Business context and reporting period
Filing identity: The source is ACE Limited’s Form 10-K for the fiscal year ended December 31, 2009, filed February 25, 2010. The request metadata names Chubb Ltd and “2009 Q4,” but the filing identifies ACE Limited and reports the full fiscal year; it is not a standalone quarterly filing. ACE was a global insurance and reinsurance holding company operating in more than 140 countries, across North American insurance, Overseas General insurance, Global Reinsurance, and Life.
ACE acquired Combined Insurance on April 1, 2008, for $2.56 billion; 2009 includes its results for a full year, while 2008 includes it from April. ACE also reported reducing its Assured Guaranty ownership to about 7% by year-end 2009, and to about 3% in the first quarter of 2010.
Key financial metrics
Amounts below are U.S. dollars. The filing’s financial statements were audited by PricewaterhouseCoopers, which issued unqualified opinions on the statements and internal control over financial reporting.
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net premiums earned | $13.240 billion | $13.203 billion |
| Total revenues | $15.075 billion | $13.632 billion |
| Net investment income | $2.031 billion | $2.062 billion |
| Net realized investment and other gains (losses) | $(196) million | $(1.633) billion |
| Net income | $2.549 billion | $1.197 billion |
| Diluted earnings per share | $7.55 | $3.50 |
| Combined ratio | 88.3% | 89.6% |
| Operating cash flow | $3.335 billion | $4.101 billion |
| Cash and investments at year-end | $47.184 billion | $40.582 billion |
| Total assets / shareholders’ equity | $77.980 billion / $19.667 billion | $72.057 billion / $14.446 billion |
| Total debt, including short-term debt | $3.319 billion | $3.277 billion |
| Debt to total capitalization | 14.2% | 18.2% |
The 88.3% combined ratio indicates an underwriting profit on the P&C business measured by this ratio. It includes a 58.8% loss and loss expense ratio and a 29.5% underwriting and administrative expense ratio. Net favorable prior-year reserve development was $579 million, compared with $814 million in 2008. Net catastrophe losses were $137 million, versus $567 million in 2008.
Cash flows used for investing activities were $3.224 billion in 2009; financing activities used $321 million. Cash declined to $669 million from $867 million. Shareholders’ equity increased by $5.221 billion, primarily reflecting net income and investment-related unrealized gains. The filing states total investments of $46.515 billion on the balance sheet; its investment discussion separately reports fair value of $46.595 billion, so those presentation figures should be reconciled when reviewing the full filing.
By segment, net income was $1.265 billion for North American Insurance, $814 million for Overseas General, $612 million for Global Reinsurance, and $279 million for Life; Corporate and Other recorded a $421 million loss. Segment underwriting income was $582 million, $561 million, $399 million, and $168 million, respectively, with Life’s measure including net investment income.
Material changes versus the prior comparable period
- Net income more than doubled year over year, chiefly as 2008’s $1.633 billion net realized investment loss narrowed to $196 million in 2009. Total revenues rose 11%, while net premiums earned were nearly flat.
- The combined ratio improved from 89.6% to 88.3%; the reported loss ratio improved, while the expense ratio increased slightly. Favorable prior-period reserve development was lower than in 2008.
- Operating cash flow fell by $766 million. Management attributed the decline principally to higher net claim payments ($6.9 billion versus $6.3 billion) and a $397 million collateral outflow, compared with a $304 million inflow in 2008.
- Net investment income declined 2%, reflecting lower yields on new investments and foreign exchange effects, partly offset by higher average invested assets. Average market yield on fixed maturities was 4.3% at year-end, compared with 6.4% in 2008.
- Net premiums written increased 2% as reported; management said growth in original currencies was 4.8%, offset by a 3.1 percentage-point foreign-exchange effect. Overseas General premiums were particularly affected by the stronger U.S. dollar.
- Global Reinsurance underwriting income rose to $399 million from $245 million, while earned premiums declined 4%. North American underwriting income rose to $582 million from $501 million; Overseas General fell to $561 million from $660 million.
- Shareholders’ equity rose from $14.446 billion to $19.667 billion, mainly due to earnings and the recovery in unrealized investment values. ACE issued $500 million of 5.9% senior notes due 2019 and repaid certain short-term borrowings during 2009.
Outlook, management commentary, risks and unusual items
- Outlook and pricing: Management described insurance markets as more competitive after improved industry capital and low catastrophe losses. It considered pricing inadequate in some lines and emphasized disciplined underwriting rather than premium volume. At January 1, 2010 renewals, reinsurance pricing declined, though management said U.S. peak-exposure pricing remained sufficiently profitable; other lines faced margin pressure.
- Management expectations: ACE expected the recession’s effect on A&H business to diminish during 2010. Management said operating cash flows should cover cash needs under most loss scenarios through 2010 and that existing liquidity was sufficient for expected requirements. The filing does not provide numerical earnings or revenue guidance.
- Insurance risks: Catastrophes, reserve estimation, latent asbestos and environmental claims, emerging coverage disputes, long-tail claims inflation, and potentially adverse legal or regulatory developments could materially affect results. Management considered reserves adequate, but noted a 5% change in net loss reserves would equal approximately $1.3 billion, or 6% of year-end equity.
- Reinsurance and counterparties: Net reinsurance recoverables on losses and loss expenses were $13.595 billion; the provision for uncollectible reinsurance was $582 million. ACE remained primarily liable to policyholders if reinsurers failed to pay. Recoverables from Century, a run-off affiliate, were approximately $1.2 billion; management said they were not impaired but disclosed risk if Century’s financial condition deteriorated.
- Market and investment exposure: The investment portfolio was predominantly fixed income; 13% of fixed income securities were below investment grade or non-rated. A hypothetical 100-basis-point interest-rate increase was estimated to reduce fixed-income portfolio value by $1.623 billion. Variable-annuity guarantee liabilities are sensitive to equity markets, rates, credit spreads, and policyholder behavior.
- Variable annuity guarantees: ACE recorded $368 million of realized gains on the GMIB liability in 2009, while related hedging instruments generated $363 million of realized losses. A model and annuitization-assumption update increased the fair-value liability by $28 million. ACE had stopped quoting new variable-annuity guarantee business and expected most living-benefit policyholders to become eligible to annuitize from 2013 onward.
- Accounting and investment items: A 2009 change in OTTI accounting shifted $305 million pre-tax of certain non-credit impairment from income to other comprehensive income, with a $242 million after-tax equity reclassification. 2009 net OTTI losses recognized in income were $397 million, down from $1.064 billion in 2008. ACE reported $2.9 billion of total net investment gains when including unrealized gains, which primarily reflected tighter credit spreads.
- Reserves and contingencies: The 2009 reserve review included a $44 million net increase for Brandywine operations, including asbestos and environmental liabilities. Business-practices investigations and litigation remained disclosed; management did not expect ordinary-course litigation to materially affect financial condition, though an individual period could be affected. ACE also recorded a contingency concerning New York workers’ compensation assessments and said it did not expect a material impact.
- Other changes: In January 2010 ACE decided to stop writing new traditional U.S. life mortality reinsurance. It adopted a new statutory reserve guideline for variable-annuity guarantees effective December 31, 2009, increasing certain client collateral requirements; ACE said available letter-of-credit capacity and assets were sufficient based on current estimates.
Most important facts for investors to verify
- Confirm the issuer and period: this is ACE Limited’s FY 2009 Form 10-K, not a Chubb Ltd filing or a standalone 2009 Q4 report.
- Review the full audited statements and notes to reconcile investment totals, realized versus unrealized gains, and the impact of the OTTI accounting change.
- Assess reserve adequacy and development, particularly latent A&E claims, Brandywine/Century recoverables, and sensitivity to actuarial assumptions.
- Evaluate reinsurance recoverable credit quality, collateral and concentration, and whether the $582 million uncollectible provision remains appropriate.
- Review the sustainability of underwriting margins as pricing competition increases, and distinguish reported results from catastrophe effects and favorable reserve releases.
- Monitor liquidity and holding-company dividend capacity, debt maturities and covenants, collateral requirements, and regulatory limits on subsidiary distributions.
- Track GMIB/GMDB exposure, hedge effectiveness, annuitization eligibility and assumptions, and the collateral impact of the new statutory guideline.