Chubb Ltd quarterly report, Q1 FY2011

Business context and reporting period

The supplied filing is ACE Limited’s unaudited Form 10-Q for the three months ended March 31, 2011; it is not filed under the name Chubb Ltd. ACE was a Swiss-incorporated global insurer and reinsurer operating through North American insurance, Overseas General insurance, Global Reinsurance, and Life segments.

Financial performance and position

Unless otherwise indicated, figures are in U.S. dollars. Millions are used for financial statement amounts.

The reported combined ratio was 105.0%, versus 92.8% a year earlier, indicating an underwriting loss on the company’s stated measure. The loss ratio was 73.4% versus 61.9%. Excluding catastrophe losses and reinstatement premiums, the loss ratio was 60.8%, compared with 61.1%; favorable prior-period reserve development was $93 million. Net income fell 66%, principally amid catastrophe claims and the reversal from prior-year realized investment gains to losses.

Operating cash flow exceeded investing cash outflow of $631 million and financing cash outflow of $37 million. The debt-to-total-capitalization ratio was 16.7%; debt plus trust preferred securities to capitalization was 17.8%. Credit lines totaled $2.4 billion, with $1.4 billion used to support letters of credit. ACE also reported $1.4 billion of reverse repurchase agreements outstanding. Management said operating cash flows were expected to cover outflows under most loss scenarios through 2011; all financial covenants were met at quarter-end.

Material changes versus the prior comparable period

• Net catastrophe losses before reinstatement premiums were $415 million, versus $148 million in Q1 2010. Including $74 million of reinstatement premiums, the pretax impact was $489 million; management reported an after-tax impact of $443 million.
• Investment income rose, but net realized results shifted from a $168 million gain to a $45 million loss. Q1 2010 also included substantially higher unrealized investment gains in other comprehensive income.
• North American net premiums written declined 8%; underwriting income fell to $68 million from $128 million, while its combined ratio increased to 95.0% from 90.7%.
• Overseas General underwriting moved to a $94 million loss from $62 million income; its combined ratio rose to 107.2% from 95.0%, reflecting catastrophe impacts and related reinstatement premiums.
• Global Reinsurance reported a $77 million underwriting loss versus $59 million income; its combined ratio increased to 129.7% from 78.8%, driven substantially by catastrophe losses.
• Life underwriting income increased to $97 million from $89 million, but net income declined to $63 million from $115 million, including the effect of realized investment and derivative losses.

Outlook, management commentary, risks and unusual items

• Management expected catastrophe losses to strengthen pricing in some property classes, including catastrophe-exposed and large-account property, and potentially marine and energy. ACE cited strict underwriting discipline and lower North American retail commercial new business writings. It anticipated continued A&H growth through 2011; no consolidated earnings guidance was provided.
• Management estimated ACE’s Japan earthquake losses, including reinstatement premiums, at $247 million, but stressed significant uncertainty around coverage, business interruption, reported claims, repair costs, and legal or regulatory developments. Actual losses could materially differ.
• Acquisitions included New York Life’s Korea operations on February 1, 2011, for approximately $75 million. The Hong Kong operations were acquired after quarter-end, on April 1, for approximately $350 million. Rain and Hail and Jerneh acquisitions completed in December 2010 contributed to the period’s results.
• Combined Insurance’s U.K. and Ireland operations were under a sales moratorium while ACE re-evaluated sales practices and processes amid regulatory changes.
• ACE’s assumed variable-annuity living-benefit reinsurance liabilities depend on market conditions and policyholder behavior. The reported GLB liability was $596 million at March 31, 2011; management reported a $6 million favorable net-income effect from technical model refinements. Management cautioned that adverse changes could materially affect earnings.
• Ongoing broker/insurer business-practices litigation remained difficult to estimate; no liability for compensatory damages was established for the described matters. In an Ohio action, the plaintiff alleged $11.3 million of overcharges and sought a $10.3 million penalty; ACE disputed the claims. Management said these matters were not likely to materially harm financial condition, though individual-period results could be affected.
• Management reported no material change to the risk factors in the 2010 Form 10-K. A new insurance-contract acquisition-cost accounting standard was due to take effect in 2012; ACE was still assessing its impact.
• The filing says there were no share repurchases during the quarter, while also reporting 588,906 shares acquired through employee tax-withholding surrenders; these were not described as open-market repurchases.

Most important facts for investors to verify

• How catastrophe reserves and recoveries develop, especially the Japan earthquake estimate, reinstatement premiums, and reinsurance collectability.
• Whether underwriting performance normalizes after catastrophe effects, particularly in Overseas General and Global Reinsurance, and whether pricing improvements materialize.
• The quality and persistence of favorable prior-period reserve development and the adequacy of unpaid-loss reserves.
• Investment portfolio exposures, sensitivity to interest rates and credit spreads, and the valuation assumptions behind Level 3 assets and GLB liabilities.
• Liquidity and funding needs, including reverse repurchase agreements, credit-line availability, and the capital and integration effects of the acquisitions.
• Developments in the unresolved litigation, tax examinations, and the Combined Insurance U.K. and Ireland sales moratorium.