ACE Limited Form 10-Q Summary
Entity and period: The supplied filing is ACE Limited’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012—not a filing under the name Chubb Ltd. Amounts are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net premiums written | $4.716B | $4.343B | $12.418B | $11.742B |
| Net premiums earned | $4.665B | $4.490B | $11.829B | $11.556B |
| Total revenue | $5.138B | $4.294B | $13.249B | $12.355B |
| Net investment income | $533M | $564M | $1.614B | $1.677B |
| Net realized gains (losses) | $(60)M | $(760)M | $(194)M | $(878)M |
| Net income (loss) | $640M | $(39)M | $1.941B | $805M |
| Diluted EPS | $1.86 | $(0.11) | $5.67 | $2.36 |
- Written premiums rose 8.6% in Q3 and 5.8% year to date; earned premiums rose 3.9% and 2.4%, respectively. Q3 total revenue and earnings improved substantially year over year, principally because realized losses were much smaller than in 2011.
- The property and casualty combined ratio was 92.0% in Q3 versus 90.2% a year earlier, and 90.2% year to date versus 95.3%. A ratio below 100% indicates underwriting income. Q3 current-accident-year combined ratio was 97.7%, or 96.4% excluding catastrophe losses, compared with 95.1% and 92.0%, respectively, in 2011.
- Favorable prior-period reserve development was $236M in Q3 and $442M year to date, versus $194M and $433M in the comparable 2011 periods. Catastrophe losses, excluding reinstatement premiums, were $55M in Q3 and $129M year to date, compared with $147M and $704M.
- Net investment income declined 5.6% in Q3 and 3.8% year to date, attributed mainly to lower reinvestment yields and foreign exchange, partly offset by private-equity distributions. Average market yield on fixed maturities was 2.2%, down from 3.2%.
Financial position, cash flow, and liquidity
- At September 30, 2012, total assets were $93.508B, total liabilities $66.545B, and shareholders’ equity $26.963B. Balance-sheet investments were $59.817B and cash was $690M.
- Total debt was $4.762B: $1.402B short-term and $3.360B long-term. Debt was 14.9% of total capitalization; debt plus trust preferred securities was 15.8%.
- For the first nine months, operating cash flow was $3.025B, investing cash outflow $2.682B, and financing cash outflow $271M. Cash dividends paid were $484M.
- Available credit lines totaled $2.4B, with $1.6B used to support letters of credit. Management said operating cash flows should cover outflows under most loss scenarios for the next 12 months; access to facilities depends on the banks’ ability to fund and compliance with covenants. The company reported meeting its covenants.
Material changes, outlook, and risks
- Business and growth: North American written premiums grew 14.9% in Q3, helped by rate increases, retention, new business, agriculture, and the Penn Millers acquisition. Overseas General premiums were down 1.0% as reported in Q3, but grew in original currencies; foreign exchange was a significant drag. Global Reinsurance Q3 premiums benefited from new treaties, including a medical-malpractice loss portfolio transfer. Life premiums were flat in Q3.
- Underwriting items: U.S. drought adversely affected Multiple Peril Crop Insurance underwriting by $147M pretax and $97M after tax in Q3. The crop business combined ratio was 114% for the quarter; management expected approximately 104% for the full year and no net profit or loss in Q4 for the 2012 crop year.
- Variable-annuity guarantees: Q3 realized losses from derivative accounting related to variable-annuity reinsurance were $64M. The business is no longer being written, but reported results remain sensitive to equity markets, interest rates, credit spreads, and policyholder lapse and annuitization behavior. Management noted that assumptions and modeled fair values are uncertain and actual results may differ materially.
- Catastrophe after quarter-end: Superstorm Sandy made landfall in late October. ACE said it could not yet estimate potential losses; the impact would be recorded in Q4 2012.
- Acquisitions: ACE acquired 80% of Indonesian insurer JaPro in September; the total purchase price for 100% was expected to be about $95M. Proposed Mexican acquisitions included Fianzas Monterrey for about $285M, expected to close in Q1 2013, and ABA Seguros for about $865M, expected in the first half of 2013; both were subject to approvals and closing conditions.
- Contingencies and accounting: ACE could not reasonably estimate potential losses from related insurance business-practices litigation; plaintiffs had not specified damages and dismissal motions remained unresolved. Management said ordinary-course litigation was not likely to materially affect consolidated financial condition, though an individual period’s results could be affected. The company retrospectively adopted revised insurance acquisition-cost guidance, reducing 2011 net income by $30M for the first nine months.
- The filing provides no general earnings or premium guidance. It reported no material changes to the risk factors in the 2011 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- Q4 claims and reserve effects from Sandy, which were not estimable when the filing was prepared.
- The persistence and sources of favorable prior-period reserve development, and the higher Q3 current-accident-year combined ratio.
- Actual full-year crop results relative to the stated approximately 104% combined-ratio expectation, including drought-related claims and reinsurance recovery.
- Variable-annuity guarantee exposure, assumptions, hedge effectiveness, and sensitivity to market and policyholder behavior changes.
- Closing, final purchase prices, and capital effects of the announced acquisitions; and developments in the unquantified business-practices litigation.