Business context and reporting period
The supplied filing identifies the registrant as ACE Limited, a global insurance and reinsurance group—not Chubb Ltd. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2009; financial amounts are in U.S. dollars unless noted.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net premiums written | $3.415bn | $3.598bn | $6.839bn | $6.752bn |
| Net premiums earned | $3.266bn | $3.428bn | $6.460bn | $6.368bn |
| Total revenues | $3.547bn | $3.834bn | $7.122bn | $6.910bn |
| Net income | $535m | $746m | $1.102bn | $1.123bn |
| Diluted EPS | $1.58 | $2.18 | $3.27 | $3.29 |
| Net investment income | $506m | $532m | $1.008bn | $1.021bn |
| Net realized investment and other losses | $(225)m | $(126)m | $(346)m | $(479)m |
| Operating cash flow | Not separately presented for the quarter | $1.322bn | $2.082bn |
At June 30, total assets were $75.655bn, shareholders’ equity $16.561bn, and cash $654m. Total debt was $3.538bn ($216m short-term and $3.322bn long-term); trust preferred securities were $309m. Debt was 17.3% of total capitalization, or 18.9% including trust preferred securities. Available credit facilities totaled $2.494bn, with $1.517bn used.
The consolidated combined ratio, excluding Life, was 87.7% for Q2 and 87.6% for the first half, versus 87.8% and 86.2% in the comparable 2008 periods. A ratio below 100% indicates underwriting income. Net favorable prior-period reserve development was $158m in Q2 and $226m year to date. Gross unpaid losses and loss expenses were $37.268bn; net reserves were $24.712bn.
Material changes versus prior periods
- Q2 net income fell 28% and total revenue fell 7%; first-half net income declined 2% while revenue rose 3%. Q2 net premiums earned decreased 5%, while first-half earned premiums increased 1%.
- Q2 net premiums written declined 5%, reflecting lower production in U.S. wholesale and international business, foreign exchange effects, and recession-related exposure reductions; reinsurance growth partly offset the decline. First-half written premiums rose 1%, with full-period inclusion of Combined Insurance contributing to the comparison.
- Global Reinsurance underwriting income increased to $125m in Q2 from $81m; its combined ratio improved to 48.2% from 68.6%. Overseas General underwriting income fell to $127m from $188m, and its combined ratio rose to 89.8% from 86.9%.
- Investment-market recovery lifted other comprehensive income by $925m in the first half, compared with an $817m loss in the prior-year period. Shareholders’ equity increased from $14.446bn at year-end 2008 to $16.561bn.
- Operating cash flow decreased by $760m year over year. The company cited higher-than-typical claim payments, increased tax payments, working-capital movements and approximately $160m of returned collateral on variable-annuity hedges.
Outlook, commentary, risks and unusual items
- Management said pricing improved modestly in Q2, with stronger conditions in reinsurance and selected retail-sourced lines. The recession, a strong U.S. dollar, lower client exposures, affordability pressures and weaker A&H sales constrained premium growth. No specific earnings or revenue guidance was provided.
- Management believed operating cash flows should cover cash needs under most loss scenarios through 2009 and that cash, routine investment sales and credit facilities were adequate for expected requirements. The $500m of 5.9% senior notes issued in June 2009 are due in 2019.
- Investment results included $306m of net OTTI losses in the first half. Adoption of new impairment guidance reclassified amounts between retained earnings and accumulated other comprehensive income; it also led to a $46m deferred-tax valuation allowance. The filing reports $2.215bn of gross unrealized investment losses at June 30, against $1.04bn of gross unrealized gains.
- ACE recognized a $67m pretax loss following Assured Guaranty Ltd’s share issuance and change in accounting treatment. Its AGO investment had a $237m fair value and $131m unrealized loss in other comprehensive income at June 30.
- Variable-annuity guarantee liabilities and valuations are sensitive to equity and interest rates, credit spreads, volatility, and policyholder behavior. The GMIB liability was $634m; management cautioned that actual experience could differ materially from model estimates. ACE did not quote new or renewal variable-annuity guarantee transactions in 2008 or the first half of 2009.
- Risks include catastrophe losses, reserve-estimation uncertainty, reinsurance collectability, investment credit and valuation risk, and the economic downturn. The company cited modeled net losses of approximately $1.2bn for a 1-in-100-year U.S. hurricane and $862m for a 1-in-100 California earthquake, while warning that modeled outcomes are uncertain and are not maximum exposures.
- Legal proceedings and regulatory matters include insurance-practices litigation, a New York workers’ compensation assessment issue and an IRS tax appeal. Management did not expect a material effect on financial condition from the tax appeal or New York matter; it nevertheless established a contingency for the latter. Litigation could affect an individual reporting period.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for ACE Limited, as named on the cover.
- Review reserve adequacy and the composition and sustainability of favorable prior-period development, particularly in long-tail lines.
- Assess investment impairment exposure, unrealized losses, credit quality and the assumptions used in fair-value and deferred-tax estimates.
- Evaluate GMIB/GMDB sensitivity to market conditions and policyholder behavior, including hedging effectiveness and future claim timing.
- Monitor recession- and foreign-exchange-driven premium trends, reinsurance recoverables, liquidity and credit-facility availability, as well as the cited legal and tax contingencies.