Business context and reporting period
ACE Limited, a Switzerland-incorporated global insurance and reinsurance group, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The filing describes five segments: North American P&C, North American Agriculture, Overseas General, Global Reinsurance, and Life. The reporting entity named in this filing is ACE Limited.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net premiums written | $4.56bn | $4.39bn | $8.74bn | $8.19bn |
| Net premiums earned | $4.33bn | $4.07bn | $8.30bn | $7.64bn |
| Total revenues | $4.82bn | $4.71bn | $9.23bn | $9.02bn |
| Net investment income | $556m | $534m | $1.11bn | $1.07bn |
| Net income | $779m | $891m | $1.51bn | $1.84bn |
| Diluted EPS | $2.28 | $2.59 | $4.43 | $5.36 |
| P&C combined ratio | 87.7% | 87.9% | 88.2% | 88.1% |
At June 30, total assets were $97.4bn, shareholders’ equity was $30.3bn, and cash was $594m. Total debt was $5.91bn, including $1.85bn short-term and $4.06bn long-term debt; debt was 16.2% of total capitalization. Six-month operating cash flow was $2.10bn, investing cash outflow $1.46bn, and financing cash outflow $625m. Management reported $1.4bn of available credit lines, of which $648m was in use; financial covenants were met.
Material changes versus the prior comparable period
- Q2 written premiums increased 3.8% reported and 4.5% on a constant-dollar basis; first-half written premiums rose 6.8% reported and 8.0% constant-dollar. Growth reflected North American P&C and Overseas General, including acquisitions; Q2 agriculture and Global Reinsurance written premiums declined.
- Q2 net income fell 12.5%, and first-half net income fell 18.0%. Lower net realized results were a major factor: realized losses were $73m in Q2 2014 versus gains of $104m in Q2 2013, and $177m losses versus $310m gains for the first half.
- Underwriting remained profitable: the Q2 P&C combined ratio improved to 87.7% from 87.9%, while the first-half ratio edged up to 88.2% from 88.1%. Acquisition-cost ratios rose, partly offset by lower administrative-expense ratios.
- Segment results were mixed. Overseas General net income rose 18.5% in Q2; North American P&C rose 3.5%. Global Reinsurance net income fell 23.4%, and Life reported a $2m Q2 loss versus $115m income a year earlier, with variable-annuity-related realized losses contributing.
- Share repurchases totaled $569m in the first half versus $212m a year earlier. Dividends paid were $428m versus $169m.
Outlook, commentary, risks and unusual items
- Management gave no specific earnings or premium guidance. It stated that operating cash flows should cover near-term cash outflows under most loss scenarios, while noting reliance on investment sales, financing, credit providers and subsidiary distributions as needed.
- Q2 catastrophe losses, including reinstatement premiums, were $80m; favorable prior-period reserve development was $126m. First-half favorable development was $188m, including $107m in North American P&C and $86m in Overseas General; North American Agriculture recorded $38m of adverse development, primarily from higher-than-expected 2013 crop-year claims.
- After quarter-end, ACE announced a definitive agreement to acquire Itaú Seguros’ large corporate P&C business for about $685m, subject to approvals and closing conditions, with completion expected in Q1 2015. ACE acquired 93.03% of Thailand’s Samaggi during the quarter for $176m.
- A new global catastrophe reinsurance program took effect July 1, 2014. Separately, ACE did not renew a $500m letter-of-credit facility that expired in June, choosing primarily to use insurance trusts backed by investments for collateral.
- Key exposures include catastrophe losses, reserve-estimation uncertainty, collectibility of reinsurance recoverables, market and interest-rate movements, foreign exchange, and variable-annuity guarantee claims. Gross unpaid loss reserves were $37.2bn and net reserves $27.1bn. A 100-basis-point interest-rate increase was estimated to reduce fixed-income portfolio value by about $2.4bn. GLB liability valuation depends on market conditions and policyholder behavior; adverse changes could materially affect income.
- Management said ordinary-course litigation and regulatory matters were not likely to be material to consolidated financial condition or results. The filing reported no material change in disclosed risk factors or critical accounting estimates.
Most important facts for investors to verify
- Whether premium growth and underwriting profitability persist, particularly given rising acquisition costs and the weaker Global Reinsurance and Life comparisons.
- The drivers and potential recurrence of realized investment and derivative losses, especially those associated with variable-annuity guarantees and hedges.
- Reserve adequacy and the sustainability of favorable prior-period development, alongside the adverse crop-insurance development.
- Reinsurer recoverability and catastrophe exposure; modeled 1-in-100-year net PML was $1.745bn for U.S. hurricane and $778m for California earthquake, with management cautioning that actual losses may differ materially.
- Execution, regulatory approval and purchase economics of the Samaggi acquisition and proposed Itaú Seguros transaction, and the effect of the changed collateral arrangements on liquidity.