ACE Limited (now Chubb Limited) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing is by ACE Limited; the planned acquisition of The Chubb Corporation had not yet closed. Amounts are in U.S. dollars unless stated otherwise.
Business context and key financial metrics
ACE operated globally through five segments: North American P&C, North American Agriculture, Overseas General, Global Reinsurance and Life.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net premiums written | $4.709bn | $4.729bn | $13.569bn | $13.473bn |
| Net premiums earned | $4.719bn | $4.754bn | $13.006bn | $13.056bn |
| Net investment income | $549m | $566m | $1.662bn | $1.675bn |
| Net realized losses | $(397)m | $(120)m | $(360)m | $(297)m |
| Net income | $528m | $785m | $2.151bn | $2.298bn |
| Diluted EPS | $1.62 | $2.32 | $6.53 | $6.75 |
| Operating cash flow | $808m | Not stated clearly for quarter | $2.699bn | $3.222bn |
At September 30, 2015, total assets were $97.760bn, total liabilities $68.633bn and shareholders’ equity $29.127bn. Cash was $1.038bn; investments totaled $62.384bn. Short- and long-term debt totaled $6.260bn, plus $309m of trust preferred securities. Debt to total capitalization was 17.5%, versus 16.5% at December 31, 2014. The $1.0bn credit line had $499m drawn; financial covenants were met.
For the quarter, P&C combined ratio was 85.9% (GAAP combined ratio 85.8%), versus 86.3% and 87.3%, respectively, a year earlier. Current accident-year P&C combined ratio excluding catastrophe losses was 89.2%, versus 89.8%. Nine-month P&C combined ratio was 87.2%, versus 87.5%.
Material changes versus the prior comparable period
- Q3 net income declined 32.7%; nine-month net income declined 6.4%. The quarter’s large realized loss was primarily associated with fair-value movements in variable-annuity guaranteed living benefit (GLB) liabilities amid falling equity markets and lower interest rates.
- Premiums written were down 0.4% in reported dollars in Q3 but up 5.5% on a constant-dollar basis; nine-month growth was 0.7% reported and 6.1% constant-dollar. Foreign exchange weighed on reported premiums.
- Q3 net investment income fell 3.1%, reflecting foreign exchange and reduced corporate-bond call activity. Nine-month operating cash flow declined by $523m, primarily due to higher net losses paid and income taxes paid.
- Shareholders’ equity fell from $29.587bn at year-end 2014 to $29.127bn. Nine-month other comprehensive loss was $1.383bn, including adverse currency translation and investment valuation movements.
- Segment results were mixed: Q3 North American P&C underwriting income increased to $160m, while Overseas General underwriting income declined to $290m. Global Reinsurance underwriting income rose to $119m despite lower premiums; favorable prior-period development contributed materially.
- ACE acquired Fireman’s Fund’s U.S. high-net-worth personal-lines business for $365m in cash in April. Its purchase accounting included $196m goodwill and $278m of other intangible assets. The acquisition contributed premium growth and a temporary underwriting benefit.
Outlook, commentary, risks and unusual items
- Chubb merger: ACE agreed to acquire Chubb for cash and ACE shares. At ACE’s September 30 share price, the estimated purchase price was approximately $28.8bn; former Chubb shareholders were expected to own about 30% of the combined company. The transaction was expected to close in Q1 2016, subject to remaining conditions and regulatory approvals. Shareholder approvals and early termination of the U.S. antitrust waiting period were reported after quarter-end.
- ACE planned to fund the cash portion with approximately $9bn from ACE and Chubb companies and $5.3bn of senior notes issued in October. The notes generally must be redeemed at 101% of principal plus accrued interest if the merger is not completed or the agreement is terminated by September 30, 2016. Share repurchases were discontinued in connection with the planned acquisition.
- Q3 and nine-month Chubb integration expenses were $9m pre-tax. Management expected acquisition and integration costs to continue; anticipated efficiencies might take time or may not be achieved.
- Q3 catastrophe losses were $72m pre-tax, including $22m net from the Tianjin chemical plant explosion. Favorable prior-period development was $210m, but this included a $76m Brandywine environmental reserve charge; North American P&C had $50m net adverse development for the quarter. Nine-month favorable development totaled $446m.
- The GLB liability was reported at $1.0bn, including a $744m fair-value derivative adjustment, up from $663m at year-end 2014. Valuation depends on market conditions and policyholder behavior; management cautioned actual experience may differ materially. ACE had ceased writing this variable-annuity reinsurance business in 2007.
- Management said operating cash flows should cover near-term outflows under most loss scenarios. Key risks include catastrophe severity and reinsurance recoverability, reserve estimation, market and foreign-exchange movements, rating changes, and merger completion, financing, integration, litigation and tax uncertainty. The filing provided no formal earnings guidance.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Chubb merger closed on schedule, its final consideration and financing costs, required regulatory approvals, and actual integration expenses and synergies.
- How much reported earnings and equity volatility reflects GLB fair-value changes, hedging results and foreign exchange, and whether reserve and policyholder-behavior assumptions change.
- The sustainability of favorable prior-period reserve development, particularly given the Brandywine environmental and legacy-liability exposures.
- Underlying premium and underwriting trends excluding acquisitions, constant-dollar effects, purchase-accounting benefits and catastrophe losses.
- Liquidity and capital after the October debt issuance, including restricted assets, debt maturities, credit-line availability and the effect of suspending share repurchases.