its transferred unearned premiums created a non-recurring $252 million in written premiums and a reported $22 million after-tax underwriting benefit net of related intangible amortization.
- For the January 2016 Chubb Corporation acquisition, management cited a $650 million annual expense-synergy run-rate target by the end of 2018, estimated integration costs of $535 million plus $100 million in branding expenses, and a combined-company quarterly investment-income run rate of approximately $810–$825 million. These were forward-looking estimates; management planned to update cost estimates after Q1 2016.
- Unaudited Q4 2015 net income was $683 million, versus $555 million in Q4 2014; diluted EPS was $2.08 versus $1.66.
Risks and contingencies
Key exposures include catastrophe severity and frequency, reserve-estimation uncertainty (especially long-tail casualty and asbestos/environmental claims), reinsurance collectability, investment-market and interest-rate risk, foreign exchange, and volatility in legacy variable-annuity guarantee liabilities. A 5% change in net loss reserves would equal approximately $1.3 billion, or 5% of year-end shareholders’ equity. The company also warned that acquisition integration, synergy realization, and the combined company’s effective tax rate remain uncertain. Management considered reserves adequate at year-end, but future reserve additions could materially affect earnings, capital and cash flow.
Important facts for investors to verify
- Whether the combined company delivers the stated $650 million synergy target and stays within estimated integration and branding costs.
- Reserve development trends, particularly the run-off and asbestos/environmental exposures, and the adequacy and collectability of reinsurance recoverables.
- Post-acquisition debt, liquidity, capital ratios and investment-income performance; 2015 figures exclude The Chubb Corporation’s results.
- Whether underwriting profitability holds as favorable reserve development, catastrophe losses, competition and foreign-exchange movements change.
- Variable-annuity guarantee liabilities and policyholder-behavior assumptions, which management identified as material and judgment-sensitive.