Business context and reporting period
ACE Limited and subsidiaries, a global insurance and reinsurance group, filed this unaudited Form 10-Q for the three months ended March 31, 2013. The filing identifies the registrant as ACE Limited, not Chubb Ltd; investors should verify the issuer and filing association. ACE reported five segments: North American P&C, North American Agriculture, Overseas General, Global Reinsurance, and Life.
Key financial metrics
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data and ratios.
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net premiums written | $3,798 | $3,572; up 6.3% |
| Net premiums earned | $3,573 | $3,381; up 5.7% |
| Total revenues | $4,310 | $4,185; up 3.0% |
| Net investment income | $531 | $544; down 2.4% |
| Net realized gains | $206 | $260 |
| Income before tax | $1,075 | $1,083 |
| Net income | $953 | $973; down 2.0% |
| Diluted EPS | $2.77 | $2.84 |
| Operating cash flow | $913 | $572 |
| P&C combined ratio | 88.2% | 89.2% |
The P&C combined ratio below 100% indicates underwriting profitability. The reported ratio benefited from $70 million of favorable prior-period reserve development (2.2 percentage points); catastrophe losses, including reinstatement premiums, were $32 million pre-tax.
Financial position, liquidity and capital
- At March 31, 2013, total assets were $93.5 billion, shareholders’ equity $27.9 billion, and cash $855 million.
- Total debt was $5.7 billion, comprising $1.4 billion short-term and $4.3 billion long-term debt, up from $4.8 billion total debt at year-end 2012. Debt to total capitalization rose to 16.8% from 14.6%.
- ACE issued $950 million of senior notes in March: $475 million at 2.7% due 2023 and $475 million at 4.15% due 2043. Management said proceeds were expected to repay notes maturing in 2014 and 2015.
- Operating cash flow was $913 million; investing activities used $1.466 billion, mainly for net investment purchases; financing activities provided $813 million, including the long-term debt proceeds. Cash increased by $240 million during the quarter.
- Available credit lines totaled $1.9 billion, with $1.4 billion used to support letters of credit. The company reported compliance with its financial covenants. Management expected operating cash flows to cover outflows under most loss scenarios in the near term.
- Share repurchases were $154 million; $307 million of authorization remained through December 31, 2013. The declared quarterly dividend was $0.49 per share; cash dividends paid in the quarter were $2 million, partly reflecting an accelerated prior-quarter payment.
Changes, management commentary and notable items
- Premium growth was broad-based, with written premiums increasing in North American P&C, Overseas General, Global Reinsurance and Life; Agriculture premiums declined, partly because of additional MPCI reinsurance.
- Underwriting income rose to $388 million from $338 million. The overall combined ratio improved as expense ratios declined, while the loss ratio was slightly higher. A $29 million legal settlement benefit improved the expense ratio, partly offset by a $10 million expense adjustment; management cited a 0.6 percentage-point net benefit from these one-time items.
- Net investment income declined mainly because of lower reinvestment rates, partly offset by higher private-equity fund distributions. The average market yield on fixed maturities was 2.3%, versus 3.0% a year earlier.
- Life segment net income fell to $201 million from $311 million, in part because variable-annuity guarantee valuation gains were lower. Q1 included $369 million of gains from a decrease in GLB liabilities, partly offset by $250 million of losses on related equity hedges; these amounts are sensitive to market movements and policyholder behavior.
- Comprehensive income decreased to $716 million from $1.271 billion, including a $237 million other comprehensive loss in 2013, with negative investment and currency translation movements.
- ACE acquired the remaining 20% of Indonesian insurer JaPro in January. It acquired Mexican surety company Fianzas Monterrey on April 1, after quarter-end, for approximately $293 million. The proposed approximately $865 million ABA Seguros acquisition remained subject to approvals and was expected to close in Q2 2013.
- No formal earnings or operating guidance is provided in the supplied filing text. Management stated interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Loss reserving involves significant estimation uncertainty. Gross unpaid losses and loss expenses were $37.1 billion and net reserves were $26.2 billion. The quarter included $70 million of favorable prior-period development, down from $93 million a year earlier.
- Reinsurance recoverables on losses and loss expenses were $11.5 billion, net of an uncollectible-reinsurance provision; collection risk includes reinsurer insolvency and contract disputes. Management reported approximately $2.5 billion of collateral against gross recoverables.
- Variable-annuity guarantee liabilities rely on internal models and assumptions for interest rates, equity markets, volatility, lapses and annuitization. Management warned actual experience could differ materially; most covered living-benefit policyholders were not yet eligible to trigger claims.
- Investment risks include interest-rate, credit, foreign-exchange and valuation exposure. Management estimated a 100-basis-point rise in rates would reduce fixed-income portfolio value by approximately $2.3 billion. Some fair-value estimates use less observable inputs.
- Other stated risks include natural and man-made catastrophes, reserve and claims uncertainty, regulatory and legal matters, competition, economic and market conditions, and the ability to collect reinsurance. Management said ordinary-course litigation was not likely to be material and reported no unexpected asbestos and environmental reserve activity in the quarter.
- The filing reports no material changes to previously disclosed risk factors or critical accounting estimates, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm that ACE Limited is the intended issuer for the request identified as Chubb Ltd.
- Assess the sustainability of underwriting improvement excluding favorable reserve development and the one-time legal settlement benefit.
- Review reserve adequacy, reinsurance recoverability and catastrophe exposure, including the assumptions underlying modeled loss estimates.
- Evaluate sensitivity of GLB liabilities and earnings to equity markets, interest rates, policyholder lapses and annuitization.
- Confirm the completion, financing and expected integration effects of the announced Mexican acquisitions, and the effect of additional debt on capital.