ACE Limited (now Chubb Ltd.): Q3 2011 Form 10-Q Summary
Business context and reporting period
The filing is by ACE Limited, a Swiss-incorporated global insurance and reinsurance group, for the quarter and nine months ended September 30, 2011. The interim financial statements are unaudited. ACE operated through Insurance—North American, Insurance—Overseas General, Global Reinsurance, and Life. The filing describes the company as serving customers in more than 170 countries.
Key financial metrics
Unless otherwise indicated, amounts are in U.S. dollars.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net premiums written | $4.343 billion | $3.295 billion | $11.742 billion | $10.286 billion |
| Net premiums earned | $4.490 billion | $3.422 billion | $11.556 billion | $9.932 billion |
| Total revenues | $4.294 billion | $3.888 billion | $12.355 billion | $11.597 billion |
| Net income (loss) | $(31) million | $675 million | $835 million | $2.107 billion |
| Diluted EPS | $(0.09) | $1.97 | $2.45 | $6.18 |
| Net investment income | $564 million | $516 million | $1.677 billion | $1.538 billion |
| Net realized gains (losses) | $(760) million | $(50) million | $(878) million | $127 million |
| Combined ratio | 90.3% | 88.4% | 95.2% | 90.2% |
- Underwriting and margins: Underwriting income was $479 million in Q3 and $689 million for the nine months, versus $402 million and $1.004 billion in the comparable 2010 periods. The combined ratio remained below 100%, indicating underwriting profit, but deteriorated year over year. Q3 loss and loss expense ratio was 64.7%, versus 58.2%; nine-month ratio was 66.6%, versus 59.6%.
- Cash flow: Nine-month operating cash flow was $2.998 billion, compared with $2.775 billion in 2010. Investing activities used $2.530 billion and financing activities used $478 million. Cash was $766 million at September 30, versus $772 million at year-end 2010.
- Balance sheet and liquidity: Total assets were $88.720 billion and shareholders’ equity $23.750 billion, up from $83.355 billion and $22.974 billion at December 31, 2010. Total investments were $55.499 billion. Debt comprised $1.250 billion short-term and $3.360 billion long-term; debt-to-total-capitalization was 16.1%, and debt plus trust preferred securities-to-capitalization was 17.2%. Available credit lines were $2.4 billion, with $1.3 billion used to support letters of credit. Management said operating cash flows should generally cover obligations through 2011; this is not a guarantee under all loss scenarios.
Material changes versus the prior comparable period
- Premium growth reflected the Rain and Hail crop insurance acquisition, international retail growth, favorable foreign exchange, and the 2011 acquisitions of New York Life’s Korea and Hong Kong operations. Those life operations were acquired for approximately $425 million in cash and contributed eight and six months of results, respectively, to the nine-month period.
- Q3 and nine-month net income fell sharply, primarily because of fair-value losses on variable-annuity guaranteed living benefit (GLB) reinsurance and associated derivatives. Q3 GLB-related realized loss was $952 million, partly offset by $220 million of gains on equity hedges; for nine months, the respective amounts were $969 million and $152 million. The reported GLB liability increased to $1.635 billion from $648 million at year-end 2010.
- Catastrophe losses were higher: net pre-tax catastrophe losses before reinstatement premiums were $147 million for Q3 and $704 million for the nine months, versus $91 million and $315 million a year earlier. Management reported after-tax catastrophe impacts, including reinstatement premiums, of $86 million and $630 million, respectively.
- Net favorable prior-period reserve development was $194 million in Q3 and $433 million for nine months, slightly below the comparable 2010 amounts of $201 million and $446 million. The favorable development included substantial overseas casualty and financial-lines releases, partly offset by adverse development in more recent accident years.
- Net investment income rose 9% in both reported periods, supported by operating cash flows, foreign exchange, acquisitions, and a larger invested-asset base; lower yields on new investments partly offset these benefits.
Outlook, management commentary, risks and contingencies
- Management emphasized underwriting discipline, declining business when pricing or exposure was inadequate, and maintaining geographic and business diversification. It expected international accident and health business to continue growing through 2011. The filing provides no specific consolidated earnings or premium guidance.
- ACE signed a definitive agreement to acquire Penn Millers Holding Corporation, subject to approvals and other conditions, and expected completion by the end of Q1 2012.
- Combined Insurance suspended sales in the UK and Ireland while reassessing sales practices and customer service, and planned to cease sales in its small Spain subsidiary. ACE was discussing potential enforcement proceedings and penalties with regulators; management did not expect a material impact on the company’s statement of operations.
- GLB valuations depend on market movements and uncertain policyholder behavior, including lapse and annuitization assumptions. Management warned that adverse changes could materially affect earnings; the filing also presents substantial sensitivity to equity-market and interest-rate shocks. Most relevant claims under living-benefit guarantees were not yet eligible to be triggered, with the vast majority becoming eligible in 2013 or later.
- Other stated risks include catastrophe severity, reserve estimation, reinsurance collectability, financial-market and foreign-exchange volatility, competition and pricing, regulation, and the availability of credit. A 100-basis-point rise in interest rates was estimated to reduce book value by approximately $1.9 billion.
- ACE reported $12.837 billion of reinsurance recoverables on losses and loss expenses. It said ordinary-course claims and business litigation were not expected to materially harm consolidated financial condition, though individual-period results could be affected. In the commercial insurance practices litigation and related cases, potential losses could not be reasonably estimated; in an Ohio action, the plaintiff’s revised claimed overcharges against ACE were $5.7 million, with a separate requested penalty of $3.3 million.
- Restricted assets totaled $13.234 billion at September 30, 2011. Subsequent to quarter-end, ACE posted approximately $600 million of additional collateral, primarily for variable-annuity reinsurance. The filing also reported $1.3 billion of reverse repurchase agreements outstanding at quarter-end.
Most important facts for investors to verify
- How much of the reported earnings decline reflects GLB fair-value accounting volatility versus underlying economic performance, and how the GLB liability, hedges, and assumptions develop.
- Whether catastrophe claims, reinstatement premiums, and reserve development differ from the estimates reported, particularly given 2011’s unusually high catastrophe activity.
- The quality and recoverability of the $12.837 billion of loss-related reinsurance recoverables, and the liquidity impact of collateral requirements and restricted assets.
- Whether premium growth from acquisitions and foreign exchange translates into sustainable underwriting returns; review segment results, especially North American agriculture and the declining Global Reinsurance business.
- Developments in the Penn Millers transaction, Combined Insurance’s UK/Ireland regulatory matters, and the commercial insurance practices and Ohio litigation.