ACE Limited Form 10-Q Summary — Quarter Ended June 30, 2010
Entity note: The supplied filing is for ACE Limited, not Chubb Ltd. The filing describes ACE as a Switzerland-incorporated global insurer and reinsurer, operating in more than 50 countries through North American Insurance, Overseas General Insurance, Global Reinsurance, and Life. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net premiums written | $3,420 | $3,415 | $6,991 | $6,839 |
| Net premiums earned | $3,233 | $3,266 | $6,510 | $6,460 |
| Total revenues | $3,760 | $3,547 | $7,709 | $7,122 |
| Net investment income | $518 | $506 | $1,022 | $1,008 |
| Net realized gains (losses) | $9 | $(225) | $177 | $(346) |
| Net income | $677 | $535 | $1,432 | $1,102 |
| Diluted earnings per share | $1.98 | $1.58 | $4.21 | $3.27 |
| Combined ratio | 89.7% | 87.7% | 91.2% | 87.6% |
Q2 net income increased 27% year over year and first-half net income rose 30%. Higher reported realized results—especially versus substantial 2009 investment impairment losses—contributed to the improvement. In Q2 2010, ACE recorded $18 million of net OTTI losses, versus $114 million in Q2 2009; first-half net OTTI losses were $36 million versus $306 million. Underwriting remained profitable, but the combined ratio deteriorated, reflecting higher expense ratios and catastrophe losses.
- Underwriting: First-half underwriting income was $602 million, down from $768 million. First-half loss and loss expense ratio was 60.3%, versus 58.9%; policy acquisition and administrative expense ratios were 16.8% and 14.1%, versus 15.7% and 13.0%.
- Cash flow: First-half operating cash flow was $1,691 million, compared with $1,322 million. Investing activities used $1,467 million and financing activities used $191 million. Cash ended at $668 million, essentially unchanged from year-end 2009.
- Balance sheet and capital: At June 30, total assets were $80.2 billion, total liabilities $58.8 billion, and shareholders’ equity $21.4 billion, up from $19.7 billion at December 31. Total debt was $3.305 billion; debt-to-capitalization was 13.2%, down from 14.2%. Debt plus trust preferred securities to capitalization was 14.4%, versus 15.6%.
- Liquidity: Available credit lines totaled $2.4 billion, with $1.5 billion used. Management said operating cash flows were expected to cover cash outflows under most loss scenarios through 2010. Cash and short-term investments were $2.765 billion combined, but $12.274 billion of assets were restricted, including $12.1 billion of fixed maturities and short-term investments.
Material changes and segment performance
- Written premiums were broadly stable as reported. Management cited favorable foreign exchange and growth in retail specialty, international retail, personal lines, and Life, offset by competitive pricing, lower assumed loss portfolio and crop business, and reduced London wholesale production.
- Insurance—North American first-half earned premiums fell 5% and underwriting income fell 18% to $257 million; its combined ratio increased to 90.5% from 89.1%.
- Insurance—Overseas General first-half earned premiums rose 3%, but underwriting income fell 32% to $177 million and its combined ratio increased to 93.0% from 89.3%. Currency movements supported reported premium growth.
- Global Reinsurance first-half written premiums declined 4%, while earned premiums rose 11%. Underwriting income fell 30% to $149 million; its combined ratio increased to 72.0% from 55.5%, primarily reflecting higher losses and a greater proportion of casualty business.
- Life first-half underwriting income, which includes investment income, increased 28% to $185 million. However, Life reported a Q2 net loss of $78 million and first-half net income of $37 million, primarily reflecting fair-value losses on variable-annuity guarantee exposures, partly offset by hedges.
- Consolidated catastrophe losses were $76 million in Q2 and $224 million in the first half, compared with $31 million and $69 million, respectively, in 2009. ACE recorded favorable prior-period development of $152 million in Q2 and $248 million in the first half, according to the MD&A segment tables.
Outlook, risks, contingencies, and unusual items
- Management said global insurance pricing was generally declining and competitive conditions were expected to continue “into the foreseeable future.” ACE said it would decline business when pricing or exposure was inadequate for an underwriting profit. It expected A&H to contribute more to results in the second half of 2010. No specific earnings or premium guidance was provided.
- Variable-annuity GMIB exposure is a significant source of earnings volatility. The reported GMIB liability rose to $776 million from $559 million at year-end; its net amount at risk increased to $1.1 billion from $683 million. Q2 GMIB fair-value losses were $301 million, partly offset by $143 million of gains on equity hedges. Management revised valuation assumptions in the quarter; the filing says the model changes reduced the realized loss by $207 million.
- ACE identified market, interest-rate, equity, credit-spread, foreign-exchange, catastrophe, reserve-estimation, reinsurance-collectability, regulatory, and policyholder-behavior risks. Its modeled net annual aggregate 1-in-100-year losses were $1.089 billion for U.S. hurricanes and $771 million for California earthquakes; management cautioned that model estimates are uncertain and not maximum exposures.
- The investment portfolio was largely fixed income, with an average credit quality of AA; 13% of fixed-income investments were below investment grade or non-rated. Management estimated that a 100-basis-point rise in interest rates would reduce book value by about $1.7 billion. Fixed-maturity fair value increased during the half, largely due to unrealized appreciation and investment of operating cash flow.
- ACE had $748 million of potential future funding commitments for certain investments. It also reported pending business-practice litigation, including a commercial insurance class action and state-court cases; management said an adverse outcome could materially affect an individual period, but was not likely to materially harm consolidated financial condition. A trial in the Office Depot matter was scheduled for January 2011.
- The company established a contingency for potential New York workers’ compensation assessment liabilities, but did not expect a material financial impact. An IRS examination proposed adjustments principally concerning transfer pricing and insurance matters; ACE appealed and did not expect a material impact. A prior IRS settlement reduced unrecognized tax benefits by about $21 million.
- ACE adopted new consolidation and financial-asset-transfer accounting standards without material impact. It did not expect the next stated accounting-standard adoption to have a material impact. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is ACE Limited’s 2010 Q2 10-Q, not a filing under the Chubb Ltd name.
- Track whether underwriting performance holds up as pricing remains competitive, particularly the combined ratio and results in Overseas General and Global Reinsurance.
- Review catastrophe claims, reserve development, and the adequacy and collectability of reinsurance recoverables.
- Examine GMIB liability assumptions, sensitivity disclosures, hedge effectiveness, and the timing of policyholder annuitization eligibility.
- Assess investment credit quality, unrealized losses, interest-rate sensitivity, restricted assets, and the liquidity available after collateral and credit-line commitments.
- Monitor outcomes of the identified litigation, New York assessment contingency, and IRS appeal, as well as regulatory changes including Dodd-Frank and Solvency II.