Business context and reporting period
This is ACE Limited’s unaudited Form 10-Q for the three months ended March 31, 2010, with comparisons to Q1 2009. ACE describes a global insurance and reinsurance business operating through North American Insurance, Overseas General Insurance, Global Reinsurance, and Life. The filing names ACE Limited as the registrant; the supplied company metadata says Chubb Ltd, so confirm the intended issuer.
Financial performance and position
| Metric | Q1 2010 / March 31, 2010 | Prior comparable / year-end |
|---|---|---|
| Net premiums written | $3.571 billion | $3.424 billion, Q1 2009 (+4%) |
| Net premiums earned | $3.277 billion | $3.194 billion, Q1 2009 (+3%) |
| Total revenues | $3.949 billion | $3.575 billion, Q1 2009 (+10%) |
| Net income; diluted EPS | $755 million; $2.22 | $567 million; $1.69 |
| Net cash from operations | $823 million | $562 million, Q1 2009 |
| Cash | $726 million | $669 million at Dec. 31, 2009 |
| Total assets; shareholders’ equity | $79.329 billion; $20.636 billion | $77.980 billion; $19.667 billion at Dec. 31, 2009 |
| Total debt; debt / total capitalization | $3.308 billion; 13.6% | $3.319 billion; 14.2% at Dec. 31, 2009 |
The consolidated combined ratio was 92.8%, versus 87.5% in Q1 2009; below 100% indicates underwriting profit. Underwriting income was $255 million, down from $378 million. The loss ratio rose to 61.9% from 59.7%; acquisition and administrative expense ratios also increased. Reported net income benefited from net realized gains of $168 million, compared with a $121 million loss in Q1 2009. Net investment income was essentially flat at $504 million. Comprehensive income was $1.058 billion, including $303 million of other comprehensive income.
Segment underwriting income was $128 million in North American Insurance (versus $170 million), $62 million in Overseas General ($134 million), $59 million in Global Reinsurance ($88 million), and $46 million in Life ($21 million). Life net income increased to $115 million from $68 million; North American net income was $387 million versus $213 million, helped by investment gains.
Investing activities used $666 million and financing activities used $93 million. ACE reported $2.5 billion of available credit lines, with $1.5 billion utilized; it met facility covenants. Debt plus trust preferred securities were 14.9% of total capitalization. Fixed-income portfolio duration was 3.7 years; management estimated that a 100-basis-point rise in interest rates would reduce book value by approximately $1.7 billion.
Material changes versus Q1 2009
- Net income increased 33%, principally alongside the swing in realized investment results: $168 million of gains versus $121 million of losses. Q1 2010 included $18 million of net OTTI charges, compared with $192 million in Q1 2009.
- Premium growth was partly currency-driven. Net premiums written grew 0.6% in original currency, while foreign exchange added 3.7 percentage points to reported growth. Earned premiums grew 1.3% in original currency overall, with foreign exchange adding 3.9 points.
- Underwriting income declined despite premium growth. Catastrophe losses were $148 million net before $25 million of reinstatement premiums, versus $38 million of net catastrophe losses in Q1 2009. Favorable prior-period development was $96 million, compared with $67 million.
- Investment markets lifted equity: net unrealized investment appreciation, net of tax, added $349 million to shareholders’ equity. Total shareholders’ equity rose $969 million during the quarter.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow to cover outflows under most loss scenarios through 2010 and considered cash, operating flows, routine investment sales, and credit facilities adequate for expected requirements.
- Management expected competitive insurance-market conditions to continue, noting client business exposures used for rating had fallen approximately 5–6% in the quarter. It expected Combined Insurance and international Accident & Health operations to improve and resume meaningful growth as 2010 progressed, particularly in the second half.
- ACE attributed modest catastrophe losses relative to industry estimates to underwriting discipline and limits on non-U.S. catastrophe reinsurance exposure. Its disclosed modeled net probable maximum losses were $1.110 billion for a 1-in-100-year U.S. hurricane scenario and $752 million for a 1-in-100-year California earthquake scenario. The company cautioned that catastrophe models are uncertain and actual losses could differ materially.
- Investment and valuation exposures include $11.406 billion of mortgage-backed securities, including $1.446 billion of non-agency residential mortgage-backed securities; below-investment-grade and non-rated holdings were about 13% of fixed income. ACE reported $61 million of sub-prime asset-backed securities. A 100-basis-point interest-rate increase could materially affect book value.
- Variable-annuity guarantee valuations are sensitive to equity markets, interest rates, volatility, credit spreads, and policyholder lapse and annuitization behavior. The GMIB liability was $469 million at quarter-end; its valuation uses significant management assumptions and unobservable inputs. ACE had stopped quoting new or renewal variable-annuity guarantee transactions in 2008, 2009, and Q1 2010.
- Unpaid loss and loss expense reserves were $37.551 billion gross and $24.991 billion net. ACE emphasized the uncertainty inherent in reserve estimates and its reliance on reinsurance recoverables, which totaled $13.335 billion on losses and loss expenses.
- Other matters include an IRS examination and appeals process, a New York workers’ compensation assessment contingency that management did not expect to materially affect financial condition or results, and ongoing business-practices and other litigation. Management said such matters were not likely to materially adversely affect financial condition, though individual-period results could be affected.
- Unusual income items included a $96 million GMIB realized gain, primarily associated with market movements, partially offset by $59 million of losses on related hedge instruments; the filing also reported a $44 million gain from selling Assured Guaranty shares. ACE sold its remaining Assured Guaranty interest after quarter-end.
Most important facts for investors to verify
- Confirm issuer identity: this filing is for ACE Limited, not an entity identified in its text as Chubb Ltd.
- Assess how much of the earnings increase came from realized investment and derivative gains versus recurring underwriting performance; review the combined-ratio deterioration and segment trends.
- Review reserve development, catastrophe losses, and the assumptions underlying gross and net loss reserves, including the collectability and concentration of reinsurance recoverables.
- Evaluate investment portfolio credit, interest-rate, and mortgage exposure, including the sensitivity of book value to rate changes and the valuation of less-liquid or Level 3 assets.
- Check the status and potential financial effects of variable-annuity guarantee exposures, litigation, tax examinations, and the New York assessment contingency.
- Verify liquidity headroom, credit-facility availability and covenants, and the effect of restricted assets and regulatory limits on subsidiary dividends.