ACE Limited (historical Chubb entity) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013. The filing’s registrant is ACE Limited, incorporated in Switzerland, and describes a global insurance and reinsurance business operating across five segments. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net premiums written | $4.185 billion | $3.798 billion; up 10.2% reported, 12.1% constant currency |
| Net premiums earned | $3.970 billion | $3.573 billion; up 11.1% |
| Total revenues | $4.419 billion | $4.310 billion; up 2.5% |
| Net investment income | $553 million | $531 million; up 4.1% |
| Net realized investment and other gains (losses) | $(104) million | $206 million |
| Net income / diluted EPS | $734 million / $2.14 | $953 million / $2.77 |
| Consolidated P&C combined ratio | 88.8% | 88.2% |
| Operating cash flow | $1.250 billion | $913 million |
| Total investments / cash | $62.045 billion / $847 million | Investments $60.928 billion / cash $579 million at December 31, 2013 |
| Total debt | $5.709 billion | $5.708 billion at December 31, 2013 |
| Shareholders’ equity | $29.369 billion | $28.825 billion at December 31, 2013 |
The company reported $1.9 billion of available credit lines, of which $1.2 billion was in use; it met all financial covenants at quarter-end. Debt was 16.1% of total capitalization, or 17.0% including trust preferred securities. The filing says operating cash flows should cover cash needs under most near-term loss scenarios, while access to facilities depends on lender performance and continued covenant compliance.
Changes versus the prior comparable period
- Net income fell 23.0%, despite premium growth, largely as net realized results swung to a $104 million loss from a $206 million gain. The 2014 result included $50 million of realized losses associated with GLB liabilities and $19 million of losses on related hedge instruments.
- The P&C combined ratio increased to 88.8% from 88.2%. Current accident-year P&C combined ratio excluding catastrophe losses improved to 88.9% from 89.4%.
- Pre-tax catastrophe losses, including reinstatement premiums, were $53 million versus $32 million; favorable prior-period development was $62 million versus $70 million.
- Operating cash flow rose to $1.250 billion from $913 million, primarily on higher net premiums collected, partly offset by higher losses paid. Investing used $503 million, versus $1.466 billion; financing used $472 million, versus $813 million provided in the prior year.
- Share repurchases were $332 million versus $154 million. Dividends paid were $214 million versus $2 million; the prior-year amount was unusually low because the fourth-quarter 2012 dividend had been paid early.
Segments, outlook, and notable items
- North American P&C: Net premiums written rose 10.5%; underwriting income increased to $227 million from $192 million, and the combined ratio improved to 84.7% from 85.7%.
- North American Agriculture: Underwriting loss was $31 million versus income of $11 million; the combined ratio was 130.3% versus 79.3%. Higher-than-expected development on the 2013 crop year contributed to $38 million of adverse prior-period development. Premium growth also reflected lower cessions to the U.S. government and third-party reinsurers.
- Overseas General: Net premiums written grew 9.3% reported and 12.3% in constant currency, including $140 million of premium growth from the 2013 Mexican acquisitions. Underwriting income rose to $159 million from $137 million; net income was $249 million versus $257 million.
- Global Reinsurance: Net premiums written grew 10.3%, but underwriting income decreased to $77 million from $81 million and the combined ratio worsened to 72.9% from 67.3%, partly due to business mix and higher acquisition costs.
- Life: Life underwriting income increased to $98 million from $91 million, including a one-time $6 million favorable adjustment in Asia. Net income fell to $2 million from $201 million, reflecting the swing in realized results related principally to variable-annuity guarantees and hedges. ACE had stopped writing this GLB business in 2007.
- Acquisitions: On April 28, 2014, after quarter-end, ACE and a local partner acquired 60.9% of Thai insurer Samaggi; a mandatory offer for the remaining shares was planned for Q2. The implied price for 100% was approximately $190 million in cash.
- Catastrophe protection: The January 2014 North American catastrophe program excluded named-storm coverage. ACE expected to purchase coverage effective no later than July 1, 2014, so it disclosed a potential coverage gap from June 1 through June 30. Modeled U.S. hurricane net PML was $2.317 billion for a 1-in-100-year event and $3.022 billion for a 1-in-250-year event under the then-current program; the expected July program was projected to reduce those figures to $1.806 billion and $2.383 billion.
- Investment and reserve risks: A 100-basis-point rise in interest rates was estimated to reduce fixed-income portfolio valuation by approximately $2.3 billion. GLB valuations depend on market conditions and policyholder behavior, and management cautioned actual outcomes may differ materially from model estimates. Net reinsurance recoverables on losses and loss expenses were $10.755 billion, net of a provision for uncollectible reinsurance and approximately $2.3 billion of collateral.
- Guidance and controls: The filing provides no specific earnings or revenue guidance. Management reported no material change in critical accounting estimates or risk factors from the 2013 Form 10-K, and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether crop-insurance claim emergence and adverse development persist, and how that affects the agriculture segment’s underwriting results.
- The assumptions, hedge effectiveness, and earnings sensitivity of the closed GLB guarantee portfolio, especially under adverse equity, interest-rate, credit-spread, lapse, or annuitization scenarios.
- Collection experience and counterparty quality for the $10.755 billion of net reinsurance recoverables.
- Whether the planned named-storm reinsurance coverage took effect by July 1, 2014, and whether final terms and limits matched management’s expectations.
- The sustainability of favorable prior-period reserve development and the impact of catastrophe losses on future combined ratios.
- Execution and final purchase cost of the Samaggi transaction and tender offer, and the company’s use of the remaining share-repurchase authorization.