ACE Limited Form 10-Q Summary — Quarter Ended June 30, 2012
Entity note: The filing is by ACE Limited, a Swiss-incorporated global insurance and reinsurance holding company; it is not filed under the name Chubb Ltd. ACE reported four segments: Insurance—North American, Insurance—Overseas General, Global Reinsurance, and Life. Financial figures are in U.S. dollars.
Business context and reporting period
This unaudited report covers the three and six months ended June 30, 2012, with comparisons to 2011. ACE provides commercial and specialty insurance, personal lines, accident and health, life, and reinsurance products worldwide. The interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net premiums written | $4.130B | $3.953B | $7.702B | $7.399B |
| Net premiums earned | $3.783B | $3.757B | $7.164B | $7.066B |
| Net investment income | $537M | $569M | $1.081B | $1.113B |
| Net realized gains (losses) | $(394)M | $(73)M | $(134)M | $(118)M |
| Net income | $328M | $594M | $1.301B | $844M |
| Diluted EPS | $0.96 | $1.74 | $3.80 | $2.48 |
| P&C combined ratio | 88.7% | 92.7% | 88.9% | 98.5% |
| Operating cash flow | $811M | Not stated for quarter | $1.383B | $2.063B |
Q2 pretax income was $476M versus $715M; six-month pretax income was $1.559B versus $1.061B. The Q2 decline in net income chiefly reflected the sharp increase in derivative-accounting losses associated with variable-annuity living-benefit reinsurance. The six-month earnings improvement reflected lower catastrophe losses and a substantially lower loss burden than in 2011.
For Q2, P&C underwriting income was $429M. The current-accident-year combined ratio was 92.1%, or 90.4% excluding catastrophe losses. Favorable prior-period reserve development was $113M, versus $146M a year earlier; catastrophe losses including reinstatement premiums were $55M pretax, versus $134M. Six-month favorable prior-period development was $206M, versus $239M.
At June 30, total assets were $90.701B, shareholders’ equity $25.762B, and cash $617M. Total debt was $4.761B ($1.401B short-term and $3.360B long-term), with $309M of trust preferred securities. Debt was 15.4% of total capitalization; debt plus trust preferred securities was 16.4%. Operating cash flow declined year over year, mainly because of a $515M unfavorable comparison in cash collateral movements. Investing activities used $1.250B and financing activities used $123M in the first half.
Material changes and segment trends
- Reported net premiums written increased 4% in both Q2 and the first half; management reported 6.5% Q2 growth on a constant-dollar basis. Net premiums earned increased 1% in both periods.
- North American Q2 written premiums grew 7%; underwriting income rose to $179M from $79M and the combined ratio improved to 89.2% from 95.1%. The six-month combined ratio improved to 88.3% from 95.0%.
- Overseas General Q2 written premiums increased 2% and underwriting income rose to $152M from $120M. Its six-month combined ratio improved to 90.3% from 99.2%; foreign exchange and prior-year catastrophe-related reinstatement premiums affected comparisons.
- Global Reinsurance Q2 written premiums increased 9%, but earned premiums fell 7%; first-half written and earned premiums fell 4% and 9%, respectively, amid competition and lower prior-period production. First-half underwriting income increased to $153M from $4M, with catastrophe experience and prior-year treaty comparisons contributing.
- Life Q2 net income was a loss of $345M, versus income of $18M, primarily reflecting realized losses on variable-annuity guarantee-related items. Life underwriting income was $103M, down from $114M. First-half net income was a loss of $34M versus income of $74M.
Outlook, risks, contingencies, and unusual items
- Crop drought exposure: Based on conditions as of July 24, ACE expected about $68M of additional after-tax MPCI losses in the second half of 2012 versus assumptions in its April guidance, implying a 93%–94% combined ratio for 2012 MPCI. If drought conditions worsened and persisted through harvest, management estimated a modeled worst case of about $200M after tax in additional losses beyond the $68M. The filing does not provide a clear updated full-year earnings target.
- Variable-annuity guarantees: The reported GLB reinsurance liability was about $1.6B at June 30, including a $1.4B fair-value derivative adjustment. Valuation depends on market factors and policyholder behavior; management warned actual outcomes could differ materially. Most covered living-benefit policyholders were not yet eligible to claim, with the majority reaching eligibility in 2013 or later.
- Investment and market risk: The fixed-income portfolio’s average duration was 3.8 years. ACE estimated a 100-basis-point interest-rate increase would reduce book value by about $2.1B. The investment portfolio included $4.298B rated BB and $3.217B rated B, among other lower-rated or unrated holdings.
- Catastrophe exposure: Modeled net annual PML for U.S. hurricanes was $1.648B at a 1-in-100 return period and $2.201B at 1-in-250. Management cautioned that models are uncertain and do not represent maximum potential losses. The North American Calabash program expired June 15 without renewal; international catastrophe coverage was renewed July 1 without significant structural change.
- Liquidity and collateral: Available credit lines were $2.4B, with $1.5B used to support letters of credit at June 30. ACE had $1.4B in reverse repurchase agreements outstanding. Management expected operating cash flows to cover outflows under most loss scenarios through 2012, while noting dependence on credit providers and access to financing.
- Acquisitions and operations: ACE and a local partner agreed to acquire Indonesian insurer PT Asuransi Jaya Proteksi, subject to approvals and closing conditions, with completion expected by year-end 2012. Combined Insurance had suspended sales in the U.K. and Ireland while reassessing its sales model and planned to seek approval to resume sales; ACE decided to cease sales in its small Spanish branch indefinitely.
- Legal matters: Insurance and business litigation was described as normal-course activity. In the consolidated broker-practices litigation and related cases, damages and class scope had not been determined, and ACE said it could not reasonably estimate any potential loss. Management said these matters were not likely to materially affect consolidated financial condition, though an individual reporting period could be affected materially.
- Accounting and taxes: ACE retrospectively adopted revised insurance acquisition-cost guidance, reducing 2011 net income by $12M for Q2 and $22M for the first half ($0.03 and $0.06 per share, respectively). The 2011 comparative statements were adjusted. The IRS settlement on 2005–2007 issues had no net operating-results impact; the 2008–2009 examination yielded no material adjustments.
Most important facts for investors to verify
- Separate underlying insurance underwriting performance from the large, market-sensitive variable-annuity derivative losses driving Q2 reported earnings.
- Track drought development, MPCI claims, and any subsequent change to the quantified crop-loss estimates or annual outlook.
- Review reserve development by segment and accident year, particularly long-tail workers’ compensation and professional liability exposures.
- Assess liquidity and financing access alongside $1.4B of reverse repos, $1.5B of letter-of-credit usage, and the availability of committed credit lines.
- Monitor the GLB model assumptions, hedge effectiveness, and upcoming policyholder eligibility for benefits, as well as catastrophe exposures and reinsurance recoverability.
- Confirm the status and terms of the JaPro acquisition, Combined Insurance sales restrictions, and unresolved broker-practices litigation.