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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2010
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
| Commission File No. 1-11778 | I.R.S. Employer Identification No. 98-0091805 |
ACE LIMITED
(Incorporated in Switzerland)
Bärengasse 32
CH-8001 Zurich, Switzerland
(Address of principal executive offices, Zip Code)
Telephone +41 (0)43 456 76 00
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
x | Accelerated filer | ¨ | |||||||||||||
|
Non-accelerated filer |
¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
The number of registrant’s Common Shares (CHF 30.89 par value) outstanding as of November 2, 2010, was 339,389,893.
INDEX TO FORM 10-Q
2
ACE LIMITED
PART I FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30 | December 31 | |||||||
| 2010 | 2009 | |||||||
|
(in millions of U.S. dollars, except
share and per share data) |
||||||||
|
Assets |
||||||||
|
Investments |
||||||||
|
Fixed maturities available for sale, at fair value (amortized cost – $39,089 and $38,985) (includes hybrid financial instruments of $394 and $354) |
$ | 41,103 | $ | 39,525 | ||||
|
Fixed maturities held to maturity, at amortized cost (fair value – $6,104 and $3,561) |
5,977 | 3,481 | ||||||
|
Equity securities, at fair value (cost – $387 and $398) |
415 | 467 | ||||||
|
Short-term investments, at fair value and amortized cost |
1,857 | 1,667 | ||||||
|
Other investments (cost – $1,449 and $1,258) |
1,619 | 1,375 | ||||||
|
Total investments |
50,971 | 46,515 | ||||||
|
Cash |
487 | 669 | ||||||
|
Securities lending collateral |
1,629 | 1,544 | ||||||
|
Accrued investment income |
539 | 502 | ||||||
|
Insurance and reinsurance balances receivable |
3,694 | 3,671 | ||||||
|
Reinsurance recoverable on losses and loss expenses |
13,475 | 13,595 | ||||||
|
Reinsurance recoverable on policy benefits |
290 | 298 | ||||||
|
Deferred policy acquisition costs |
1,621 | 1,445 | ||||||
|
Value of business acquired |
656 | 748 | ||||||
|
Goodwill and other intangible assets |
3,906 | 3,931 | ||||||
|
Prepaid reinsurance premiums |
1,678 | 1,521 | ||||||
|
Deferred tax assets |
873 | 1,154 | ||||||
|
Investments in partially-owned insurance companies (cost – $371 and $314) |
510 | 433 | ||||||
|
Other assets |
2,059 | 1,954 | ||||||
|
Total assets |
$ | 82,388 | $ | 77,980 | ||||
|
Liabilities |
||||||||
|
Unpaid losses and loss expenses |
$ | 37,742 | $ | 37,783 | ||||
|
Unearned premiums |
6,571 | 6,067 | ||||||
|
Future policy benefits |
3,083 | 3,008 | ||||||
|
Insurance and reinsurance balances payable |
3,091 | 3,295 | ||||||
|
Deposit liabilities |
327 | 332 | ||||||
|
Securities lending payable |
1,653 | 1,586 | ||||||
|
Payable for securities purchased |
473 | 154 | ||||||
|
Accounts payable, accrued expenses, and other liabilities |
2,721 | 2,349 | ||||||
|
Income taxes payable |
260 | 111 | ||||||
|
Short-term debt |
155 | 161 | ||||||
|
Long-term debt |
3,158 | 3,158 | ||||||
|
Trust preferred securities |
309 | 309 | ||||||
|
Total liabilities |
59,543 | 58,313 | ||||||
|
Commitments and contingencies |
||||||||
|
Shareholders’ equity |
||||||||
|
Common Shares (CHF 30.89 and CHF 31.88 par value, 340,777,358 and 337,841,616 shares issued, 339,229,422 and 336,524,657 shares outstanding) |
10,264 | 10,503 | ||||||
|
Common Shares in treasury (1,547,936 and 1,316,959 shares) |
(33 | ) | (3 | ) | ||||
|
Additional paid-in capital |
5,579 | 5,526 | ||||||
|
Retained earnings |
4,925 | 2,818 | ||||||
|
Deferred compensation obligation |
2 | 2 | ||||||
|
Accumulated other comprehensive income (AOCI) |
2,110 | 823 | ||||||
|
Common Shares issued to employee trust |
(2 | ) | (2 | ) | ||||
|
Total shareholders’ equity |
22,845 | 19,667 | ||||||
|
Total liabilities and shareholders’ equity |
$ | 82,388 | $ | 77,980 | ||||
See accompanying notes to the interim consolidated financial statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2010 and 2009
(Unaudited)
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
(in millions of U.S. dollars, except per share data) |
||||||||||||||||
|
Revenues |
||||||||||||||||
|
Net premiums written |
$ | 3,295 | $ | 3,155 | $ | 10,286 | $ | 9,994 | ||||||||
|
Change in unearned premiums |
127 | 238 | (354 | ) | (141 | ) | ||||||||||
|
Net premiums earned |
3,422 | 3,393 | 9,932 | 9,853 | ||||||||||||
|
Net investment income |
516 | 511 | 1,538 | 1,519 | ||||||||||||
|
Net realized gains (losses): |
||||||||||||||||
|
Other-than-temporary impairment (OTTI) losses gross |
(39 | ) | (169 | ) | (120 | ) | (666 | ) | ||||||||
|
Portion of OTTI losses recognized in other comprehensive income (OCI) |
20 | 111 | 65 | 302 | ||||||||||||
|
Net OTTI losses recognized in income |
(19 | ) | (58 | ) | (55 | ) | (364 | ) | ||||||||
|
Net realized gains (losses) excluding OTTI losses |
(31 | ) | (165 | ) | 182 | (205 | ) | |||||||||
|
Total net realized gains (losses) |
(50 | ) | (223 | ) | 127 | (569 | ) | |||||||||
|
Total revenues |
3,888 | 3,681 | 11,597 | 10,803 | ||||||||||||
|
Expenses |
||||||||||||||||
|
Losses and loss expenses |
1,887 | 1,885 | 5,608 | 5,522 | ||||||||||||
|
Policy benefits |
93 | 79 | 267 | 256 | ||||||||||||
|
Policy acquisition costs |
607 | 567 | 1,697 | 1,571 | ||||||||||||
|
Administrative expenses |
433 | 451 | 1,356 | 1,325 | ||||||||||||
|
Interest expense |
58 | 60 | 162 | 169 | ||||||||||||
|
Other (income) expense |
(25 | ) | 51 | (26 | ) | 44 | ||||||||||
|
Total expenses |
3,053 | 3,093 | 9,064 | 8,887 | ||||||||||||
|
Income before income tax |
835 | 588 | 2,533 | 1,916 | ||||||||||||
|
Income tax expense |
160 | 94 | 426 | 320 | ||||||||||||
|
Net income |
$ | 675 | $ | 494 | $ | 2,107 | $ | 1,596 | ||||||||
|
Other comprehensive income |
||||||||||||||||
|
Unrealized appreciation (depreciation) |
$ | 953 | $ | 1,985 | $ | 2,023 | $ | 2,511 | ||||||||
|
Reclassification adjustment for net realized (gains) losses included in net income |
(120 | ) | 51 | (346 | ) | 387 | ||||||||||
| 833 | 2,036 | 1,677 | 2,898 | |||||||||||||
|
Change in: |
||||||||||||||||
|
Cumulative translation adjustment |
186 | 160 | (73 | ) | 427 | |||||||||||
|
Pension liability |
(6 | ) | 1 | 2 | (13 | ) | ||||||||||
|
Other comprehensive income, before income tax |
1,013 | 2,197 | 1,606 | 3,312 | ||||||||||||
|
Income tax expense related to other comprehensive income items |
(197 | ) | (421 | ) | (319 | ) | (611 | ) | ||||||||
|
Other comprehensive income |
816 | 1,776 | 1,287 | 2,701 | ||||||||||||
|
Comprehensive income |
$ | 1,491 | $ | 2,270 | $ | 3,394 | $ | 4,297 | ||||||||
|
Basic earnings per share |
$ | 1.98 | $ | 1.46 | $ | 6.21 | $ | 4.74 | ||||||||
|
Diluted earnings per share |
$ | 1.97 | $ | 1.46 | $ | 6.18 | $ | 4.73 | ||||||||
See accompanying notes to the interim consolidated financial statements
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the nine months ended September 30, 2010 and 2009
(Unaudited)
|
Nine Months Ended
September 30 |
||||||||
| 2010 | 2009 | |||||||
|
(in millions of U.S.
dollars) |
||||||||
|
Common Shares |
||||||||
|
Balance – beginning of period |
$ | 10,503 | $ | 10,827 | ||||
|
Net shares issued under employee share-based compensation plans |
71 | 73 | ||||||
|
Exercise of stock options |
20 | 3 | ||||||
|
Dividends declared on Common Shares-par value reduction |
(330 | ) | (297 | ) | ||||
|
Balance – end of period |
10,264 | 10,606 | ||||||
|
Common Shares in treasury |
||||||||
|
Balance – beginning of period |
(3 | ) | (3 | ) | ||||
|
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans |
(30 | ) | (1 | ) | ||||
|
Balance – end of period |
(33 | ) | (4 | ) | ||||
|
Additional paid-in capital |
||||||||
|
Balance – beginning of period |
5,526 | 5,464 | ||||||
|
Net shares redeemed under employee share-based compensation plans |
(59 | ) | (79 | ) | ||||
|
Exercise of stock options |
11 | 6 | ||||||
|
Share-based compensation expense |
101 | 90 | ||||||
|
Balance – end of period |
5,579 | 5,481 | ||||||
|
Retained earnings |
||||||||
|
Balance – beginning of period |
2,818 | 74 | ||||||
|
Effect of adoption of OTTI standard |
— | 195 | ||||||
|
Net income |
2,107 | 1,596 | ||||||
|
Balance – end of period |
4,925 | 1,865 | ||||||
|
Deferred compensation obligation |
||||||||
|
Balance – beginning of period |
2 | 3 | ||||||
|
Decrease to obligation |
— | (1 | ) | |||||
|
Balance – end of period |
$ | 2 | $ | 2 | ||||
See accompanying notes to the interim consolidated financial statements
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
For the nine months ended September 30, 2010 and 2009
(Unaudited)
|
Nine Months Ended
September 30 |
||||||||
| 2010 | 2009 | |||||||
|
(in millions of U.S.
dollars) |
||||||||
|
Accumulated other comprehensive income (loss) |
||||||||
|
Net unrealized appreciation (depreciation) on investments |
||||||||
|
Balance – beginning of period |
$ | 657 | $ | (1,712 | ) | |||
|
Effect of adoption of OTTI standard |
— | (242 | ) | |||||
|
Change in period, net of income tax (expense) benefit of $(366) and $(555) |
1,311 | 2,648 | ||||||
|
Balance – end of period |
1,968 | 694 | ||||||
|
Cumulative translation adjustment |
||||||||
|
Balance – beginning of period |
240 | (161 | ) | |||||
|
Change in period, net of income tax (expense) benefit of $48 and $(123) |
(25 | ) | 304 | |||||
|
Balance – end of period |
215 | 143 | ||||||
|
Pension liability adjustment |
||||||||
|
Balance – beginning of period |
(74 | ) | (43 | ) | ||||
|
Change in period, net of income tax (expense) benefit of $(1) and $4 |
1 | (9 | ) | |||||
|
Balance – end of period |
(73 | ) | (52 | ) | ||||
|
Accumulated other comprehensive income |
2,110 | 785 | ||||||
|
Common Shares issued to employee trust |
||||||||
|
Balance – beginning of period |
(2 | ) | (3 | ) | ||||
|
Decrease in Common Shares |
— | (1 | ) | |||||
|
Balance – end of period |
(2 | ) | (2 | ) | ||||
|
Total shareholders’ equity |
$ | 22,845 | $ | 18,733 | ||||
See accompanying notes to the interim consolidated financial statements
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2010 and 2009
(Unaudited)
|
Nine Months Ended
September 30 |
||||||||
| 2010 | 2009 | |||||||
|
(in millions of U.S.
dollars) |
||||||||
|
Cash flows from operating activities |
||||||||
|
Net income |
$ | 2,107 | $ | 1,596 | ||||
|
Adjustments to reconcile net income to net cash flows from operating activities |
||||||||
|
Net realized (gains) losses |
(127 | ) | 569 | |||||
|
Amortization of premiums/discounts on fixed maturities |
103 | 26 | ||||||
|
Deferred income taxes |
(16 | ) | (122 | ) | ||||
|
Unpaid losses and loss expenses |
58 | 289 | ||||||
|
Unearned premiums |
517 | 394 | ||||||
|
Future policy benefits |
94 | 105 | ||||||
|
Insurance and reinsurance balances payable |
(290 | ) | 219 | |||||
|
Accounts payable, accrued expenses, and other liabilities |
116 | (292 | ) | |||||
|
Income taxes payable |
146 | 59 | ||||||
|
Insurance and reinsurance balances receivable |
12 | (38 | ) | |||||
|
Reinsurance recoverable on losses and loss expenses |
65 | 453 | ||||||
|
Reinsurance recoverable on policy benefits |
12 | (96 | ) | |||||
|
Deferred policy acquisition costs |
(172 | ) | (254 | ) | ||||
|
Prepaid reinsurance premiums |
(167 | ) | (177 | ) | ||||
|
Other |
317 | (399 | ) | |||||
|
Net cash flows from operating activities |
2,775 | 2,332 | ||||||
|
Cash flows used for investing activities |
||||||||
|
Purchases of fixed maturities available for sale |
(22,762 | ) | (25,241 | ) | ||||
|
Purchases of to be announced mortgage-backed securities |
(1,128 | ) | (5,717 | ) | ||||
|
Purchases of fixed maturities held to maturity |
(514 | ) | (273 | ) | ||||
|
Purchases of equity securities |
(336 | ) | (314 | ) | ||||
|
Sales of fixed maturities available for sale |
17,233 | 18,946 | ||||||
|
Sales of to be announced mortgage-backed securities |
1,063 | 6,085 | ||||||
|
Sales of fixed maturities held to maturity |
— | 1 | ||||||
|
Sales of equity securities |
432 | 1,102 | ||||||
|
Maturities and redemptions of fixed maturities available for sale |
2,666 | 2,695 | ||||||
|
Maturities and redemptions of fixed maturities held to maturity |
931 | 375 | ||||||
|
Net derivative instruments settlements |
11 | (23 | ) | |||||
|
Other |
(264 | ) | (73 | ) | ||||
|
Net cash flows used for investing activities |
(2,668 | ) | (2,437 | ) | ||||
|
Cash flows from (used for) financing activities |
||||||||
|
Dividends paid on Common Shares |
(323 | ) | (283 | ) | ||||
|
Net repayment of short-term debt |
— | (266 | ) | |||||
|
Net proceeds from issuance of long-term debt |
— | 500 | ||||||
|
Proceeds from exercise of options for Common Shares |
31 | 9 | ||||||
|
Proceeds from Common Shares issued under Employee Stock Purchase Plan (ESPP) |
10 | 10 | ||||||
|
Net cash flows from (used for) financing activities |
(282 | ) | (30 | ) | ||||
|
Effect of foreign currency rate changes on cash and cash equivalents |
(7 | ) | 10 | |||||
|
Net decrease in cash |
(182 | ) | (125 | ) | ||||
|
Cash – beginning of period |
669 | 867 | ||||||
|
Cash – end of period |
$ | 487 | $ | 742 | ||||
See accompanying notes to the interim consolidated financial statements
7
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ACE Limited (ACE or the Company) is a holding company incorporated in Zurich, Switzerland. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 9.
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions have been eliminated. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
2. Significant accounting policies
New accounting pronouncements
Adopted in the nine months ended September 30, 2010
Consolidation of variable interest entities and accounting for transfers of financial assets
Accounting Standard Update (ASU) No. 2009-16, Accounting for Transfers of Financial Assets (ASU 2009-16) and ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17) include provisions effective for interim and annual reporting periods beginning on January 1, 2010. ASU 2009-16 amends Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing , by removing the exemption from consolidation for qualifying special purpose entities. This statement also limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. ASU 2009-17 amends ASC Topic 810, Consolidation, to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations.
Fair value measurements and disclosures
ASU No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06) includes provisions that amend ASC Topic 820, Fair Value Measurements and Disclosures , (Topic 820) to require reporting entities to make new disclosures about recurring and nonrecurring fair value measurements including the amounts of and reasons for significant transfers into and out of Level 1 and Level 2 fair value measurements and separate disclosure of purchases, sales, issuances, and settlements in the reconciliation of Level 3 fair value measurements. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning after December 15, 2010.
8
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Embedded credit derivatives
ASU No. 2010-11, Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11) includes provisions effective for interim and annual reporting periods beginning on July 1, 2010. The provisions of ASU 2010-11 amend ASC Topic 815, Derivatives and Hedging , to provide clarification on the bifurcation scope exception for embedded credit derivative features. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations.
To be adopted after September 30, 2010
Financing receivables disclosures
In July 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20). The provisions of ASU 2010-20 require new disclosures about the allowance for credit losses and the credit quality of financing receivables . ASU 2010-20 is effective for interim and annual reporting periods beginning on October 1, 2010.
a) Transfers of securities
As part of the Company’s fixed income diversification strategy, ACE has decided to hold to maturity certain residential agency mortgage-backed securities that have shorter term durations. Because the Company has the intent to hold these securities to maturity, a transfer of such securities with a fair value of $2.9 billion was made during the three months ended September 30, 2010, from Fixed maturities available for sale to Fixed maturities held to maturity.
9
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
b) Fixed maturities
The following tables present the fair values and amortized costs of and the gross unrealized appreciation (depreciation) related to fixed maturities as well as related OTTI recognized in AOCI at September 30, 2010, and December 31, 2009.
| September 30, 2010 | ||||||||||||||||||||
|
Amortized
Cost |
Gross
Unrealized Appreciation |
Gross
Unrealized Depreciation |
Fair
Value |
OTTI Recognized in
AOCI |
||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
|
Available for sale |
||||||||||||||||||||
|
U.S. Treasury and agency |
$ | 3,270 | $ | 186 | $ | — | $ | 3,456 | $ | — | ||||||||||
|
Foreign |
11,737 | 611 | (39 | ) | 12,309 | (28 | ) | |||||||||||||
|
Corporate securities |
14,779 | 1,165 | (62 | ) | 15,882 | (37 | ) | |||||||||||||
|
Mortgage-backed securities |
7,873 | 255 | (188 | ) | 7,940 | (239 | ) | |||||||||||||
|
States, municipalities, and political subdivisions |
1,430 | 89 | (3 | ) | 1,516 | — | ||||||||||||||
| $ | 39,089 | $ | 2,306 | $ | (292 | ) | $ | 41,103 | $ | (304 | ) | |||||||||
|
Held to maturity |
||||||||||||||||||||
|
U.S. Treasury and agency |
$ | 913 | $ | 41 | $ | — | $ | 954 | $ | — | ||||||||||
|
Foreign |
20 | 1 | — | 21 | — | |||||||||||||||
|
Corporate securities |
288 | 16 | — | 304 | — | |||||||||||||||
|
Mortgage-backed securities |
4,074 | 75 | (15 | ) | 4,134 | — | ||||||||||||||
|
States, municipalities, and political subdivisions |
682 | 9 | — | 691 | — | |||||||||||||||
| $ | 5,977 | $ | 142 | $ | (15 | ) | $ | 6,104 | $ | — | ||||||||||
| December 31, 2009 | ||||||||||||||||||||
|
Amortized
Cost |
Gross
Unrealized Appreciation |
Gross
Unrealized Depreciation |
Fair
Value |
OTTI Recognized in
AOCI |
||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
|
Available for sale |
||||||||||||||||||||
|
U.S. Treasury and agency |
$ | 3,680 | $ | 48 | $ | (19 | ) | $ | 3,709 | $ | — | |||||||||
|
Foreign |
10,960 | 345 | (160 | ) | 11,145 | (37 | ) | |||||||||||||
|
Corporate securities |
12,707 | 658 | (150 | ) | 13,215 | (41 | ) | |||||||||||||
|
Mortgage-backed securities |
10,058 | 239 | (455 | ) | 9,842 | (227 | ) | |||||||||||||
|
States, municipalities, and political subdivisions |
1,580 | 52 | (18 | ) | 1,614 | — | ||||||||||||||
| $ | 38,985 | $ | 1,342 | $ | (802 | ) | $ | 39,525 | $ | (305 | ) | |||||||||
|
Held to maturity |
||||||||||||||||||||
|
U.S. Treasury and agency |
$ | 1,026 | $ | 33 | $ | (2 | ) | $ | 1,057 | $ | — | |||||||||
|
Foreign |
26 | 1 | — | 27 | — | |||||||||||||||
|
Corporate securities |
313 | 10 | (1 | ) | 322 | — | ||||||||||||||
|
Mortgage-backed securities |
1,440 | 39 | (10 | ) | 1,469 | — | ||||||||||||||
|
States, municipalities, and political subdivisions |
676 | 11 | (1 | ) | 686 | — | ||||||||||||||
| $ | 3,481 | $ | 94 | $ | (14 | ) | $ | 3,561 | $ | — | ||||||||||
10
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
As discussed in Note 3 d), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above is the cumulative amount of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI Recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the statement of comprehensive income. For the three and nine months ended September 30, 2010, $65 million and $161 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At September 30, 2010, and December 31, 2009, AOCI includes net unrealized depreciation of $118 million and $162 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
The following table presents fixed maturities at September 30, 2010, and December 31, 2009, by contractual maturity. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.
|
September 30
2010 |
December 31
2009 |
|||||||||||||||
|
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Available for sale; maturity period |
||||||||||||||||
|
Due in 1 year or less |
$ | 1,719 | $ | 1,853 | $ | 1,354 | $ | 1,352 | ||||||||
|
Due after 1 year through 5 years |
14,167 | 14,760 | 14,457 | 14,905 | ||||||||||||
|
Due after 5 years through 10 years |
12,017 | 13,067 | 9,642 | 10,067 | ||||||||||||
|
Due after 10 years |
3,313 | 3,483 | 3,474 | 3,359 | ||||||||||||
| 31,216 | 33,163 | 28,927 | 29,683 | |||||||||||||
|
Mortgage-backed securities |
7,873 | 7,940 | 10,058 | 9,842 | ||||||||||||
| $ | 39,089 | $ | 41,103 | $ | 38,985 | $ | 39,525 | |||||||||
|
Held to maturity; maturity period |
||||||||||||||||
|
Due in 1 year or less |
$ | 489 | $ | 496 | $ | 755 | $ | 766 | ||||||||
|
Due after 1 year through 5 years |
1,351 | 1,405 | 1,096 | 1,129 | ||||||||||||
|
Due after 5 years through 10 years |
15 | 17 | 108 | 115 | ||||||||||||
|
Due after 10 years |
48 | 52 | 82 | 82 | ||||||||||||
| 1,903 | 1,970 | 2,041 | 2,092 | |||||||||||||
|
Mortgage-backed securities |
4,074 | 4,134 | 1,440 | 1,469 | ||||||||||||
| $ | 5,977 | $ | 6,104 | $ | 3,481 | $ | 3,561 | |||||||||
c) Equity securities
The following table presents the fair value and cost of and gross unrealized appreciation (depreciation) related to equity securities at September 30, 2010, and December 31, 2009.
|
September 30
2010 |
December 31
2009 |
|||||||
| (in millions of U.S. dollars) | ||||||||
|
Cost |
$ | 387 | $ | 398 | ||||
|
Gross unrealized appreciation |
31 | 70 | ||||||
|
Gross unrealized depreciation |
(3 | ) | (1 | ) | ||||
|
Fair value |
$ | 415 | $ | 467 | ||||
11
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
d) Net realized gains (losses)
The Company adopted provisions included in ASC Topic 320, Investments-Debt and Equity Securities , (Topic 320) related to the recognition and presentation of OTTI on April 1, 2009. Under these provisions, when an OTTI related to a fixed maturity has occurred, ACE is required to record the OTTI in net income if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before the recovery of its amortized cost. Further, in cases where the Company does not intend to sell the security and it is more likely than not that it will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities. For fixed maturities, prior to this adoption, ACE was required to record OTTI in net income unless the Company had the intent and ability to hold the impaired security to recovery. These provisions do not have any impact on the accounting for OTTI for any other type of investment.
The cumulative effect of the adoption resulted in a reduction to AOCI and an increase to Retained earnings of $242 million. These adjustments reflect the net of tax amount ($305 million pre-tax) of OTTI recognized in net income prior to the adoption related to fixed maturities held at the adoption date that had not suffered a credit loss, the Company did not intend to sell, and it was more likely than not that ACE would not be required to sell before the recovery of their amortized cost. These amounts include a $25 million adjustment ($44 million pre-tax) recorded by ACE in the third quarter of 2009. The $44 million pre-tax adjustment reflects the true-up of ACE’s prior estimate of reversals of non-credit OTTI for securities impaired prior to 2006 (Pre-2006 OTTI) for which a detailed review of securities held at the adoption date of the then new OTTI standards was not completed until the third quarter of 2009. Upon completion of the detailed review of securities held at the adoption date, ACE determined that fewer Pre-2006 OTTI securities were held than previously estimated, which resulted in an overstatement of the original reversal estimate of non-credit OTTI on Pre-2006 OTTI. The adjustment resulted in an increase to Accumulated other comprehensive income and an offsetting decrease in Retained earnings with no impact on net income or shareholders’ equity. Retained earnings and Deferred tax assets at the adoption date were also reduced by $47 million as a result of an increase in the Company’s valuation allowance against deferred tax assets, which was a direct effect of the adoption.
Each quarter, the Company reviews its securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.
For impaired fixed maturities, the Company assesses OTTI based on the provisions of Topic 320 as described above. The factors that the Company considers when determining if a credit loss exists related to a fixed maturity are discussed in “Evaluation of potential credit losses related to fixed maturities” below. Prior to the adoption, when evaluating fixed maturities for OTTI, the Company principally considered its ability and intent to hold the impaired security to the expected recovery period, the issuer’s financial condition, and the Company’s assessment (using available market information such as credit ratings) of the issuer’s ability to make future scheduled principal and interest payments on a timely basis.
The Company reviews all non-fixed maturities for OTTI based on the following:
| • |
the amount of time a security has been in a loss position and the magnitude of the loss position; |
| • |
the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and |
12
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
| • |
the Company’s ability and intent to hold the security to the expected recovery period. |
ACE, as a general rule, also considers that equity securities in an unrealized loss position for twelve consecutive months are impaired.
Evaluation of potential credit losses related to fixed maturities
ACE reviews each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, ACE considers credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which ACE determines that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in net income, if any. In general, credit loss recognized in net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. The specific methodologies and significant assumptions used by asset class are discussed below. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
U.S. Treasury and agency obligations (including agency mortgage-backed securities), foreign government obligations, and states, municipalities, and political subdivisions obligations
U.S. Treasury and agency obligations (including agency mortgage-backed securities), foreign government obligations, and states, municipalities, and political subdivisions obligations represent less than $20 million of gross unrealized loss at September 30, 2010. These securities were evaluated for credit loss primarily using qualitative assessments of the likelihood of credit loss considering credit rating of the issuers and level of credit enhancement, if any. ACE concluded that the high level of creditworthiness of the issuers coupled with credit enhancement, where applicable, supports recognizing no credit loss in net income.
Corporate securities
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. ACE develops these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. ACE believes that use of a default assumption in excess of the historical mean is reasonable in light of recent market conditions. The following table presents default assumptions by Moody’s rating category (historical mean default rate provided for comparison).
|
Moody’s Rating Category |
1-in-100 Year
Default Rate |
Historical Mean
Default Rate |
||||||
|
Investment Grade: |
||||||||
|
Aaa-Baa |
0.0%-1.4 | % | 0.0%-0.3 | % | ||||
|
Below Investment Grade: |
||||||||
|
Ba |
4.8 | % | 1.1 | % | ||||
|
B |
12.9 | % | 3.4 | % | ||||
|
Caa-C |
53.6 | % | 13.8 | % | ||||
13
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Consistent with management’s approach to developing default rate assumptions considering recent market conditions, ACE assumed a 25 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody’s historical mean recovery rate of 40 percent. ACE believes that use of a recovery rate assumption lower than the historical mean is reasonable in light of recent market conditions.
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for corporate securities for the three and nine months ended September 30, 2010, of $11 million and $12 million, respectively. Credit losses recognized in net income for corporate securities for the three months ended September 30, 2009, and from the date of adoption to September 30, 2009, were $15 million and $49 million, respectively.
Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
ACE develops specific assumptions using market data, where available, and includes internal estimates as well as estimates published by rating agencies and other third-party sources. ACE projects default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming:
| • |
lower loss severity for Prime sector bonds versus ALT-A, Sub-prime, and Option ARM sector bonds; and |
| • |
lower loss severity for older vintage securities versus more recent vintage securities, which reflects the recent decline in underwriting standards. |
These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions used contemplate the actual collateral attributes, including geographic concentrations, rating agency loss projections, rating actions, and current market prices. If cash flow projections indicate that losses will exceed the credit enhancement for a given tranche, then the Company does not expect to recover its amortized cost basis and recognizes an estimated credit loss in net income.
14
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents the significant assumptions used to estimate future cash flows for specific mortgage-backed securities evaluated for potential credit loss at September 30, 2010, by sector and vintage.
Range of Significant Assumptions Used
|
Sector (1) |
Vintage | Default Rate (2) |
Loss
Severity
Rate (2) |
|||||||||
|
Prime |
2003 and prior | 11 | % | 21 | % | |||||||
| 2004 | 21-45 | % | 36-55 | % | ||||||||
| 2005 | 12-41 | % | 47-55 | % | ||||||||
| 2006-2007 | 10-66 | % | 38-61 | % | ||||||||
|
ALT-A |
2003 and prior | 25 | % | 38 | % | |||||||
| 2004 | 33 | % | 44 | % | ||||||||
| 2005 | 12-47 | % | 47-60 | % | ||||||||
| 2006-2007 | 31-65 | % | 60-64 | % | ||||||||
|
Option ARM |
2003 and prior | 27 | % | 27 | % | |||||||
| 2004 | 55 | % | 44 | % | ||||||||
| 2005 | 67-78 | % | 57-64 | % | ||||||||
| 2006-2007 | 73-77 | % | 63-64 | % | ||||||||
|
Sub-prime |
2003 and prior | 57 | % | 55 | % | |||||||
| 2004 | 60 | % | 61 | % | ||||||||
| 2005 | 74 | % | 73 | % | ||||||||
| 2006-2007 | 55-85 | % | 71-81 | % | ||||||||
| (1) |
Prime, ALT-A, and Sub-prime sector bonds are categorized based on creditworthiness of the borrower. Option ARM sector bonds are categorized based on the type of mortgage product, rather than creditworthiness of the borrower. |
| (2) |
Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors. |
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for mortgage-backed securities for the three and nine months ended September 30, 2010, of $8 million and $30 million, respectively. Credit losses recognized in net income for mortgage-backed securities for the three months ended September 30, 2009, and from the date of adoption to September 30, 2009, were $24 million and $50 million, respectively.
15
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents, for the periods indicated, the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused the Company to conclude the decline in fair value of certain investments was “other-than-temporary”.
|
Three Months
Ended September 30 |
Nine Months
Ended September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Fixed maturities: |
||||||||||||||||
|
OTTI on fixed maturities, gross |
$ | (39 | ) | $ | (150 | ) | $ | (107 | ) | $ | (519 | ) | ||||
|
OTTI on fixed maturities recognized in OCI (pre-tax) |
20 | 111 | 65 | 302 | ||||||||||||
|
OTTI on fixed maturities, net |
(19 | ) | (39 | ) | (42 | ) | (217 | ) | ||||||||
|
Gross realized gains excluding OTTI |
138 | 121 | 434 | 451 | ||||||||||||
|
Gross realized losses excluding OTTI |
(6 | ) | (83 | ) | (121 | ) | (354 | ) | ||||||||
|
Total fixed maturities |
113 | (1 | ) | 271 | (120 | ) | ||||||||||
|
Equity securities: |
||||||||||||||||
|
OTTI on equity securities |
— | — | — | (26 | ) | |||||||||||
|
Gross realized gains excluding OTTI |
8 | 2 | 85 | 67 | ||||||||||||
|
Gross realized losses excluding OTTI |
(1 | ) | (1 | ) | (1 | ) | (221 | ) | ||||||||
|
Total equity securities |
7 | 1 | 84 | (180 | ) | |||||||||||
|
OTTI on other investments |
— | (19 | ) | (13 | ) | (121 | ) | |||||||||
|
Foreign exchange gains (losses) |
(62 | ) | (7 | ) | (10 | ) | (31 | ) | ||||||||
|
Investment and embedded derivative instruments |
(1 | ) | 28 | 23 | 62 | |||||||||||
|
Fair value adjustments on insurance derivative |
25 | (65 | ) | (180 | ) | 218 | ||||||||||
|
S&P put options and futures |
(110 | ) | (144 | ) | (26 | ) | (300 | ) | ||||||||
|
Other derivative instruments |
(14 | ) | (19 | ) | (19 | ) | (85 | ) | ||||||||
|
Other |
(8 | ) | 3 | (3 | ) | (12 | ) | |||||||||
|
Net realized gains (losses) |
$ | (50 | ) | $ | (223 | ) | $ | 127 | $ | (569 | ) | |||||
The following table presents, for the periods indicated, a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI. For 2009, the roll forward is presented for the three months ended September 30, 2009, and for the six month period from the date of adoption of the then new OTTI standard to September 30, 2009.
|
Three Months
Ended September 30 |
Nine Months
Ended September 30 2010 |
Six Months
Ended September 30 2009 |
||||||||||||||
| 2010 | 2009 | |||||||||||||||
| (in millions of U.S. Dollars) | ||||||||||||||||
|
Balance of credit losses related to securities still held-beginning of period |
$ | 137 | $ | 188 | $ | 174 | $ | 130 | ||||||||
|
Additions where no OTTI was previously recorded |
8 | 24 | 32 | 78 | ||||||||||||
|
Additions where an OTTI was previously recorded |
11 | 15 | 10 | 21 | ||||||||||||
|
Reductions reflecting amounts previously recorded in OCI but subsequently reflected in net income |
— | — | — | (2 | ) | |||||||||||
|
Reductions for securities sold during the period |
(9 | ) | (10 | ) | (69 | ) | (10 | ) | ||||||||
|
Balance of credit losses related to securities still held-end of period |
$ | 147 | $ | 217 | $ | 147 | $ | 217 | ||||||||
16
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
e) Gross unrealized loss
At September 30, 2010, there were 2,363 fixed maturities out of a total of 19,008 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $6 million. Fixed maturities in an unrealized loss position at September 30, 2010, were comprised of both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase and included non-agency mortgage-backed securities that suffered a decline in value since their original date of purchase.
The following tables present, for all securities in an unrealized loss position at September 30, 2010, and December 31, 2009 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.
| 0 – 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
|
Fair
Value |
Gross
Unrealized Loss |
Fair
Value |
Gross
Unrealized Loss |
Fair
Value |
Gross
Unrealized Loss |
|||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
September 30, 2010 |
||||||||||||||||||||||||
|
U.S. Treasury and agency |
$ | 51 | $ | (0.1 | ) | $ | — | $ | — | $ | 51 | $ | (0.1 | ) | ||||||||||
|
Foreign |
701 | (8.3 | ) | 350 | (30.7 | ) | 1,051 | (39.0 | ) | |||||||||||||||
|
Corporate securities |
475 | (8.1 | ) | 364 | (54.0 | ) | 839 | (62.1 | ) | |||||||||||||||
|
Mortgage-backed securities |
2,840 | (14.2 | ) | 1,108 | (188.7 | ) | 3,948 | (202.9 | ) | |||||||||||||||
|
States, municipalities, and political subdivisions |
125 | (0.6 | ) | 53 | (2.7 | ) | 178 | (3.3 | ) | |||||||||||||||
|
Total fixed maturities |
4,192 | (31.3 | ) | 1,875 | (276.1 | ) | 6,067 | (307.4 | ) | |||||||||||||||
|
Equity securities |
63 | (2.4 | ) | 1 | (0.3 | ) | 64 | (2.7 | ) | |||||||||||||||
|
Other investments |
40 | (5.3 | ) | — | — | 40 | (5.3 | ) | ||||||||||||||||
|
Total |
$ | 4,295 | $ | (39.0 | ) | $ | 1,876 | $ | (276.4 | ) | $ | 6,171 | $ | (315.4 | ) | |||||||||
| 0 – 12 Months | Over 12 Months | Total | ||||||||||||||||||||||
|
Fair
Value |
Gross
Unrealized Loss |
Fair
Value |
Gross
Unrealized Loss |
Fair
Value |
Gross
Unrealized Loss |
|||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
December 31, 2009 |
||||||||||||||||||||||||
|
U.S. Treasury and agency |
$ | 1,952 | $ | (19.4 | ) | $ | 21 | $ | (1.1 | ) | $ | 1,973 | $ | (20.5 | ) | |||||||||
|
Foreign |
2,568 | (124.0 | ) | 363 | (36.4 | ) | 2,931 | (160.4 | ) | |||||||||||||||
|
Corporate securities |
1,222 | (52.3 | ) | 865 | (99.1 | ) | 2,087 | (151.4 | ) | |||||||||||||||
|
Mortgage-backed securities |
1,731 | (54.8 | ) | 1,704 | (409.7 | ) | 3,435 | (464.5 | ) | |||||||||||||||
|
States, municipalities, and political subdivisions |
455 | (13.9 | ) | 60 | (5.0 | ) | 515 | (18.9 | ) | |||||||||||||||
|
Total fixed maturities |
7,928 | (264.4 | ) | 3,013 | (551.3 | ) | 10,941 | (815.7 | ) | |||||||||||||||
|
Equity securities |
111 | (1.3 | ) | — | — | 111 | (1.3 | ) | ||||||||||||||||
|
Other investments |
81 | (16.4 | ) | — | — | 81 | (16.4 | ) | ||||||||||||||||
|
Total |
$ | 8,120 | $ | (282.1 | ) | $ | 3,013 | $ | (551.3 | ) | $ | 11,133 | $ | (833.4 | ) | |||||||||
17
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
f) Restricted assets
The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at September 30, 2010, are fixed maturities and short-term investments totaling $12.8 billion and cash of $126 million. The following table presents the components of the restricted assets at September 30, 2010, and December 31, 2009.
|
September 30
2010 |
December 31
2009 |
|||||||
| (in millions of U.S. dollars) | ||||||||
|
Trust funds |
$ | 8,849 | $ | 8,402 | ||||
|
Deposits with non-U.S. regulatory authorities |
2,507 | 2,475 | ||||||
|
Deposits with U.S. regulatory authorities |
1,379 | 1,199 | ||||||
|
Other pledged assets |
213 | 245 | ||||||
| $ | 12,948 | $ | 12,321 | |||||
4. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts
The following table presents income and expenses relating to guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) reinsurance for the periods indicated.
|
Three Months
Ended September 30 |
Nine Months
Ended September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
GMDB |
||||||||||||||||
|
Net premiums earned |
$ | 26 | $ | 28 | $ | 82 | $ | 78 | ||||||||
|
Policy benefits and other reserve adjustments |
$ | 26 | $ | 29 | $ | 72 | $ | 94 | ||||||||
|
GMIB |
||||||||||||||||
|
Net premiums earned |
$ | 41 | $ | 41 | $ | 122 | $ | 120 | ||||||||
|
Policy benefits and other reserve adjustments |
8 | 6 | 21 | 14 | ||||||||||||
|
Realized gains (losses) |
25 | (65 | ) | (180 | ) | 218 | ||||||||||
|
Gain (loss) recognized in income |
$ | 58 | $ | (30 | ) | $ | (79 | ) | $ | 324 | ||||||
|
Net cash received (disbursed) |
$ | 40 | $ | 41 | $ | 120 | $ | 119 | ||||||||
|
Net (increase) decrease in liability |
$ | 18 | $ | (71 | ) | $ | (199 | ) | $ | 205 | ||||||
At September 30, 2010, reported liabilities for GMDB and GMIB reinsurance were $192 million and $758 million, respectively, compared with $212 million and $559 million, respectively, at December 31, 2009. The reported liability for GMIB reinsurance of $758 million at September 30, 2010, and $559 million at December 31, 2009, includes a fair value derivative adjustment of $623 million and $443 million, respectively. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in equity
18
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
markets, changes in credit markets, changes in the allocation of the investments underlying annuitant’s account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more information, such as market conditions and demographics of in-force annuities.
GMDB reinsurance
At September 30, 2010, and December 31, 2009, the Company’s net amount at risk from its GMDB reinsurance programs was $3.4 billion and $3.8 billion, respectively. For GMDB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
| • |
policy account values and guaranteed values are fixed at the valuation date (September 30, 2010, and December 31, 2009, respectively); |
| • |
there are no lapses or withdrawals; |
| • |
mortality according to 100 percent of the Annuity 2000 mortality table; and |
| • |
future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 2 to 3 percent. |
At September 30, 2010, if all of the Company’s cedants’ policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable by the Company, taking into account all appropriate claims limits, would be approximately $1.3 billion. As a result of the annual claim limits on the GMDB reinsurance agreements, the claims payable are lower in this case than if all the policyholders were to die over time, all else equal.
GMIB reinsurance
At September 30, 2010, and December 31, 2009, the Company’s net amount at risk from its GMIB reinsurance programs was $854 million and $683 million, respectively. For GMIB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
| • |
policy account values and guaranteed values are fixed at the valuation date (September 30, 2010, and December 31, 2009, respectively); |
| • |
there are no deaths, lapses, or withdrawals; |
| • |
policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the Company’s reinsurance contracts; |
| • |
for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve; and |
| • |
future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 2 to 3 percent. |
The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 66.
19
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
5. Commitments, contingencies, and guarantees
a) Derivative instruments
Derivative instruments employed
The Company maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Along with convertible bonds and to be announced mortgage-backed securities (TBA), discussed below, these are the most numerous and frequent derivative transactions.
ACE maintains positions in convertible bond investments that contain embedded derivatives. In addition, the Company purchases TBAs as part of its investing activities. These securities are included within the Company’s fixed maturities available for sale (FM AFS) portfolio.
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of GMIBs associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GMIBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). The Company also maintains positions in exchange-traded equity futures contracts and options on equity market indices to limit equity and interest rate exposure in the GMDB and GMIB block of business.
In relation to certain debt issuances, the Company has entered into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. Although the use of these interest rate swaps has the economic effect of fixing or reducing borrowing costs on a net basis, gross interest expense on the related debt issuances is included in Interest expense while the settlements related to the interest rate swaps are reflected in Net realized gains (losses) in the consolidated statements of operations. ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.
The Company carries all derivative instruments at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are used as hedges for accounting purposes.
20
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of the Company’s derivative instruments at September 30, 2010, and December 31, 2009.
| September 30, 2010 | December 31, 2009 | |||||||||||||||||||
|
Consolidated
Balance Sheet Location |
Fair
Value |
Notional
Value/ Payment Provision |
Fair
Value |
Notional
Value/ Payment Provision |
||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
|
Investment and embedded derivative instruments |
||||||||||||||||||||
|
Foreign currency forward contracts |
AP | $ | (6 | ) | $ | 705 | $ | 6 | $ | 393 | ||||||||||
|
Futures contracts on money market instruments |
AP | 9 | 5,470 | 4 | 4,711 | |||||||||||||||
|
Futures contracts on notes and bonds |
AP | (4 | ) | 943 | (2 | ) | 500 | |||||||||||||
|
Options on money market instruments |
AP | — | — | — | 200 | |||||||||||||||
|
Options on notes and bonds futures |
AP | — | — | (1 | ) | 305 | ||||||||||||||
|
Convertible bonds |
FM AFS | 394 | 1,141 | 354 | 725 | |||||||||||||||
|
TBAs |
FM AFS | 77 | 75 | 11 | 10 | |||||||||||||||
| $ | 470 | $ | 8,334 | $ | 372 | $ | 6,844 | |||||||||||||
|
Other derivative instruments |
||||||||||||||||||||
|
Futures contracts on equities |
AP | $ | (32 | ) | $ | 960 | $ | (9 | ) | $ | 960 | |||||||||
|
Options on equity market indices |
AP | 64 | 250 | 56 | 250 | |||||||||||||||
|
Interest rate swaps |
AP | (36 | ) | 500 | (24 | ) | 500 | |||||||||||||
|
Credit default swaps |
AP | 6 | 350 | 2 | 350 | |||||||||||||||
|
Other |
AP | — | 17 | 12 | 37 | |||||||||||||||
| $ | 2 | $ | 2,077 | $ | 37 | $ | 2,097 | |||||||||||||
|
GMIB (1) |
AP/FPB | $ | (758 | ) | $ | 854 | $ | (559 | ) | $ | 683 | |||||||||
| (1) |
Note that the payment provision related to GMIB is the net amount at risk. The concept of a notional value does not apply to the GMIB reinsurance contracts. |
21
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statement of operations for the periods indicated.
|
Three Months
Ended September 30 |
Nine Months
Ended September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Investment and embedded derivative instruments |
||||||||||||||||
|
Foreign currency forward contracts |
$ | (14 | ) | $ | (6 | ) | $ | 22 | $ | (20 | ) | |||||
|
All other futures contracts and options |
(9 | ) | 11 | 1 | 7 | |||||||||||
|
Convertible bonds |
22 | 23 | — | 80 | ||||||||||||
|
TBAs |
— | — | — | (5 | ) | |||||||||||
| $ | (1 | ) | $ | 28 | $ | 23 | $ | 62 | ||||||||
|
GMIB and other derivative instruments |
||||||||||||||||
|
GMIB |
$ | 25 | $ | (65 | ) | $ | (180 | ) | $ | 218 | ||||||
|
Futures contracts on equities |
(101 | ) | (111 | ) | (35 | ) | (213 | ) | ||||||||
|
Options on equity market indices |
(9 | ) | (33 | ) | 9 | (87 | ) | |||||||||
|
Interest rate swaps |
(7 | ) | (6 | ) | (24 | ) | (21 | ) | ||||||||
|
Credit default swaps |
(7 | ) | (15 | ) | 4 | (67 | ) | |||||||||
|
Other |
— | 2 | 1 | 3 | ||||||||||||
| $ | (99 | ) | $ | (228 | ) | $ | (225 | ) | $ | (167 | ) | |||||
| $ | (100 | ) | $ | (200 | ) | $ | (202 | ) | $ | (105 | ) | |||||
Derivative instrument objectives
(i) Foreign currency exposure management
A foreign currency forward contract (forward) is an agreement between participants to exchange specific foreign currencies at a future date. The Company uses forwards to minimize the effect of fluctuating foreign currencies.
(ii) Duration management and market exposure
Futures
Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. Exchange-traded bond and note futures contracts are used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business.
Options
An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. Option contracts are used in the investment portfolio as
22
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the Company’s synthetic strategy as described above. Another use for option contracts is to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties and obtains collateral. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to the Company’s investment guidelines.
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used occasionally in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced. The Company also employs interest rate swaps related to certain debt issuances for the purpose of either fixing and/or reducing borrowing costs.
Credit default swaps
A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller pays the protection buyer the difference between the fair value of assets and the principal amount. The Company has purchased a credit default swap to mitigate its global credit risk exposure to one of its reinsurers.
(iii) Convertible security investments
A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer’s equity at certain times prior to the bond’s maturity. The convertible option is an embedded derivative within the fixed maturity host instruments which are classified in the investment portfolio as available for sale. The Company purchases convertible bonds for their total return and not specifically for the conversion feature.
(iv) TBA
By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative in the consolidated financial statements. The Company purchases TBAs both for their total return and for the flexibility they provide related to ACE’s mortgage-backed security strategy.
23
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(v) GMIB
Under the GMIB program, as the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as Net realized gains (losses). Fair value represents management’s estimate of exit price and thus, includes a risk margin. The Company may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) and changes in actual or estimated future policyholder behavior (i.e., increased annuitization or decreased lapse rates) although the Company expects the business to be profitable. The Company believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.
b) Other investments
Included in Other investments are investments in limited partnerships and partially-owned investment companies with a carrying value of $1.1 billion. In connection with these investments, the Company has commitments that may require funding of up to $882 million over the next several years.
c) Taxation
During the three months ended June 30, 2010, the Company reached final settlement with the Internal Revenue Service (IRS) Appeals Division regarding the Company’s federal tax returns for 2002, 2003, and 2004. As a result of the settlement, the Company reduced the amount of its unrecognized tax benefits by approximately $21 million. During the three months ended June 30, 2010, the IRS completed its field examination of the Company’s federal tax returns for 2005, 2006, and 2007 and has proposed several adjustments principally involving transfer pricing and other insurance-related matters. In July 2010, the Company filed a written protest with the IRS seeking review by the IRS Appeals Division. While it is reasonably possible that a significant change in the Company’s unrecognized tax benefits could occur in the next 12 months, the Company believes that the outcome of the appeal will not have a material impact on the Company’s financial condition or results of operations. With few exceptions, the Company’s significant U.K. subsidiaries remain subject to examination for tax years 2007 and later.
d) Legal proceedings
(i) Claims and other litigation
The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company’s subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
24
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(ii) Business practices litigation
Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries were issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG) and the Pennsylvania Insurance Department. Such inquiries concerned underwriting practices and non-traditional or loss mitigation insurance products.
On April 25, 2006, ACE reached a settlement with the Attorneys General of New York, Illinois, and Connecticut and the New York Insurance Department pursuant to which ACE received from these authorities an Assurance of Discontinuance. On May 9, 2007, ACE and the Pennsylvania Insurance Department (Department) and the Pennsylvania Office of Attorney General (OAG) entered into a settlement agreement. This settlement agreement resolved the issues raised by the Department and the OAG arising from their investigation of ACE’s underwriting practices and contingent commission payments. On October 24, 2007, ACE entered into a settlement agreement with the Attorneys General of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Texas, West Virginia, the District of Columbia, and the Florida Department of Financial Services and Office of Insurance Regulation. The agreement resolved investigations of ACE’s underwriting practices and contingent commission payments.
In June 2008, in an action filed by the NYAG against another insurer, a New York court held that “[c]ontingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between parties, defendants[s] had no duty to disclose the existence of the contingent commission agreement.” New York v. Liberty Mut. Ins. Co. , 52 A.D. 3d 378, 379 (2008) (citing Hersch v. DeWitt Stern Group, Inc. , 43 A.D. 3d 644, 645 (2007). In February 2010, the NYAG amended its agreement with the country’s three largest insurance brokers, eliminating the ban on contingent commissions that was levied in 2005.
ACE, ACE INA Holdings, Inc., and ACE USA, Inc., along with a number of other insurers and brokers, were named in a series of federal putative nationwide class actions brought by insurance policyholders. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases in the District of New Jersey. On August 1, 2005, plaintiffs in the New Jersey consolidated proceedings filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans. The employee benefit plans litigation against ACE has been dismissed.
In the commercial insurance complaint, the plaintiffs named ACE, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that certain brokers and insurers, including certain ACE entities, conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that acted as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.
In 2006 and 2007, the Court dismissed plaintiffs’ first two attempts to properly plead a case without prejudice and permitted plaintiffs one final opportunity to re-plead. The amended complaint, filed on May 22, 2007, purported to add several new ACE defendants: ACE Group Holdings, Inc., ACE US Holdings, Inc., Westchester Fire Insurance Company, INA Corporation, INA Financial Corporation, INA Holdings Corporation, ACE Property and Casualty Insurance Company, and Pacific Employers Insurance Company. Plaintiffs also added a
25
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
new antitrust claim against Marsh, ACE, and other insurers based on the same allegations as the other claims but limited to excess casualty insurance. On June 21, 2007, defendants moved to dismiss the amended complaint and moved to strike the new parties. The Court granted defendants’ motions and dismissed plaintiffs’ antitrust and RICO claims with prejudice on August 31, 2007, and September 28, 2007, respectively. The Court also declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and dismissed those claims without prejudice. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit. On August 16, 2010, the Third Circuit affirmed, in part, and vacated, in part, the District Court’s previous dismissals with instructions for further briefing at the District Court on remand. Defendants have renewed their motions to dismiss, and the District Court has indicated that it will issue a decision in late 2010 or early 2011.
There are a number of federal actions brought by policyholders based on allegations similar to the allegations in the consolidated federal actions that were filed in, or transferred to, the United States District Court for the District of New Jersey for coordination. All proceedings in these actions are currently stayed.
| • |
New Cingular Wireless Headquarters LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 06-5120; D.N.J.), was originally filed in the Northern District of Georgia on April 4, 2006. ACE, ACE American Ins. Co., ACE USA, Inc., ACE Bermuda Ins. Co. Ltd., Illinois Union Ins. Co., Pacific Employers Ins. Co., and Lloyd’s of London Syndicate 2488 AGM, along with a number of other insurers and brokers, are named. |
| • |
Avery Dennison Corp. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-00757; D.N.J.) was filed on February 13, 2007. ACE, ACE INA Holdings, Inc., ACE USA, Inc., and ACE American Insurance Co., along with a number of other insurers and brokers, are named. |
| • |
Henley Management Co., Inc. et al v. Marsh, Inc. et al. (Case No. 07-2389; D.N.J.) was filed on May 27, 2007. ACE USA, Inc., along with a number of other insurers and Marsh, are named. |
| • |
Lincoln Adventures LLC et al. v. Those Certain Underwriters at Lloyd’s, London Members of Syndicates 0033 et al. (Case No. 07-60991; D.N.J.) was originally filed in the Southern District of Florida on July 13, 2007. Supreme Auto Transport LLC et al. v. Certain Underwriters of Lloyd’s of London, et al. (Case No. 07-6703; D.N.J.) was originally filed in the Southern District of New York on July 25, 2007. Lloyd’s of London Syndicate 2488 AGM, along with a number of other Lloyd’s of London Syndicates and various brokers, are named in both actions. The allegations in these putative class-action lawsuits are similar to the allegations in the consolidated federal actions identified above, although these lawsuits focus on alleged conduct within the London insurance market. |
| • |
Sears, Roebuck & Co. et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-2535; D.N.J.) was originally filed in the Northern District of Georgia on October 12, 2007. ACE American Insurance Co., ACE Bermuda Insurance Ltd., and Westchester Surplus Lines Insurance Co., along with a number of other insurers and brokers, are named. |
Three cases have been filed in state courts with allegations similar to those in the consolidated federal actions described above.
| • |
Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts), a class action in Massachusetts, was filed on January 13, 2005. Illinois Union Insurance Company is named. The Van Emden case has been stayed pending resolution of the consolidated proceedings in the District of New Jersey or until further order of the Court. |
| • |
State of Ohio, ex. rel. Marc E. Dann, Attorney General v. American Int’l Group, Inc. et al. (Case No. 07-633857; Court of Common Pleas in Cuyahoga County, Ohio) is an Ohio state action filed by |
26
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
the Ohio Attorney General on August 24, 2007. ACE INA Holdings, Inc., ACE American Insurance Co., ACE Property & Casualty Insurance Co., Insurance Company of North America, and Westchester Fire Insurance Co., along with a number of other insurance companies and Marsh, are named. Defendants filed motions to dismiss in November 2007. On July 2, 2008, the court denied all of the defendants’ motions. Discovery is ongoing. Trial will likely occur in 2011. |
| • |
Office Depot, Inc. v. Marsh & McLennan Companies, Inc. et al. (Case No. 502005CA004396; Circuit Court of the 15th Judicial Circuit in Palm Beach County Florida), a Florida state action, was filed on June 22, 2005. ACE American Insurance Co. was named. In August 2010, ACE and Office Depot agreed to settle the case and ACE was dismissed with prejudice. |
ACE was named in four putative securities class action suits following the filing of a civil suit against Marsh by the NYAG on October 14, 2004. The suits were consolidated by the JPML in the Eastern District of Pennsylvania and the Court appointed Sheet Metal Workers’ National Pension Fund and Alaska Ironworkers Pension Trust as lead plaintiffs. Lead plaintiffs filed a consolidated amended complaint on September 30, 2005, naming ACE, Evan G. Greenberg, Brian Duperreault, and Philip V. Bancroft as defendants. Plaintiffs alleged that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities, and brokers allegedly conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenues and earnings were inflated by these practices. In December 2008, the parties entered into a Stipulation of Settlement in which ACE agreed to pay the plaintiffs $1.95 million in exchange for a full release of all claims. On June 9, 2009, the Court approved the settlement and dismissed the multidistrict litigation (including the four underlying suits) with prejudice.
ACE, ACE USA, Inc., ACE INA Holdings, Inc., and Evan G. Greenberg, as a former officer and director of AIG and current officer and director of ACE, are named in one or both of two derivative cases brought by certain shareholders of AIG. One of the derivative cases was filed in Delaware Chancery Court, and the other was filed in federal court in the Southern District of New York. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal commercial insurance cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty, aiding and abetting breaches of fiduciary duties, unjust enrichment, conspiracy, and fraud. In Delaware, the shareholder plaintiffs filed an amended complaint (their third pleading effort), on April 14, 2008, which drops Evan Greenberg as a defendant (plaintiffs in the New York action subsequently dismissed Evan Greenberg as well). On June 13, 2008, ACE filed a motion to dismiss, and on April 20, 2009, the court heard oral argument on the motion. On June 17, 2009, the Court dismissed all claims against ACE with prejudice; final judgment in favor of ACE was entered on July 13, 2009. The derivative plaintiffs appealed and argument was held before a three judge panel of the Delaware Supreme Court on February 17, 2010. On February 22, 2010, the three judge panel ordered further oral argument to the Court en banc , and recently scheduled the argument for December 15, 2010. The New York derivative action is currently stayed.
In all of the lawsuits described above, plaintiffs seek compensatory and in some cases special damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and, accordingly, no liability for compensatory damages has been established in the consolidated financial statements.
ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
27
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
(iii) Legislative activity
The State of New York, as part of the 2009-10 State budget, has adopted language that requires an insurer which (1) paid to the Workers’ Compensation Board (WCB) various statutory assessments in an amount less than that insurer “collected” from insured employers in a given year and (2) “has identified and held any funds collected but not paid to the WCB, as measurable and available, as of January 1, 2009” to pay retroactive assessments to the WCB. The language, and impact, of this new law is at present uncertain because it uses terms and dates that are not readily identifiable with respect to insurers’ statutory financial statements and because the State has not promulgated implementing regulations or other explanatory materials. The Company’s understanding is that the law is intended to address certain inconsistencies in the New York State laws regulating the calculation of workers’ compensation assessments by insurance carriers and the remittance of those funds to the State. In July 2009, ACE received a subpoena from the NYAG requesting documents related to these issues, and in October 2009, ACE received a request from the WCB asking ACE to explain whether or not it was an “affected carrier” under the new law. In addition, the New York State legislature, as part of the 2010-11 State budget, has enacted language that appears to require an insurer who paid to the WCB various statutory assessments in an amount less than that insurer “collected” from insured employers for the period April 1, 2008, through March 31, 2009, to pay such “excess assessment funds” to the WCB. Although the Company cannot at this time predict the interpretation that will be afforded the legislative language, ACE is confident that it has complied with the law governing workers’ compensation surcharges and assessments. ACE has established a contingency based on the Company’s best estimate of the potential liability that could result from the legislation or other events surrounding this topic, based on the facts and circumstances at this time. Such contingency will be increased or decreased as circumstances develop. The Company does not expect these events to have a material impact on its financial condition or results of operations.
All Common Shares of the Company are registered common shares under Swiss corporate law. Though the par value of Common Shares is stated in Swiss francs, the Company continues to use U.S. dollars as its reporting currency for preparing the consolidated financial statements. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value distributions), must be declared by ACE in Swiss francs though dividend payments are made by the Company in U.S. dollars. For the foreseeable future, subject to shareholder approval, the Company expects to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax. For the three months ended September 30, 2010 and 2009, dividends declared per Common Share amounted to CHF 0.32 ($0.33) and CHF 0.31 ($0.31), respectively. Dividends declared for the nine months ended September 30, 2010 and 2009, were CHF 0.99 ($0.97) and CHF 0.94 ($0.88), respectively. The par value distribution in the nine months ended September 30, 2010, is reflected as such through Common Shares in the consolidated statement of shareholders’ equity and had the effect of reducing the par value per Common Share to CHF 30.89.
Under Swiss corporate law, the Company may not generally issue Common Shares below their par value. In the event there is a need to raise common equity at a time when the trading price of the Company’s Common Shares is below par value, the Company will need to obtain shareholder approval to decrease the par value of the Common Shares.
Common Shares in treasury are used principally for issuance upon the exercise of employee stock options. At September 30, 2010, 1,547,936 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.
28
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
During 2004, the Company established the ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP). The Company’s 2004 LTIP provides for grants of both incentive and non-qualified stock options principally at an option price per share of 100 percent of the fair value of the Company’s Common Shares on the date of grant. Stock options are generally granted with a 3-year vesting period and a 10-year term. The stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period. On February 25, 2010, the Company granted 2,114,706 stock options with a weighted-average grant date fair value of $12.08 each. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.
The Company’s 2004 LTIP also provides for grants of restricted stock and restricted stock units. The Company generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the day of grant. On February 25, 2010, the Company granted 2,187,844 restricted stock awards and 320,766 restricted stock units to officers of the Company and its subsidiaries with a grant date fair value of $50.37 each. Each restricted stock unit represents the Company’s obligation to deliver to the holder one Common Share upon vesting. On May 19, 2010, the date of the Company’s annual general meeting, 36,248 restricted stock awards were granted to ACE’s outside directors with a grant date fair value of $52.83 each. Such awards will vest at the 2011 annual general meeting.
Fair value hierarchy
The provisions of Topic 820 define fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establish a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ACE makes decisions regarding the categorization of assets or liabilities within the valuation hierarchy based on the inputs used to determine respective fair values at the balance sheet date. Accordingly, transfers between levels within the valuation hierarchy are determined on the same basis.
The Company utilizes one or more pricing services to obtain fair value measurements for the majority of the investment securities it holds. Based on management’s understanding of the methodologies used by these pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. The following is a description of the valuation techniques and inputs used to determine fair values for the Company’s financial instruments carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.
29
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Fixed maturities
The Company utilizes pricing services to estimate fair value measurements for the majority of its fixed maturities. The pricing services utilize market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependant on the asset class and the market conditions. Additionally, given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Fixed maturities for which pricing is unobservable are classified within Level 3.
Equity securities
Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2.
Short-term investments
Short-term investments, which comprise securities due to mature within one year of the date of purchase, that are traded in active markets are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates par value.
Securities lending collateral
The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as the Company’s other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to the Company’s obligation to return the collateral plus interest.
Other investments
Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which the Company has used NAV as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investment or will not have the contractual option to redeem the investments in the near term. The remainder of such investments are classified within Level 2. Equity securities and fixed maturities held in rabbi trusts maintained by the Company for deferred compensation plans, and included in Other investments, are classified within the valuation hierarchy on the same basis as the Company’s other equity securities and fixed maturities.
30
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Investments in partially-owned insurance companies
Fair values for investments in partially-owned insurance companies based on the financial statements provided by those companies are classified within Level 3.
Investment derivative instruments
For actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts, the Company obtains quoted market prices to determine fair value. As such, these instruments are included within Level 1.
Guaranteed minimum income benefits
The liability for GMIBs arises from the Company’s life reinsurance programs covering living benefit guarantees whereby the Company assumes the risk of GMIBs associated with variable annuity contracts. For GMIB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. Based on the Company’s second quarter valuation review, ACE made changes to the valuation model as follows:
| • |
Adjusted the likelihood that policyholders will exercise their contractual options to be consistent with emerging market participant expectations of future behavior; |
| • |
The annuitization assumption was revised to increase the amount of annuitizations for policies with guaranteed values far in excess of their account values, based on a recent study of ACE’s annuitization experience; and |
| • |
Inputs for interest rate and equity volatilities were changed, moving to an approach that ACE believes is consistent with how a market participant would interpret limited market data. |
Based on the Company’s third quarter 2010 valuation review, no changes were made to actuarial or behavior assumptions. ACE made minor technical refinements to the model with a favorable net income impact of approximately $2 million.
The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors. A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted as
31
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
appropriate with industry estimates. The Company views the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GMIB reinsurance is classified within Level 3.
Short- and long-term debt and trust preferred securities
Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including the Company’s incremental borrowing rates, which reflect ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. As such, these instruments are classified within Level 2.
Other derivative instruments
The Company maintains positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for GMDB and GMIB reinsurance business. The Company’s position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the Company’s remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. The Company’s position in credit default swaps is typically included within Level 3.
32
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following tables present, by valuation hierarchy, the financial instruments carried or disclosed at fair value, and measured on a recurring basis, at September 30, 2010, and December 31, 2009.
|
Quoted Prices in
Active Markets for Identical Assets or Liabilities Level 1 |
Significant
Other Observable Inputs Level 2 |
Significant
Unobservable Inputs Level 3 |
Total | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
September 30, 2010 |
||||||||||||||||
|
Assets: |
||||||||||||||||
|
Fixed maturities available for sale |
||||||||||||||||
|
U.S. Treasury and agency |
$ | 1,703 | $ | 1,753 | $ | — | $ | 3,456 | ||||||||
|
Foreign |
185 | 12,093 | 31 | 12,309 | ||||||||||||
|
Corporate securities |
32 | 15,691 | 159 | 15,882 | ||||||||||||
|
Mortgage-backed securities |
— | 7,928 | 12 | 7,940 | ||||||||||||
|
States, municipalities, and political subdivisions |
— | 1,514 | 2 | 1,516 | ||||||||||||
| 1,920 | 38,979 | 204 | 41,103 | |||||||||||||
|
Fixed maturities held to maturity |
||||||||||||||||
|
U.S. Treasury and agency |
394 | 560 | — | 954 | ||||||||||||
|
Foreign |
— | 21 | — | 21 | ||||||||||||
|
Corporate securities |
— | 304 | — | 304 | ||||||||||||
|
Mortgage-backed securities |
— | 4,134 | — | 4,134 | ||||||||||||
|
States, municipalities, and political subdivisions |
— | 691 | — | 691 | ||||||||||||
| 394 | 5,710 | — | 6,104 | |||||||||||||
|
Equity securities |
397 | 3 | 15 | 415 | ||||||||||||
|
Short-term investments |
1,006 | 850 | 1 | 1,857 | ||||||||||||
|
Other investments |
25 | 214 | 1,380 | 1,619 | ||||||||||||
|
Securities lending collateral |
— | 1,629 | — | 1,629 | ||||||||||||
|
Investments in partially-owned insurance companies |
— | — | 510 | 510 | ||||||||||||
|
Other derivative instruments |
(32 | ) | 28 | 6 | 2 | |||||||||||
|
Total assets at fair value |
$ | 3,710 | $ | 47,413 | $ | 2,116 | $ | 53,239 | ||||||||
|
Liabilities: |
||||||||||||||||
|
Investment derivative instruments |
$ | 4 | $ | (3 | ) | $ | — | $ | 1 | |||||||
|
GMIB |
— | — | 758 | 758 | ||||||||||||
|
Short-term debt |
— | 160 | — | 160 | ||||||||||||
|
Long-term debt |
— | 3,586 | — | 3,586 | ||||||||||||
|
Trust preferred securities |
— | 369 | — | 369 | ||||||||||||
|
Total liabilities at fair value |
$ | 4 | $ | 4,112 | $ | 758 | $ | 4,874 | ||||||||
33
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
There were no significant gross transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2010.
|
Quoted Prices in
Active Markets for Identical Assets or Liabilities Level 1 |
Significant
Other Observable Inputs Level 2 |
Significant
Unobservable Inputs Level 3 |
Total | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
December 31, 2009 |
||||||||||||||||
|
Assets: |
||||||||||||||||
|
Fixed maturities available for sale |
||||||||||||||||
|
U.S. Treasury and agency |
$ | 1,611 | $ | 2,098 | $ | — | $ | 3,709 | ||||||||
|
Foreign |
207 | 10,879 | 59 | 11,145 | ||||||||||||
|
Corporate securities |
31 | 13,016 | 168 | 13,215 | ||||||||||||
|
Mortgage-backed securities |
— | 9,821 | 21 | 9,842 | ||||||||||||
|
States, municipalities, and political subdivisions |
— | 1,611 | 3 | 1,614 | ||||||||||||
| 1,849 | 37,425 | 251 | 39,525 | |||||||||||||
| Fixed maturities held to maturity | ||||||||||||||||
|
U.S. Treasury and agency |
414 | 643 | — | 1,057 | ||||||||||||
|
Foreign |
— | 27 | — | 27 | ||||||||||||
|
Corporate securities |
— | 322 | — | 322 | ||||||||||||
|
Mortgage-backed securities |
— | 1,424 | 45 | 1,469 | ||||||||||||
|
States, municipalities, and political subdivisions |
— | 686 | — | 686 | ||||||||||||
| 414 | 3,102 | 45 | 3,561 | |||||||||||||
|
Equity securities |
453 | 2 | 12 | 467 | ||||||||||||
|
Short-term investments |
1,132 | 535 | — | 1,667 | ||||||||||||
|
Other investments |
31 | 195 | 1,149 | 1,375 | ||||||||||||
|
Securities lending collateral |
— | 1,544 | — | 1,544 | ||||||||||||
|
Investments in partially-owned insurance companies |
— | — | 433 | 433 | ||||||||||||
|
Investment derivative instruments |
7 | — | — | 7 | ||||||||||||
|
Other derivative instruments |
(9 | ) | 32 | 14 | 37 | |||||||||||
|
Total assets at fair value |
$ | 3,877 | $ | 42,835 | $ | 1,904 | $ | 48,616 | ||||||||
|
Liabilities: |
||||||||||||||||
|
GMIB |
$ | — | $ | — | $ | 559 | $ | 559 | ||||||||
|
Short-term debt |
— | 168 | — | 168 | ||||||||||||
|
Long-term debt |
— | 3,401 | — | 3,401 | ||||||||||||
|
Trust preferred securities |
— | 336 | — | 336 | ||||||||||||
|
Total liabilities at fair value |
$ | — | $ | 3,905 | $ | 559 | $ | 4,464 | ||||||||
34
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Fair value of alternative investments
Included in Other investments in the fair value hierarchy at September 30, 2010, and December 31, 2009, are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At September 30, 2010, there were no probable or pending sales related to any of the investments measured at fair value using NAV. The following table presents, by investment category, the fair values of and maximum future funding commitments related to these investments at September 30, 2010, and December 31, 2009. The table also shows the expected liquidation period from September 30, 2010.
| September 30, 2010 | December 31, 2009 | |||||||||||||||||||
|
Expected
Liquidation Period |
Fair
Value |
Maximum
future funding commitments |
Fair
Value |
Maximum
future funding commitments |
||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||
|
Financial |
5 to 9 Years | $ | 180 | $ | 172 | $ | 173 | $ | 109 | |||||||||||
|
Real estate |
3 to 9 Years | 152 | 97 | 89 | 150 | |||||||||||||||
|
Distressed |
6 to 9 Years | 241 | 57 | 233 | 59 | |||||||||||||||
|
Mezzanine |
6 to 9 Years | 119 | 204 | 102 | 75 | |||||||||||||||
|
Traditional |
3 to 8 Years | 361 | 348 | 243 | 300 | |||||||||||||||
|
Vintage |
1 to 3 Years | 29 | 4 | 31 | 2 | |||||||||||||||
|
Investment funds |
Not Applicable | 326 | — | 310 | — | |||||||||||||||
| $ | 1,408 | $ | 882 | $ | 1,181 | $ | 695 | |||||||||||||
Included in all categories in the above table except for Investment Funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Included in the “Expected Liquidation Period” column above is the range in years over which ACE expects the majority of underlying assets in the respective categories to be liquidated. Further, for all categories except for Investment Funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Financial
Financial primarily consists of investments in private equity funds targeting financial services companies such as financial institutions and insurance services around the world.
Real estate
Real Estate consists of investments in private equity funds targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market.
Distressed
Distressed consists of investments in private equity funds targeting distressed debt/credit and equity opportunities in the U.S.
Mezzanine
Mezzanine consists of investments in private equity funds targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide.
35
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Traditional
Traditional consists of investments in private equity funds employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.
Vintage
Vintage consists of investments in private equity funds made before 2002 and where the funds’ commitment periods had already expired.
Investment funds
ACE’s investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which ACE has the option to redeem at agreed upon value as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, the Company may redeem investment fund investments monthly, quarterly, semi-annually, or annually. If the Company wishes to redeem an investment fund investment, ACE must first determine if the investment fund is still in a lock-up period (a time when ACE cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, ACE must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem ACE’s investment within several months of the notification. Notice periods for redemption of ACE’s investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.
36
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Level 3 financial instruments
The following tables present a reconciliation of the beginning and ending balances of financial instruments carried or disclosed at fair value using significant unobservable inputs (Level 3) for the periods indicated.
|
Balance-
Beginning of Period |
Net
Realized Gains/ Losses |
Change in
Net Unrealized Gains (Losses) Included in OCI |
Purchases,
Sales, Issuances, and Settlements, Net |
Transfers
Into (Out of) Level 3 |
Balance-End
of Period |
Net Realized
Gains/Losses Attributable to Changes in Fair Value (1) |
||||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||||||
|
Three Months Ended September 30, 2010 |
||||||||||||||||||||||||||||
|
Assets: |
||||||||||||||||||||||||||||
|
Fixed maturities available for sale |
||||||||||||||||||||||||||||
|
Foreign |
$ | 28 | $ | 1 | $ | (1 | ) | $ | 2 | $ | 1 | $ | 31 | $ | — | |||||||||||||
|
Corporate securities |
121 | 1 | 3 | 34 | — | 159 | — | |||||||||||||||||||||
|
Mortgage-backed securities |
12 | — | — | — | — | 12 | — | |||||||||||||||||||||
|
States, municipalities, and political subdivisions |
3 | — | — | (1 | ) | — | 2 | — | ||||||||||||||||||||
| 164 | 2 | 2 | 35 | 1 | 204 | — | ||||||||||||||||||||||
|
Fixed maturities held to maturity |
||||||||||||||||||||||||||||
|
Mortgage-backed securities |
— | — | — | (43 | ) | 43 | — | — | ||||||||||||||||||||
|
Equity securities |
16 | — | 3 | (4 | ) | — | 15 | (1 | ) | |||||||||||||||||||
|
Short-term investments |
— | — | — | 1 | — | 1 | — | |||||||||||||||||||||
|
Other investments |
1,227 | 6 | 14 | 133 | — | 1,380 | — | |||||||||||||||||||||
|
Investments in partially-owned insurance companies |
459 | 1 | 4 | 46 | — | 510 | — | |||||||||||||||||||||
|
Other derivative instruments |
14 | (8 | ) | — | — | — | 6 | (8 | ) | |||||||||||||||||||
|
Total assets at fair value |
$ | 1,880 | $ | 1 | $ | 23 | $ | 168 | $ | 44 | $ | 2,116 | $ | (9 | ) | |||||||||||||
|
Liabilities: |
||||||||||||||||||||||||||||
|
GMIB |
$ | 776 | $ | (25 | ) | $ | — | $ | 7 | $ | — | $ | 758 | $ | (25 | ) | ||||||||||||
| (1) |
Relates only to financial instruments still held at the balance sheet date. |
37
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
Balance-
Beginning of Period |
Net
Realized Gains/ Losses |
Change in Net
Unrealized Gains (Losses) Included in OCI |
Purchases,
Sales, Issuances, and Settlements, Net |
Transfers
Into (Out of) Level 3 |
Balance-End
of Period |
Net Realized
Gains/Losses Attributable to Changes in Fair Value (1) |
||||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||||||
| Three Months Ended September 30, 2009 | ||||||||||||||||||||||||||||
|
Assets: |
||||||||||||||||||||||||||||
|
Fixed maturities available for sale |
||||||||||||||||||||||||||||
|
Foreign |
$ | 38 | $ | — | $ | 2 | $ | (5 | ) | $ | 12 | $ | 47 | $ | 1 | |||||||||||||
|
Corporate securities |
100 | (2 | ) | 8 | 2 | 16 | 124 | 5 | ||||||||||||||||||||
|
Mortgage-backed securities |
42 | (2 | ) | 5 | (3 | ) | (2 | ) | 40 | 3 | ||||||||||||||||||
|
States, municipalities, and political subdivisions |
3 | — | 1 | 10 | 5 | 19 | — | |||||||||||||||||||||
| 183 | (4 | ) | 16 | 4 | 31 | 230 | 9 | |||||||||||||||||||||
|
Fixed maturities held to maturity |
||||||||||||||||||||||||||||
|
Mortgage-backed securities |
51 | — | — | (3 | ) | — | 48 | — | ||||||||||||||||||||
|
Equity securities |
8 | — | — | — | 1 | 9 | — | |||||||||||||||||||||
|
Short-term investments |
4 | — | — | 6 | — | 10 | — | |||||||||||||||||||||
|
Other investments |
1,084 | (37 | ) | 110 | (12 | ) | — | 1,145 | (38 | ) | ||||||||||||||||||
|
Investments in partially-owned insurance companies |
462 | — | 15 | 1 | — | 478 | — | |||||||||||||||||||||
|
Other derivative instruments |
34 | (12 | ) | — | (2 | ) | — | 20 | (12 | ) | ||||||||||||||||||
|
Total assets at fair value |
$ | 1,826 | $ | (53 | ) | $ | 141 | $ | (6 | ) | $ | 32 | $ | 1,940 | $ | (41 | ) | |||||||||||
|
Liabilities: |
||||||||||||||||||||||||||||
|
GMIB |
$ | 634 | $ | 65 | $ | — | $ | 6 | $ | — | $ | 705 | $ | 65 | ||||||||||||||
| (1) |
Relates only to financial instruments still held at the balance sheet date. |
38
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
Balance-
Beginning of Period |
Net
Realized Gains/ Losses |
Change in Net
Unrealized Gains (Losses) Included in OCI |
Purchases,
Sales, Issuances, and Settlements, Net |
Transfers
Into (Out of) Level 3 |
Balance-End
of Period |
Net Realized
Gains/Losses Attributable to Changes in Fair Value (1) |
||||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2010 | ||||||||||||||||||||||||||||
|
Assets: |
||||||||||||||||||||||||||||
|
Fixed maturities available for sale |
||||||||||||||||||||||||||||
|
Foreign |
$ | 59 | $ | — | $ | — | $ | 2 | $ | (30 | ) | $ | 31 | $ | — | |||||||||||||
|
Corporate securities |
168 | — | 9 | 17 | (35 | ) | 159 | — | ||||||||||||||||||||
|
Mortgage-backed securities |
21 | — | — | (9 | ) | — | 12 | — | ||||||||||||||||||||
|
States, municipalities, and political subdivisions |
3 | — | — | (1 | ) | — | 2 | — | ||||||||||||||||||||
| 251 | — | 9 | 9 | (65 | ) | 204 | — | |||||||||||||||||||||
|
Fixed maturities held to maturity |
||||||||||||||||||||||||||||
|
Mortgage-backed securities |
45 | — | — | (43 | ) | (2 | ) | — | — | |||||||||||||||||||
|
Equity securities |
12 | 1 | 3 | (1 | ) | — | 15 | — | ||||||||||||||||||||
|
Short-term investments |
— | — | — | 1 | — | 1 | — | |||||||||||||||||||||
|
Other investments |
1,149 | (7 | ) | 47 | 191 | — | 1,380 | — | ||||||||||||||||||||
|
Investments in partially-owned insurance companies |
433 | 5 | 21 | 51 | — | 510 | — | |||||||||||||||||||||
|
Other derivative instruments |
14 | 4 | — | (12 | ) | — | 6 | 4 | ||||||||||||||||||||
|
Total assets at fair value |
$ | 1,904 | $ | 3 | $ | 80 | $ | 196 | $ | (67 | ) | $ | 2,116 | $ | 4 | |||||||||||||
|
Liabilities: |
||||||||||||||||||||||||||||
|
GMIB |
$ | 559 | $ | 180 | $ | — | $ | 19 | $ | — | $ | 758 | $ | 180 | ||||||||||||||
| (1) |
Relates only to financial instruments still held at the balance sheet date. |
39
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
|
Balance-
Beginning of Period |
Net
Realized Gains/ Losses |
Change in Net
Unrealized Gains (Losses) Included in OCI |
Purchases,
Sales, Issuances, and Settlements, Net |
Transfers
Into (Out of) Level 3 |
Balance-End
of Period |
Net Realized
Gains/Losses Attributable to Changes in Fair Value (1) |
||||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2009 | ||||||||||||||||||||||||||||
|
Assets: |
||||||||||||||||||||||||||||
|
Fixed maturities available for sale |
||||||||||||||||||||||||||||
|
Foreign |
$ | 45 | $ | (1 | ) | $ | 2 | $ | (1 | ) | $ | 2 | $ | 47 | $ | — | ||||||||||||
|
Corporate securities |
117 | (2 | ) | 13 | (4 | ) | — | 124 | 1 | |||||||||||||||||||
|
Mortgage-backed securities |
109 | (6 | ) | 19 | (63 | ) | (19 | ) | 40 | (2 | ) | |||||||||||||||||
|
States, municipalities, and political subdivisions |
3 | — | 1 | 10 | 5 | 19 | — | |||||||||||||||||||||
| 274 | (9 | ) | 35 | (58 | ) | (12 | ) | 230 | (1 | ) | ||||||||||||||||||
|
Fixed maturities held to maturity |
||||||||||||||||||||||||||||
|
Mortgage-backed securities |
— | — | — | 48 | — | 48 | — | |||||||||||||||||||||
|
States, municipalities, and political subdivisions |
1 | — | — | (1 | ) | — | — | — | ||||||||||||||||||||
| 1 | — | — | 47 | — | 48 | — | ||||||||||||||||||||||
|
Equity securities |
21 | — | — | 4 | (16 | ) | 9 | — | ||||||||||||||||||||
|
Short-term investments |
— | — | — | 10 | — | 10 | — | |||||||||||||||||||||
|
Other investments |
1,099 | (120 | ) | 130 | 37 | (1 | ) | 1,145 | (121 | ) | ||||||||||||||||||
|
Investments in partially-owned insurance companies |
435 | 8 | (2 | ) | 37 | — | 478 | — | ||||||||||||||||||||
|
Other derivative instruments |
87 | (64 | ) | — | (3 | ) | — | 20 | (64 | ) | ||||||||||||||||||
|
Total assets at fair value |
$ | 1,917 | $ | (185 | ) | $ | 163 | $ | 74 | $ | (29 | ) | $ | 1,940 | $ | (186 | ) | |||||||||||
|
Liabilities: |
||||||||||||||||||||||||||||
|
GMIB |
$ | 910 | $ | (218 | ) | $ | — | $ | 13 | $ | — | $ | 705 | $ | (218 | ) | ||||||||||||
| (1) |
Relates only to financial instruments still held at the balance sheet date. |
The Company operates through the following business segments, certain of which represent the aggregation of distinct operating segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries.
The Insurance – North American segment comprises the operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations. ACE USA is the North American retail operating division which provides a broad array of Property & Casualty (P&C), Accident & Health (A&H), and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE Westchester specializes in the North American wholesale distribution of excess and surplus P&C, environmental, professional and inland marine products in addition to crop insurance in the U.S. ACE Bermuda provides
40
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
commercial insurance products on an excess basis to a global client base, covering exposures that are generally low in frequency and high in severity. ACE Private Risk Services provides personal lines coverages (such as homeowners and automobile) for high net worth individuals and families in North America. The run-off operations include Brandywine Holdings Corporation, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, and other exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
The Insurance – Overseas General segment comprises ACE International, the wholesale insurance business of ACE Global Markets, and the international A&H and life business of Combined Insurance. ACE International, the ACE INA retail business serving territories outside the U.S., Bermuda, and Canada, maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets, the London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488, offers products through its parallel distribution network via ACE European Group Limited (AEGL) and Lloyd’s Syndicate 2488. ACE provides funds at Lloyd’s to support underwriting by Syndicate 2488, which is managed by ACE Underwriting Agencies Limited. ACE Global Markets utilizes Syndicate 2488 to underwrite P&C business on a global basis through Lloyd’s worldwide licenses. ACE Global Markets utilizes AEGL to underwrite similar classes of business through its network of U.K. and Continental Europe licenses, and in the U.S. where it is eligible to write excess & surplus business. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Combined Insurance distributes a wide range of supplemental accident and health products. The Insurance – Overseas General segment has four regions of operations: the ACE European Group (which comprises ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America. Companies within the Insurance – Overseas General segment write a variety of insurance products including P&C, professional lines (directors & officers and errors & omissions), marine, energy, aviation, political risk, specialty consumer-oriented products, and A&H (principally accident and supplemental health).
The Global Reinsurance segment represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C insurers. The Global Reinsurance segment also includes ACE Global Markets’ reinsurance operations.
The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. ACE Life provides individual and group life insurance through multiple distribution channels primarily in emerging markets, including Egypt, Indonesia, Taiwan, Thailand, Vietnam, the United Arab Emirates, throughout Latin America, selectively in Europe, as well as China through a partially-owned insurance company. ACE Life Re helps clients (ceding companies) manage mortality, morbidity, and lapse risks embedded in their books of business. ACE Life Re comprises two operations. The first is a Bermuda-based operation which provides reinsurance to primary life insurers, focusing on guarantees included in certain fixed and variable annuity products and also on more traditional mortality reinsurance protection. The second is a U.S.-based traditional life reinsurance company licensed in 49 states and the District of Columbia. It was decided in January 2010 to discontinue writing new traditional life mortality reinsurance business from the U.S.-based company. Combined Insurance distributes specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in the U.S. and Canada.
41
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Corporate and Other (Corporate) includes ACE Limited, ACE Group Management and Holdings Ltd., ACE INA Holdings, Inc., and intercompany eliminations. Losses and loss expenses arise in connection with the commutation of ceded reinsurance contracts that result from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverable, principally related to the time value of money. Due to the Company’s initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and, accordingly, are directly allocated to Corporate. ACE also eliminates the impact of intersegment loss portfolio transfer transactions which are not reflected in the results within the statements of operations by segment.
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting losses and loss expenses, policy benefits, policy acquisition costs, and administrative expenses from net premiums earned. For the Life business, management also includes net investment income as a component of underwriting income. The following tables present the operations by segment for the periods indicated.
Statement of Operations by Segment
For the Three Months Ended September 30, 2010
(in millions of U.S. dollars)
|
Insurance –
North American |
Insurance –
Overseas General |
Global
Reinsurance |
Life |
Corporate
and Other |
ACE
Consolidated |
|||||||||||||||||||
|
Net premiums written |
$ | 1,445 | $ | 1,205 | $ | 272 | $ | 373 | $ | — | $ | 3,295 | ||||||||||||
|
Net premiums earned |
1,444 | 1,321 | 271 | 386 | — | 3,422 | ||||||||||||||||||
|
Losses and loss expenses |
1,026 | 605 | 137 | 119 | — | 1,887 | ||||||||||||||||||
|
Policy benefits |
— | — | — | 93 | — | 93 | ||||||||||||||||||
|
Policy acquisition costs |
165 | 326 | 51 | 65 | — | 607 | ||||||||||||||||||
|
Administrative expenses |
112 | 204 | 14 | 59 | 44 | 433 | ||||||||||||||||||
|
Underwriting income (loss) |
141 | 186 | 69 | 50 | (44 | ) | 402 | |||||||||||||||||
|
Net investment income |
287 | 118 | 71 | 43 | (3 | ) | 516 | |||||||||||||||||
|
Net realized gains (losses) including OTTI |
(2 | ) | 32 | 10 | (85 | ) | (5 | ) | (50 | ) | ||||||||||||||
|
Interest expense |
6 | — | — | — | 52 | 58 | ||||||||||||||||||
|
Other (income) expense |
(20 | ) | (4 | ) | (10 | ) | 5 | 4 | (25 | ) | ||||||||||||||
|
Income tax expense (benefit) |
108 | 63 | 12 | 16 | (39 | ) | 160 | |||||||||||||||||
|
Net income (loss) |
$ | 332 | $ | 277 | $ | 148 | $ | (13 | ) | $ | (69 | ) | $ | 675 | ||||||||||
42
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Statement of Operations by Segment
For the Three Months Ended September 30, 2009
(in millions of U.S. dollars)
|
Insurance –
North American |
Insurance –
Overseas General |
Global
Reinsurance |
Life |
Corporate
and Other |
ACE
Consolidated |
|||||||||||||||||||
|
Net premiums written |
$ | 1,374 | $ | 1,203 | $ | 206 | $ | 372 | $ | — | $ | 3,155 | ||||||||||||
|
Net premiums earned |
1,467 | 1,317 | 247 | 362 | — | 3,393 | ||||||||||||||||||
|
Losses and loss expenses |
1,053 | 631 | 80 | 121 | — | 1,885 | ||||||||||||||||||
|
Policy benefits |
— | — | — | 79 | — | 79 | ||||||||||||||||||
|
Policy acquisition costs |
142 | 316 | 50 | 59 | — | 567 | ||||||||||||||||||
|
Administrative expenses |
146 | 204 | 15 | 51 | 35 | 451 | ||||||||||||||||||
|
Underwriting income (loss) |
126 | 166 | 102 | 52 | (35 | ) | 411 | |||||||||||||||||
|
Net investment income |
278 | 121 | 65 | 43 | 4 | 511 | ||||||||||||||||||
|
Net realized gains (losses) including OTTI |
(25 | ) | 40 | (11 | ) | (212 | ) | (15 | ) | (223 | ) | |||||||||||||
|
Interest expense |
— | — | — | — | 60 | 60 | ||||||||||||||||||
|
Other (income) expense |
4 | 3 | (1 | ) | — | 45 | 51 | |||||||||||||||||
|
Income tax expense (benefit) |
47 | 56 | 9 | 17 | (35 | ) | 94 | |||||||||||||||||
|
Net income (loss) |
$ | 328 | $ | 268 | $ | 148 | $ | (134 | ) | $ | (116 | ) | $ | 494 | ||||||||||
Statement of Operations by Segment
For the Nine Months Ended September 30, 2010
(in millions of U.S. dollars)
|
Insurance –
North American |
Insurance –
Overseas General |
Global
Reinsurance |
Life |
Corporate
and Other |
ACE
Consolidated |
|||||||||||||||||||
|
Net premiums written |
$ | 4,278 | $ | 3,927 | $ | 932 | $ | 1,149 | $ | — | $ | 10,286 | ||||||||||||
|
Net premiums earned |
4,140 | 3,835 | 803 | 1,154 | — | 9,932 | ||||||||||||||||||
|
Losses and loss expenses |
2,888 | 1,950 | 391 | 379 | — | 5,608 | ||||||||||||||||||
|
Policy benefits |
— | 4 | — | 263 | — | 267 | ||||||||||||||||||
|
Policy acquisition costs |
447 | 905 | 153 | 192 | — | 1,697 | ||||||||||||||||||
|
Administrative expenses |
407 | 613 | 41 | 171 | 124 | 1,356 | ||||||||||||||||||
|
Underwriting income (loss) |
398 | 363 | 218 | 149 | (124 | ) | 1,004 | |||||||||||||||||
|
Net investment income |
852 | 347 | 213 | 129 | (3 | ) | 1,538 | |||||||||||||||||
|
Net realized gains (losses) including OTTI |
163 | 102 | 69 | (197 | ) | (10 | ) | 127 | ||||||||||||||||
|
Interest expense |
6 | — | — | — | 156 | 162 | ||||||||||||||||||
|
Other (income) expense |
(21 | ) | (5 | ) | (16 | ) | 11 | 5 | (26 | ) | ||||||||||||||
|
Income tax expense (benefit) |
322 | 136 | 31 | 46 | (109 | ) | 426 | |||||||||||||||||
|
Net income (loss) |
$ | 1,106 | $ | 681 | $ | 485 | $ | 24 | $ | (189 | ) | $ | 2,107 | |||||||||||
43
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Statement of Operations by Segment
For the Nine Months Ended September 30, 2009
(in millions of U.S. dollars)
|
Insurance –
North American |
Insurance –
Overseas General |
Global
Reinsurance |
Life |
Corporate
and Other |
ACE
Consolidated |
|||||||||||||||||||
|
Net premiums written |
$ | 4,220 | $ | 3,795 | $ | 894 | $ | 1,085 | $ | — | $ | 9,994 | ||||||||||||
|
Net premiums earned |
4,319 | 3,747 | 726 | 1,061 | — | 9,853 | ||||||||||||||||||
|
Losses and loss expenses |
3,054 | 1,879 | 223 | 366 | — | 5,522 | ||||||||||||||||||
|
Policy benefits |
— | 3 | — | 253 | — | 256 | ||||||||||||||||||
|
Policy acquisition costs |
394 | 869 | 147 | 161 | — | 1,571 | ||||||||||||||||||
|
Administrative expenses |
433 | 569 | 41 | 173 | 109 | 1,325 | ||||||||||||||||||
|
Underwriting income (loss) |
438 | 427 | 315 | 108 | (109 | ) | 1,179 | |||||||||||||||||
|
Net investment income |
816 | 355 | 210 | 132 | 6 | 1,519 | ||||||||||||||||||
|
Net realized gains (losses) including OTTI |
(242 | ) | (40 | ) | (47 | ) | (95 | ) | (145 | ) | (569 | ) | ||||||||||||
|
Interest expense |
— | — | — | — | 169 | 169 | ||||||||||||||||||
|
Other (income) expense |
9 | 12 | — | 1 | 22 | 44 | ||||||||||||||||||
|
Income tax expense (benefit) |
219 | 131 | 38 | 37 | (105 | ) | 320 | |||||||||||||||||
|
Net income (loss) |
$ | 784 | $ | 599 | $ | 440 | $ | 107 | $ | (334 | ) | $ | 1,596 | |||||||||||
Underwriting assets are reviewed in total by management for purpose of decision-making. Other than goodwill, the Company does not allocate assets to its segments.
44
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents the net premiums earned for each segment by product for the periods indicated.
|
Property & All
Other |
Casualty |
Life, Accident
& Health |
ACE
Consolidated |
|||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
For the Three Months Ended September 30, 2010 |
||||||||||||||||
|
Insurance – North American |
$ | 466 | $ | 903 | $ | 75 | $ | 1,444 | ||||||||
|
Insurance – Overseas General |
457 | 358 | 506 | 1,321 | ||||||||||||
|
Global Reinsurance |
133 | 138 | — | 271 | ||||||||||||
|
Life |
— | — | 386 | 386 | ||||||||||||
| $ | 1,056 | $ | 1,399 | $ | 967 | $ | 3,422 | |||||||||
|
For the Three Months Ended September 30, 2009 |
||||||||||||||||
|
Insurance – North American |
$ | 496 | $ | 904 | $ | 67 | $ | 1,467 | ||||||||
|
Insurance – Overseas General |
451 | 366 | 500 | 1,317 | ||||||||||||
|
Global Reinsurance |
134 | 113 | — | 247 | ||||||||||||
|
Life |
— | — | 362 | 362 | ||||||||||||
| $ | 1,081 | $ | 1,383 | $ | 929 | $ | 3,393 | |||||||||
|
For the Nine Months Ended September 30, 2010 |
||||||||||||||||
|
Insurance – North American |
$ | 1,179 | $ | 2,742 | $ | 219 | $ | 4,140 | ||||||||
|
Insurance – Overseas General |
1,301 | 1,052 | 1,482 | 3,835 | ||||||||||||
|
Global Reinsurance |
391 | 412 | — | 803 | ||||||||||||
|
Life |
— | — | 1,154 | 1,154 | ||||||||||||
| $ | 2,871 | $ | 4,206 | $ | 2,855 | $ | 9,932 | |||||||||
|
For the Nine Months Ended September 30, 2009 |
||||||||||||||||
|
Insurance – North American |
$ | 1,361 | $ | 2,766 | $ | 192 | $ | 4,319 | ||||||||
|
Insurance – Overseas General |
1,293 | 1,038 | 1,416 | 3,747 | ||||||||||||
|
Global Reinsurance |
408 | 318 | — | 726 | ||||||||||||
|
Life |
— | — | 1,061 | 1,061 | ||||||||||||
| $ | 3,062 | $ | 4,122 | $ | 2,669 | $ | 9,853 | |||||||||
45
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The following table presents the computation of basic and diluted earnings per share for the periods indicated.
|
Three Months Ended
September 30 |
Nine Months
Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars, except share and per share data) | ||||||||||||||||
|
Numerator: |
||||||||||||||||
|
Net Income |
$ | 675 | $ | 494 | $ | 2,107 | $ | 1,596 | ||||||||
|
Denominator: |
||||||||||||||||
|
Denominator for basic earnings per share: |
||||||||||||||||
|
Weighted-average shares outstanding |
340,218,717 | 337,190,828 | 339,527,671 | 336,501,257 | ||||||||||||
|
Denominator for diluted earnings per share: |
||||||||||||||||
|
Share-based compensation plans |
1,636,802 | 1,221,041 | 1,314,662 | 579,116 | ||||||||||||
|
Adjusted weighted-average shares outstanding and assumed conversions |
341,855,519 | 338,411,869 | 340,842,333 | 337,080,373 | ||||||||||||
|
Basic earnings per share |
$ | 1.98 | $ | 1.46 | $ | 6.21 | $ | 4.74 | ||||||||
|
Diluted earnings per share |
$ | 1.97 | $ | 1.46 | $ | 6.18 | $ | 4.73 | ||||||||
Excluded from adjusted weighted-average shares outstanding and assumed conversions is the impact of securities that would have been anti-dilutive during the respective periods. For the three months ended September 30, 2010 and 2009, the potential anti-dilutive share conversions were 204,251 shares and 882,760 shares, respectively. The potential anti-dilutive share conversions for the nine months ended September 30, 2010 and 2009, were 264,312 shares and 1,399,509 shares, respectively.
46
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
11. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at September 30, 2010, and December 31, 2009, and for the three and nine months ended September 30, 2010 and 2009, for ACE Limited (the Parent Guarantor) and its “Subsidiary Issuer”, ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.
Condensed Consolidating Balance Sheet at September 30, 2010
(in millions of U.S. dollars)
|
ACE
Limited (Parent Guarantor) |
ACE INA
Holdings Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
Consolidating
Adjustments (2) |
ACE
Limited Consolidated |
||||||||||||||||
|
Assets |
||||||||||||||||||||
|
Investments |
$ | 37 | $ | 26,319 | $ | 24,615 | $ | — | $ | 50,971 | ||||||||||
|
Cash |
(26 | ) | 284 | 229 | — | 487 | ||||||||||||||
|
Insurance and reinsurance balances receivable |
— | 3,212 | 482 | — | 3,694 | |||||||||||||||
|
Reinsurance recoverable on losses and loss expenses |
— | 17,303 | (3,828 | ) | — | 13,475 | ||||||||||||||
|
Reinsurance recoverable on policy benefits |
— | 680 | (390 | ) | — | 290 | ||||||||||||||
|
Value of business acquired |
— | 656 | — | — | 656 | |||||||||||||||
|
Goodwill and other intangible assets |
— | 3,354 | 552 | — | 3,906 | |||||||||||||||
|
Investments in subsidiaries |
22,004 | — | — | (22,004 | ) | — | ||||||||||||||
|
Due from (to) subsidiaries and affiliates, net |
994 | (562 | ) | 562 | (994 | ) | — | |||||||||||||
|
Other assets |
12 | 7,338 | 1,559 | — | 8,909 | |||||||||||||||
|
Total assets |
$ | 23,021 | $ | 58,584 | $ | 23,781 | $ | (22,998 | ) | $ | 82,388 | |||||||||
|
Liabilities |
||||||||||||||||||||
|
Unpaid losses and loss expenses |
$ | — | $ | 30,650 | $ | 7,092 | $ | — | $ | 37,742 | ||||||||||
|
Unearned premiums |
— | 5,504 | 1,067 | — | 6,571 | |||||||||||||||
|
Future policy benefits |
— | 2,471 | 612 | — | 3,083 | |||||||||||||||
|
Short-term debt |
— | 155 | — | — | 155 | |||||||||||||||
|
Long-term debt |
— | 3,158 | — | — | 3,158 | |||||||||||||||
|
Trust preferred securities |
— | 309 | — | — | 309 | |||||||||||||||
|
Other liabilities |
176 | 6,724 | 1,625 | — | 8,525 | |||||||||||||||
|
Total liabilities |
176 | 48,971 | 10,396 | — | 59,543 | |||||||||||||||
|
Total shareholders’ equity |
22,845 | 9,613 | 13,385 | (22,998 | ) | 22,845 | ||||||||||||||
|
Total liabilities and shareholders’ equity |
$ | 23,021 | $ | 58,584 | $ | 23,781 | $ | (22,998 | ) | $ | 82,388 | |||||||||
| (1) |
Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
| (2) |
Includes ACE Limited parent company eliminations. |
47
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Balance Sheet at December 31, 2009
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
Consolidating
Adjustments (2) |
ACE Limited
Consolidated |
||||||||||||||||
|
Assets |
||||||||||||||||||||
|
Investments |
$ | 51 | $ | 24,125 | $ | 22,339 | $ | — | $ | 46,515 | ||||||||||
|
Cash |
(1 | ) | 400 | 270 | — | 669 | ||||||||||||||
|
Insurance and reinsurance balances receivable |
— | 3,043 | 628 | — | 3,671 | |||||||||||||||
|
Reinsurance recoverable on losses and loss expenses |
— | 17,173 | (3,578 | ) | — | 13,595 | ||||||||||||||
|
Reinsurance recoverable on policy benefits |
— | 681 | (383 | ) | — | 298 | ||||||||||||||
|
Value of business acquired |
— | 748 | — | — | 748 | |||||||||||||||
|
Goodwill and other intangible assets |
— | 3,377 | 554 | — | 3,931 | |||||||||||||||
|
Investments in subsidiaries |
18,714 | — | — | (18,714 | ) | — | ||||||||||||||
|
Due from (to) subsidiaries and affiliates, net |
1,062 | (669 | ) | 669 | (1,062 | ) | — | |||||||||||||
|
Other assets |
18 | 7,158 | 1,377 | — | 8,553 | |||||||||||||||
|
Total assets |
$ | 19,844 | $ | 56,036 | $ | 21,876 | $ | (19,776 | ) | $ | 77,980 | |||||||||
|
Liabilities |
||||||||||||||||||||
|
Unpaid losses and loss expenses |
$ | — | $ | 30,038 | $ | 7,745 | $ | — | $ | 37,783 | ||||||||||
|
Unearned premiums |
— | 4,944 | 1,123 | — | 6,067 | |||||||||||||||
|
Future policy benefits |
— | 2,383 | 625 | — | 3,008 | |||||||||||||||
|
Short-term debt |
— | 161 | — | — | 161 | |||||||||||||||
|
Long-term debt |
— | 3,158 | — | — | 3,158 | |||||||||||||||
|
Trust preferred securities |
— | 309 | — | — | 309 | |||||||||||||||
|
Other liabilities |
177 | 6,613 | 1,037 | — | 7,827 | |||||||||||||||
|
Total liabilities |
177 | 47,606 | 10,530 | — | 58,313 | |||||||||||||||
|
Total shareholders’ equity |
19,667 | 8,430 | 11,346 | (19,776 | ) | 19,667 | ||||||||||||||
|
Total liabilities and shareholders’ equity |
$ | 19,844 | $ | 56,036 | $ | 21,876 | $ | (19,776 | ) | $ | 77,980 | |||||||||
| (1) |
Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
| (2) |
Includes ACE Limited parent company eliminations. |
48
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2010
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings, Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
Consolidating
Adjustments (2) |
ACE
Limited Consolidated |
||||||||||||||||
|
Net premiums written |
$ | — | $ | 1,965 | $ | 1,330 | $ | — | $ | 3,295 | ||||||||||
|
Net premiums earned |
— | 2,031 | 1,391 | — | 3,422 | |||||||||||||||
|
Net investment income |
— | 253 | 263 | — | 516 | |||||||||||||||
|
Equity in earnings of subsidiaries |
653 | — | — | (653 | ) | — | ||||||||||||||
|
Net realized gains (losses) including OTTI |
(8 | ) | (13 | ) | (29 | ) | — | (50 | ) | |||||||||||
|
Losses and loss expenses |
— | 1,202 | 685 | — | 1,887 | |||||||||||||||
|
Policy benefits |
— | 46 | 47 | — | 93 | |||||||||||||||
|
Policy acquisition costs and administrative expenses |
16 | 586 | 448 | (10 | ) | 1,040 | ||||||||||||||
|
Interest expense |
(9 | ) | 63 | (5 | ) | 9 | 58 | |||||||||||||
|
Other (income) expense |
(40 | ) | 14 | 1 | — | (25 | ) | |||||||||||||
|
Income tax expense |
3 | 126 | 31 | — | 160 | |||||||||||||||
|
Net income |
$ | 675 | $ | 234 | $ | 418 | $ | (652 | ) | $ | 675 | |||||||||
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings, Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
Consolidating
Adjustments (2) |
ACE
Limited Consolidated |
||||||||||||||||
|
Net premiums written |
$ | — | $ | 1,669 | $ | 1,486 | $ | — | $ | 3,155 | ||||||||||
|
Net premiums earned |
— | 1,943 | 1,450 | — | 3,393 | |||||||||||||||
|
Net investment income |
1 | 262 | 248 | — | 511 | |||||||||||||||
|
Equity in earnings of subsidiaries |
500 | — | — | (500 | ) | — | ||||||||||||||
|
Net realized gains (losses) including OTTI |
(14 | ) | (34 | ) | (175 | ) | — | (223 | ) | |||||||||||
|
Losses and loss expenses |
— | 1,230 | 655 | — | 1,885 | |||||||||||||||
|
Policy benefits |
— | 19 | 60 | — | 79 | |||||||||||||||
|
Policy acquisition costs and administrative expenses |
4 | 574 | 446 | (6 | ) | 1,018 | ||||||||||||||
|
Interest expense |
(11 | ) | 70 | (8 | ) | 9 | 60 | |||||||||||||
|
Other (income) expense |
1 | 8 | 42 | — | 51 | |||||||||||||||
|
Income tax expense (benefit) |
(1 | ) | 49 | 46 | — | 94 | ||||||||||||||
|
Net income |
$ | 494 | $ | 221 | $ | 282 | $ | (503 | ) | $ | 494 | |||||||||
| (1) |
Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
| (2) |
Includes ACE Limited parent company eliminations. |
49
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2010
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings, Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
Consolidating
Adjustments (2) |
ACE
Limited Consolidated |
||||||||||||||||
|
Net premiums written |
$ | — | $ | 6,185 | $ | 4,101 | $ | — | $ | 10,286 | ||||||||||
|
Net premiums earned |
— | 5,881 | 4,051 | — | 9,932 | |||||||||||||||
|
Net investment income |
— | 760 | 778 | — | 1,538 | |||||||||||||||
|
Equity in earnings of subsidiaries |
2,036 | — | — | (2,036 | ) | — | ||||||||||||||
|
Net realized gains (losses) including OTTI |
3 | 60 | 64 | — | 127 | |||||||||||||||
|
Losses and loss expenses |
— | 3,665 | 1,943 | — | 5,608 | |||||||||||||||
|
Policy benefits |
— | 112 | 155 | — | 267 | |||||||||||||||
|
Policy acquisition costs and administrative expenses |
48 | 1,730 | 1,302 | (27 | ) | 3,053 | ||||||||||||||
|
Interest expense |
(28 | ) | 184 | (22 | ) | 28 | 162 | |||||||||||||
|
Other (income) expense |
(94 | ) | 52 | 16 | — | (26 | ) | |||||||||||||
|
Income tax expense |
6 | 329 | 91 | — | 426 | |||||||||||||||
|
Net income |
$ | 2,107 | $ | 629 | $ | 1,408 | $ | (2,037 | ) | $ | 2,107 | |||||||||
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings, Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
Consolidating
Adjustments (2) |
ACE
Limited Consolidated |
||||||||||||||||
|
Net premiums written |
$ | — | $ | 5,514 | $ | 4,480 | $ | — | $ | 9,994 | ||||||||||
|
Net premiums earned |
— | 5,533 | 4,320 | — | 9,853 | |||||||||||||||
|
Net investment income |
1 | 754 | 764 | — | 1,519 | |||||||||||||||
|
Equity in earnings of subsidiaries |
1,656 | — | — | (1,656 | ) | — | ||||||||||||||
|
Net realized gains (losses) including OTTI |
(67 | ) | (150 | ) | (352 | ) | — | (569 | ) | |||||||||||
|
Losses and loss expenses |
— | 3,471 | 2,051 | — | 5,522 | |||||||||||||||
|
Policy benefits |
— | 61 | 195 | — | 256 | |||||||||||||||
|
Policy acquisition costs and administrative expenses |
30 | 1,603 | 1,284 | (21 | ) | 2,896 | ||||||||||||||
|
Interest expense |
(32 | ) | 198 | (25 | ) | 28 | 169 | |||||||||||||
|
Other (income) expense |
1 | 13 | 30 | — | 44 | |||||||||||||||
|
Income tax expense (benefit) |
(5 | ) | 221 | 104 | — | 320 | ||||||||||||||
|
Net income |
$ | 1,596 | $ | 570 | $ | 1,093 | $ | (1,663 | ) | $ | 1,596 | |||||||||
| (1) |
Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
| (2) |
Includes ACE Limited parent company eliminations. |
50
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
ACE Limited
Consolidated |
|||||||||||||
|
Net cash flows from operating activities |
$ | 90 | $ | 1,432 | $ | 1,253 | $ | 2,775 | ||||||||
|
Cash flows from (used for) investing activities |
||||||||||||||||
|
Purchases of fixed maturities available for sale |
— | (10,785 | ) | (13,105 | ) | (23,890 | ) | |||||||||
|
Purchases of fixed maturities held to maturity |
— | (513 | ) | (1 | ) | (514 | ) | |||||||||
|
Purchases of equity securities |
— | (98 | ) | (238 | ) | (336 | ) | |||||||||
|
Sales of fixed maturities available for sale |
7 | 7,877 | 10,412 | 18,296 | ||||||||||||
|
Sales of equity securities |
— | 8 | 424 | 432 | ||||||||||||
|
Maturities and redemptions of fixed maturities available for sale |
— | 1,393 | 1,273 | 2,666 | ||||||||||||
|
Maturities and redemptions of fixed maturities held to maturity |
— | 781 | 150 | 931 | ||||||||||||
|
Net derivative instruments settlements |
(2 | ) | (18 | ) | 31 | 11 | ||||||||||
|
Advances (to) from affiliates |
162 | — | (162 | ) | — | |||||||||||
|
Other |
— | (198 | ) | (66 | ) | (264 | ) | |||||||||
|
Net cash flows from (used for) investing activities |
167 | (1,553 | ) | (1,282 | ) | (2,668 | ) | |||||||||
|
Cash flows from (used for) financing activities |
||||||||||||||||
|
Dividends paid on Common Shares |
(323 | ) | — | — | (323 | ) | ||||||||||
|
Proceeds from exercise of options for Common Shares |
31 | — | — | 31 | ||||||||||||
|
Proceeds from Common Shares issued under ESPP |
10 | — | — | 10 | ||||||||||||
|
Advances (to) from affiliates |
— | 4 | (4 | ) | — | |||||||||||
|
Net cash flows from (used for) financing activities |
(282 | ) | 4 | (4 | ) | (282 | ) | |||||||||
|
Effect of foreign currency rate changes on cash and cash equivalents |
— | 1 | (8 | ) | (7 | ) | ||||||||||
|
Net decrease in cash |
(25 | ) | (116 | ) | (41 | ) | (182 | ) | ||||||||
|
Cash – beginning of period |
(1 | ) | 400 | 270 | 669 | |||||||||||
|
Cash – end of period |
$ | (26 | ) | $ | 284 | $ | 229 | $ | 487 | |||||||
| (1) |
Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
51
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2009
(in millions of U.S. dollars)
|
ACE Limited
(Parent Guarantor) |
ACE INA
Holdings Inc. (Subsidiary Issuer) |
Other ACE
Limited Subsidiaries and Eliminations (1) |
ACE Limited
Consolidated |
|||||||||||||
|
Net cash flows from operating activities |
$ | 204 | $ | 1,385 | $ | 743 | $ | 2,332 | ||||||||
|
Cash flows from (used for) investing activities |
||||||||||||||||
|
Purchases of fixed maturities available for sale |
— | (14,312 | ) | (16,646 | ) | (30,958 | ) | |||||||||
|
Purchases of fixed maturities held to maturity |
— | (272 | ) | (1 | ) | (273 | ) | |||||||||
|
Purchases of equity securities |
— | (181 | ) | (133 | ) | (314 | ) | |||||||||
|
Sales of fixed maturities available for sale |
95 | 11,008 | 13,928 | 25,031 | ||||||||||||
|
Sales of fixed maturities held to maturity |
— | — | 1 | 1 | ||||||||||||
|
Sales of equity securities |
— | 520 | 582 | 1,102 | ||||||||||||
|
Maturities and redemptions of fixed maturities available for sale |
— | 1,416 | 1,279 | 2,695 | ||||||||||||
|
Maturities and redemptions of fixed maturities held to maturity |
— | 298 | 77 | 375 | ||||||||||||
|
Net derivative instruments settlements |
— | — | (23 | ) | (23 | ) | ||||||||||
|
Advances (to) from affiliates |
103 | — | (103 | ) | — | |||||||||||
|
Other |
1 | (123 | ) | 49 | (73 | ) | ||||||||||
|
Net cash flows from (used for) investing activities |
199 | (1,646 | ) | (990 | ) | (2,437 | ) | |||||||||
|
Cash flows from (used for) financing activities |
||||||||||||||||
|
Dividends paid on Common Shares |
(283 | ) | — | — | (283 | ) | ||||||||||
|
Proceeds from exercise of options for Common Shares |
9 | — | — | 9 | ||||||||||||
|
Proceeds from Common Shares issued under ESPP |
10 | — | — | 10 | ||||||||||||
|
Net repayment of short-term debt |
— | (266 | ) | — | (266 | ) | ||||||||||
|
Net proceeds from issuance of long-term debt |
— | 500 | — | 500 | ||||||||||||
|
Advances (to) from affiliates |
— | 1 | (1 | ) | — | |||||||||||
|
Net cash flows from (used for) financing activities |
(264 | ) | 235 | (1 | ) | (30 | ) | |||||||||
|
Effect of foreign currency rate changes on cash and cash equivalents |
— | 2 | 8 | 10 | ||||||||||||
|
Net increase (decrease) in cash |
139 | (24 | ) | (240 | ) | (125 | ) | |||||||||
|
Cash – beginning of period |
(52 | ) | 442 | 477 | 867 | |||||||||||
|
Cash – end of period |
$ | 87 | $ | 418 | $ | 237 | $ | 742 | ||||||||
| (1) |
Includes all other subsidiaries of ACE Limited and intercompany eliminations. |
52
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and nine months ended September 30, 2010. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009 (2009 Form 10-K).
Other Information
We routinely post important information for investors on our website (www.acelimited.com) under the Investor Relations section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Securities and Exchange Commission (SEC) Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Relations portion of our website, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties, and other factors that could, should potential events occur, cause actual results to differ materially from such statements. These risks, uncertainties, and other factors (which are described in more detail elsewhere herein and in other documents we file with the SEC) include but are not limited to:
| • |
developments in global financial markets, including changes in interest rates, stock markets, and other financial markets, increased government involvement or intervention in the financial services industry, the cost and availability of financing, and foreign currency exchange rate fluctuations (which we refer to in this report as foreign exchange and foreign currency exchange), which could affect our statement of operations, investment portfolio, financial position, and financing plans; |
| • |
general economic and business conditions resulting from volatility in the stock and credit markets and the depth and duration of recession; |
| • |
losses arising out of natural or man-made catastrophes such as hurricanes, typhoons, earthquakes, floods, climate change (including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow), or terrorism which could be affected by: |
| • |
the number of insureds and ceding companies affected; |
| • |
the amount and timing of losses actually incurred and reported by insureds; |
| • |
the impact of these losses on our reinsurers and the amount and timing of reinsurance recoverable actually received; |
| • |
the cost of building materials and labor to reconstruct properties following a catastrophic event; and |
| • |
complex coverage and regulatory issues such as whether losses occurred from storm surge or flooding and related lawsuits; |
| • |
infection rates and severity of pandemics and their effects on our business operations and claims activity; |
53
| • |
actions that rating agencies may take from time to time, such as financial strength or credit ratings downgrades or placing these ratings on credit watch negative or the equivalent; |
| • |
global political conditions, the occurrence of any terrorist attacks, including any nuclear, radiological, biological, or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events; |
| • |
the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto and changes in the cost, quality, or availability of reinsurance; |
| • |
actual loss experience from insured or reinsured events and the timing of claim payments; |
| • |
the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses and the timing of loss payments; |
| • |
judicial decisions and rulings, new theories of liability, legal tactics, and settlement terms; |
| • |
the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on: |
| • |
the capital markets; |
| • |
the markets for directors and officers and errors and omissions (E&O) insurance; and |
| • |
claims and litigation arising out of such disclosures or practices by other companies; |
| • |
uncertainties relating to governmental, legislative and regulatory policies, developments, actions, investigations and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations; |
| • |
the actual amount of new and renewal business, market acceptance of our products, and risks associated with the introduction of new products and services and entering new markets, including regulatory constraints on exit strategies; |
| • |
the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections and changes in market conditions that could render our business strategies ineffective or obsolete; |
| • |
acquisitions made by us performing differently than expected, our failure to realize anticipated expense-related efficiencies or growth from acquisitions, the impact of acquisitions on our pre-existing organization or announced acquisitions not closing; |
| • |
risks associated with our re-domestication to Switzerland, including reduced flexibility with respect to certain aspects of capital management and the potential for additional regulatory burdens; |
| • |
the potential impact from government-mandated insurance coverage for acts of terrorism; |
| • |
the availability of borrowings and letters of credit under our credit facilities; |
| • |
the adequacy of collateral supporting funded high deductible programs; |
| • |
changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; |
| • |
material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; |
| • |
the effects of investigations into market practices in the property and casualty (P&C) industry; |
| • |
changing rates of inflation and other economic conditions, for example, recession; |
54
| • |
the amount of dividends received from subsidiaries; |
| • |
loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame; |
| • |
the ability of our technology resources to perform as anticipated; and |
| • |
management’s response to these factors and actual events (including, but not limited to, those described above). |
The words “believe,” “anticipate,” “estimate,” “project,” “should,” “plan,” “expect,” “intend,” “hope,”, “feel”, “will likely result,” or “will continue,” and variations thereof and similar expressions, identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
ACE Limited is the holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain operations in Bermuda. ACE Limited, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, the Company, we, us, or our) are a global insurance and reinsurance organization, with operating subsidiaries in more than 50 countries serving the needs of commercial and individual customers globally. We serve the P&C insurance needs of businesses of all sizes in a broad range of industries. We also provide specialized insurance products such as personal accident, supplemental health and life insurance to individuals in select countries. At September 30, 2010, ACE had total assets of $82.4 billion and shareholders’ equity of $22.8 billion.
Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. The Insurance – North American segment includes our wholesale divisions ACE Westchester and ACE Bermuda; and our retail divisions ACE USA (including ACE Canada), ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine). The Insurance – Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international accident & health (A&H) and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets. The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, ACE Tempest Re Canada, and the reinsurance operation of ACE Global Markets. The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. For more information on each of our segments refer to “Segment Information” in our 2009 Form 10-K.
Transactions
On September 14, 2010, we announced that we had signed a definitive agreement to acquire all of the outstanding common stock of Rain and Hail Insurance Service, Inc. (Rain and Hail) not currently owned by us for approximately $1.1 billion, based upon current estimates of Rain and Hail’s December 31, 2010 adjusted book value. ACE currently owns approximately 20 percent of the outstanding common stock of Rain and Hail. Headquartered in Johnston, Iowa, Rain and Hail has served America’s farmers since 1919, providing comprehensive multiple peril crop and crop/hail insurance protection to customers in the U.S. and Canada. We
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intend to operate Rain and Hail as a unit of our ACE Westchester division in the Insurance-North American segment. The transaction is anticipated to be completed in the fourth quarter of 2010, subject to the satisfaction of customary conditions, including the termination of the Hart-Scott-Rodino Antitrust Improvements Act waiting period (which has already occurred) and the approvals of certain regulatory authorities.
On October 7, 2010, we signed a definitive agreement to acquire 100 percent of Jerneh Insurance Berhad, a general insurance company in Malaysia that is majority owned by Jerneh Asia Berhad, an investment holding company listed on Bursa Malaysia Securities Berhad. The proposed acquisition price is approximately $200 million, subject to adjustment to reflect the book value of Jerneh Insurance Berhad at the transaction’s closing. This transaction is expected to close during the fourth quarter of 2010, subject to seller shareholder approvals and other closing conditions.
In addition, on October 27, 2010, we announced that we had signed a definitive agreement to acquire New York Life’s Hong Kong and Korea life insurance operations for approximately $425 million. The final purchase price will be based on the adjusted book value of the life companies at the time of closing. This transaction, which is subject to regulatory approvals and other customary conditions, is expected to close during the first quarter of 2011.
Market Conditions
We believe our industry is continuing to experience typical soft market behavior, with prices continuing to soften around the world, with increased competition around terms and conditions.
Continuing with the trend of recent quarters, primary commercial P&C increased modestly in the quarter ended September 30, 2010, driven by retail P&C lines and offset by wholesale P&C lines. Our Global Reinsurance segment reported a significant increase in net premiums written in the quarter ended September 30, 2010, predominately due to a large casualty-related structured transaction in the U.S. Excluding this large transaction, reinsurance premiums decreased due to competitive conditions and our continued underwriting discipline. New business within our U.S. retail P&C operations decreased substantially in the quarter ended September 30, 2010, while our renewal retention rates were stable, compared to the prior year quarter. New business in our international retail P&C operations increased, driven by new multinational business opportunities. International retail P&C renewal retention rates increased slightly with the exception of Continental Europe, where inadequate casualty rates led to lower production. Rates overall declined modestly in both U.S. and International retail P&C lines. Recession-related reductions in exposure had a modest impact on revenue for the quarter ended September 30, 2010, continuing an improving trend of recent quarters.
A&H growth was stable globally on a reported and constant dollar basis. Our International A&H business has improved in the second half of 2010, driven by growth in Latin America and Asia, and Europe. Combined Insurance’s net premiums written decreased in the quarter ended September 30, 2010, compared with the prior year quarter. While customer retention ratios are steadily improving, new business sales continue to be impacted by recession.
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Consolidated Operating Results – Three and Nine Months Ended September 30, 2010 and 2009
|
Three Months Ended
September 30 |
% change |
Nine Months Ended
September 30 |
% change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Net premiums written |
$ | 3,295 | $ | 3,155 | 4 | % | $ | 10,286 | $ | 9,994 | 3 | % | ||||||||||||
|
Net premiums earned |
3,422 | 3,393 | 1 | % | 9,932 | 9,853 | 1 | % | ||||||||||||||||
|
Net investment income |
516 | 511 | 1 | % | 1,538 | 1,519 | 1 | % | ||||||||||||||||
|
Net realized gains (losses) |
(50 | ) | (223 | ) | 78 | % | 127 | (569 | ) | NM | ||||||||||||||
|
Total revenues |
3,888 | 3,681 | 6 | % | 11,597 | 10,803 | 7 | % | ||||||||||||||||
|
Losses and loss expenses |
1,887 | 1,885 | 0 | % | 5,608 | 5,522 | 2 | % | ||||||||||||||||
|
Policy benefits |
93 | 79 | 18 | % | 267 | 256 | 4 | % | ||||||||||||||||
|
Policy acquisition costs |
607 | 567 | 7 | % | 1,697 | 1,571 | 8 | % | ||||||||||||||||
|
Administrative expenses |
433 | 451 | (4 | )% | 1,356 | 1,325 | 2 | % | ||||||||||||||||
|
Interest expense |
58 | 60 | (3 | )% | 162 | 169 | (4 | )% | ||||||||||||||||
|
Other (income) expense |
(25 | ) | 51 | NM | (26 | ) | 44 | NM | ||||||||||||||||
|
Total expenses |
3,053 | 3,093 | (1 | )% | 9,064 | 8,887 | 2 | % | ||||||||||||||||
|
Income before income tax |
835 | 588 | 42 | % | 2,533 | 1,916 | 32 | % | ||||||||||||||||
|
Income tax expense |
160 | 94 | 70 | % | 426 | 320 | 33 | % | ||||||||||||||||
|
Net income |
$ | 675 | $ | 494 | 37 | % | $ | 2,107 | $ | 1,596 | 32 | % | ||||||||||||
NM – not meaningful
The following table summarizes by major product line the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the period indicated.
|
Three Months Ended
September 30, 2010 |
||||||||||||
| P&C | A&H | Total | ||||||||||
|
Net premiums written: |
||||||||||||
|
Growth in original currency |
5.9 | % | 0.6 | % | 4.5 | % | ||||||
|
Foreign exchange effect |
(0.2 | )% | (0.1 | )% | (0.1 | )% | ||||||
|
Growth as reported in U.S. dollars |
5.7 | % | 0.5 | % | 4.4 | % | ||||||
|
Net premiums earned: |
||||||||||||
|
Growth in original currency |
1.0 | % | 2.0 | % | 1.2 | % | ||||||
|
Foreign exchange effect |
(0.5 | )% | (0.2 | )% | (0.4 | )% | ||||||
|
Growth as reported in U.S. dollars |
0.5 | % | 1.8 | % | 0.8 | % | ||||||
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased in the three and nine months ended September 30, 2010, compared with the prior year periods. We reported growth in our Global Reinsurance segment, and international retail P&C business, as well as personal lines, international life, and financial solutions business. Growth in the quarter ended September 30, 2010, was partially offset by the effect of continued competitive conditions in our London wholesale unit. The nine month period was adversely impacted by reduced crop business which generated a lower adjustment to net premiums written and earned in connection with the annual first quarter crop settlement (refer to Insurance – North American). In addition, net premiums written and earned were reduced by $36 million in the nine months ended September 30, 2010, due to reinstatement premiums expensed primarily in connection with the first quarter 2010 catastrophe activity.
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Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure periods expire. Net premiums earned were stable in the three and nine months ended September 30, 2010, compared with the prior year periods. The increases in net premiums earned in our Global Reinsurance segment, international retail P&C operations, personal lines, international life, and financial solutions were offset by lower crop and London wholesale production.
The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated.
|
Three Months Ended
September 30 |
% change |
Nine Months Ended
September 30 |
% change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Property and all other |
$ | 1,056 | $ | 1,081 | (2 | )% | $ | 2,871 | $ | 3,062 | (6 | )% | ||||||||||||
|
Casualty |
1,399 | 1,383 | 1 | % | 4,206 | 4,122 | 2 | % | ||||||||||||||||
|
Subtotal |
2,455 | 2,464 | (0 | )% | 7,077 | 7,184 | (1 | )% | ||||||||||||||||
|
Personal accident (A&H) |
833 | 818 | 2 | % | 2,470 | 2,348 | 5 | % | ||||||||||||||||
|
Life |
134 | 111 | 21 | % | 385 | 321 | 20 | % | ||||||||||||||||
|
Net premiums earned |
$ | 3,422 | $ | 3,393 | 1 | % | $ | 9,932 | $ | 9,853 | 1 | % | ||||||||||||
|
2010
% of total |
2009
% of total |
2010
% of total |
2009
% of total |
|||||||||||||||||||||
|
Property and all other |
31 | % | 32 | % | 29 | % | 31 | % | ||||||||||||||||
|
Casualty |
41 | % | 41 | % | 42 | % | 42 | % | ||||||||||||||||
|
Subtotal |
72 | % | 73 | % | 71 | % | 73 | % | ||||||||||||||||
|
Personal accident (A&H) |
24 | % | 24 | % | 25 | % | 24 | % | ||||||||||||||||
|
Life |
4 | % | 3 | % | 4 | % | 3 | % | ||||||||||||||||
|
Net premiums earned |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
Net investment income was stable in the three and nine months ended September 30, 2010, compared with the prior year periods. Positive operating cash flows which have resulted in a higher overall average invested asset base, were partially offset by lower yields on new investments and short-term securities. Refer to “Net Investment Income” and “Investments”.
In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting loss.
The following table shows our consolidated loss and loss expense ratio, policy acquisition cost ratio, administrative expense ratio, and combined ratio for the periods indicated.
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Loss and loss expense ratio |
58.2 | % | 58.2 | % | 59.6 | % | 58.7 | % | ||||||||
|
Policy acquisition cost ratio |
17.9 | % | 16.7 | % | 17.1 | % | 16.0 | % | ||||||||
|
Administrative expense ratio |
12.3 | % | 13.2 | % | 13.5 | % | 13.1 | % | ||||||||
|
Combined ratio |
88.4 | % | 88.1 | % | 90.2 | % | 87.8 | % | ||||||||
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The following table shows the impact of catastrophe losses and related reinstatement premiums and the impact of prior period development on our consolidated loss and loss expense ratio for the periods indicated. For the quarter ended September 30, 2010, the decline in our adjusted loss and loss expense ratio was primarily due to favorable changes in mix of business and improved current accident year experience. The nine months ended September 30, 2010, also benefited from the annual first quarter crop settlement which had a favorable impact on the loss ratio, compared with the prior year period.
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Loss and loss expense ratio, as reported |
58.2 | % | 58.2 | % | 59.6 | % | 58.7 | % | ||||||||
|
Catastrophe losses and related reinstatement premiums |
(3.1 | )% | (1.5 | )% | (3.8 | )% | (1.3 | )% | ||||||||
|
Prior period development |
6.6 | % | 6.7 | % | 5.6 | % | 4.9 | % | ||||||||
|
Loss and loss expense ratio, adjusted |
61.7 | % | 63.4 | % | 61.4 | % | 62.3 | % | ||||||||
We recorded net pre-tax catastrophe losses of $91 million and $315 million in the three and nine months ended September 30, 2010, compared with net pre-tax catastrophe losses of $45 million and $114 million in the prior year periods. The catastrophe losses for the quarter ended September 30, 2010, were primarily related to an earthquake in New Zealand. For the nine months ended September 30, 2010, catastrophe losses also included severe weather-related events in the U.S., earthquakes in Chile and Mexico, and storms in Australia.
Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premium from previous accident years. We experienced $201 million and $446 million of net favorable prior period development in our P&C segments in the three and nine months ended September 30, 2010, respectively. This compares with net favorable prior period development in our P&C segments of $203 million and $429 million in the three and nine months ended September 30, 2009, respectively. Refer to “Prior Period Development” for more information.
Our policy acquisition costs include commissions, premium taxes, underwriting, and other costs that vary with, and are primarily related to, the production of premium. Administrative expenses include all other operating costs. Our policy acquisition cost ratio increased in the three and nine months ended September 30, 2010, compared with prior year periods. The increase in the quarter ended September 30, 2010, was primarily related to premium tax benefits recorded in the prior year quarter in the Insurance – North American segment. For the nine months ended September 30, 2010, the increase in policy acquisition cost ratio was primarily due to the impact of the annual crop settlement, which generated higher profit-share commissions and a lower adjustment to net premiums earned, as well as the impact of reinstatement premiums expensed in connection with catastrophe activity. Our administrative expense ratio decreased in the quarter ended September 30, 2010, primarily due to higher net results generated by our third party claims administration business, ESIS, the results of which are included within our administrative expenses. ESIS generated $52 million in net results in the quarter ended September 30, 2010, primarily from non-recurring sources. Administrative expenses in the prior year quarter included $7 million in net results from ESIS. For the nine month period, our administrative expense ratio increased due to the impact of the first quarter crop settlement, reinstatement premiums expensed, and increased costs in our international operations. Although the annual crop settlement generates minimal administrative expenses, it resulted in lower adjustment to net premiums earned in 2010, compared with 2009.
Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective tax rate on net income before tax was 19 percent and 17 percent in the three and nine months ended September 30, 2010, respectively, compared with 16 percent and 17 percent in the prior year periods, respectively. The increase in our effective tax rate in the quarter ended September 30, 2010, was primarily due to a reduction in pre-tax investment losses in the third quarter of 2010, and a change in geographic mix of earnings. In addition, the prior year quarter included a
59
reduction of a deferred tax valuation allowance related to investments, which reduced the effective tax rate for the quarter ended September 30, 2009.
Prior Period Development
The favorable prior period development, inclusive of the Life segment, of $205 million and $203 million during the quarters ended September 30, 2010 and 2009, respectively, was the net result of several underlying favorable and adverse movements. With respect to ACE’s crop business, ACE regularly receives reports from its managing general agent (MGA) relating to the previous crop year(s) in subsequent calendar quarters and this typically results in adjustments to the previously reported premiums, losses and loss expenses, and profit share commission. Commencing in the third quarter of 2009, prior period development for ACE’s crop business includes adjustments to both crop losses and loss expenses and the related crop profit share commission. In the sections following the table below, significant prior period movements within each reporting segment are discussed in more detail. Long-tail lines include lines such as workers’ compensation, general liability, and professional liability while short-tail lines include lines such as most property lines, energy, personal accident, aviation, and marine.
The following table summarizes (favorable) and adverse prior period development by segment for the periods indicated.
| Three Months Ended September 30 | Long-tail | Short-tail | Total |
% of net
unpaid reserves* |
||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||
|
2010 |
||||||||||||||||
|
Insurance – North American |
$ | (19 | ) | $ | (16 | ) | $ | (35 | ) | 0.2 | % | |||||
|
Insurance – Overseas General |
(132 | ) | 15 | (117 | ) | 1.8 | % | |||||||||
|
Global Reinsurance |
(47 | ) | (2 | ) | (49 | ) | 2.2 | % | ||||||||
|
Life |
— | (4 | ) | (4 | ) | 1.6 | % | |||||||||
|
Total |
$ | (198 | ) | $ | (7 | ) | $ | (205 | ) | 0.8 | % | |||||
|
2009 |
||||||||||||||||
|
Insurance – North American |
$ | (51 | ) | $ | 6 | $ | (45 | ) | 0.3 | % | ||||||
|
Insurance – Overseas General |
(107 | ) | (12 | ) | (119 | ) | 1.8 | % | ||||||||
|
Global Reinsurance |
(39 | ) | — | (39 | ) | 1.6 | % | |||||||||
|
Total |
$ | (197 | ) | $ | (6 | ) | $ | (203 | ) | 0.8 | % | |||||
| * | Calculated based on the segment beginning of period net unpaid loss and loss expenses reserves (except for Total, which is based on consolidated beginning of period net unpaid loss and loss expense reserves). |
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| Nine Months Ended September 30 | Long-tail | Short-tail | Total |
% of net
unpaid reserves* |
||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||
|
2010 |
||||||||||||||||
|
Insurance – North American |
$ | (65 | ) | $ | (88 | ) | $ | (153 | ) | 1.0 | % | |||||
|
Insurance – Overseas General |
(129 | ) | (70 | ) | (199 | ) | 2.9 | % | ||||||||
|
Global Reinsurance |
(71 | ) | (23 | ) | (94 | ) | 4.2 | % | ||||||||
|
Life |
— | (7 | ) | (7 | ) | 3.2 | % | |||||||||
|
Total |
$ | (265 | ) | $ | (188 | ) | $ | (453 | ) | 1.8 | % | |||||
|
2009 |
||||||||||||||||
|
Insurance – North American |
$ | (88 | ) | $ | (41 | ) | $ | (129 | ) | 0.8 | % | |||||
|
Insurance – Overseas General |
(110 | ) | (59 | ) | (169 | ) | 2.8 | % | ||||||||
|
Global Reinsurance |
(92 | ) | (39 | ) | (131 | ) | 5.2 | % | ||||||||
|
Life |
— | 1 | 1 | 0.3 | % | |||||||||||
|
Total |
$ | (290 | ) | $ | (138 | ) | $ | (428 | ) | 1.8 | % | |||||
| * | Calculated based on the segment beginning of period net unpaid loss and loss expenses reserves (except for Total, which is based on consolidated beginning of period net unpaid loss and loss expense reserves). |
Insurance – North American
Insurance – North American experienced net favorable prior period development of $35 million in the quarter ended September 30, 2010, compared with net favorable prior period development of $45 million in the prior year quarter. The net prior period development for the quarter ended September 30, 2010, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
| • |
Net favorable development of $19 million on long-tail business, including: |
| • |
Favorable development of $15 million in our medical professional liability portfolios. This favorable development is concentrated in the 2005 and prior report years in our hospital professional liability excess business and mainly in the 2007 report year for a group of portfolios of primary medical professional business including physicians. These portfolios provide coverage on a claims made basis. The favorable development was a function of low levels of case incurred loss activity for these coverage periods since our last review, leading to lower indications of ultimate losses versus the prior valuation. |
| • |
Favorable development of $8 million in our financial solutions business unit, impacting the 2007 and prior accident years. Reported and paid loss activity for this product line continues to be lower than what was expected when the contracts were originally bound, resulting in a reduction in our estimate of ultimate losses. |
| • |
Favorable development of $7 million in the long-tail components of our programs division primarily affecting the 2007 and prior accident years. Development in the auto liability and general liability product lines for these accident years was lower than expected. As a result, we gave more weight to experience-based methods for these accident years. |
| • |
Net favorable development of $16 million on short-tail business, including: |
| • |
Favorable development of $6 million in global property product lines. This is the net effect of a small adverse movement on the 2009 accident year, offset by favorable development on the 2008 and prior accident years, largely due to savings on settlements of a small amount of large claims. |
| • |
Favorable development of $8 million in our retail inland marine portfolio concentrated in the 2008 and 2009 accident years where newly reported losses and development on known losses for these years was lower than what was expected in our prior evaluation. |
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The net prior period development for the quarter ended September 30, 2009, was the net result of several underlying adverse and favorable movements, driven by the following principal changes:
| • |
Net favorable development of $51 million on long-tail business including: |
| • |
Favorable development of $16 million in our foreign casualty product line primarily impacting the 2006 accident year. Reported incurred loss activity was favorable relative to the expected activity implied in our prior review, particularly for workers’ compensation and general liability. This coverage typically includes high volume, low average premium business covering overseas exposures with shorter development patterns than typically found for larger commercial risks. |
| • |
Favorable development of $15 million in our medical risk business unit, with the favorable activity concentrated in the 2004 and 2005 report years for hospital professional liability business. Our portfolio includes both primary and excess facilities business written primarily on a claims-made basis. Loss activity for this business was lower than expected. In addition, all open claims for the 2005 and prior report years were reviewed in the quarter ended September 30, 2009, and updated using the available information. This review led to a revision in our estimate of ultimate losses for the portfolio. |
| • |
Favorable development of $33 million in our financial solutions business unit concentrated in policies issued in the 2004-2006 years. This favorable development was a function of a continuation of lower than expected loss development, first observed in 2008, on a small number of large risks with predominantly workers’ compensation exposure. |
| • |
Favorable development of $10 million for workers’ compensation captive business primarily for the 1999 and prior accident years. This correction resulted from a reserve reconciliation completed in the quarter ended September 30, 2009. |
| • |
Adverse development of $19 million on participations in run-off assumed reinsurance pools impacting accident years prior to 1999. An audit found that assumed losses payable had not been registered and this caused an understatement of the required reserves for this portfolio. |
| • |
Adverse development of $8 million on run-off environmental losses for accident years prior to 1999 in the Brandywine business unit due to a single large claim where a court decision required the return of a contribution previously received from a third party. |
| • |
Net adverse development of $6 million on short-tail business including: |
| • |
Adverse development of $27 million in our energy and global property business lines primarily affecting the 2008 accident year. Higher than expected loss activity on a few large complex claims led to the increase in our estimate of ultimate losses in the quarter ended September 30, 2009. |
| • |
Adverse development of $10 million in our commercial marine lines affecting the 2008 accident year. A claims review of 2008 hurricane losses performed in the quarter ended September 30, 2009, led to increases in loss estimates for several claims. |
| • |
Adverse development of $6 million in our farm line primarily associated with the 2008 accident year. Paid and reported loss activity for this product line was higher than anticipated. |
| • |
Favorable development of $17 million in our Canadian accident and health business affecting the 2008 and prior accident years. This resulted from a reconciliation of statutory and GAAP ledger balances completed in the quarter ended September 30, 2009. |
| • |
Favorable development of $13 million in our inland marine product line primarily associated with the 2008 accident year. Paid and reported loss activity for this product line was lower than anticipated. |
| • |
Favorable development of $7 million in our crop/hail business relating to the recording in the quarter ended September 30, 2009, of the bordereau for the 2008 crop year. |
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Insurance – Overseas General
Insurance – Overseas General experienced net favorable prior period development of $117 million in the quarter ended September 30, 2010, compared with net favorable prior period development of $119 million in the prior year quarter. The net prior period development for the quarter ended September 30, 2010, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
| • |
Net favorable development of $132 million on long-tail business including: |
| • |
Favorable development of $239 million in casualty (primary and excess) and financial lines for accident years 2006 and prior. The changes were mainly in accident years 2004-2006. The findings of the detailed actuarial reviews completed in the quarter ended September 30, 2010, recognized the impact of favorable loss emergence and the increased weight given to experience-based methods on maturing accident years. |
| • |
Adverse development of $67 million in the financial lines book for accident years 2007-2009, across multiple geographies. A claims review completed in the quarter ended September 30, 2010 of the exposure to financial fraud and subprime claims concluded with increases to case estimates of $57 million following specific developments on notified claims. The remaining development arose from case strengthening on several large claims of $27 million and favorable development in attritional losses on the 2007 and 2008 accident years. |
| • |
Adverse development of $40 million in the casualty lines for accident years 2007-2009, driven by adverse frequency and severity trends within European countries ($24 million increase) and specific case development across the primary and excess books ($12 million increase). |
| • |
Net adverse development of $15 million on short-tail business including: |
| • |
Adverse development of $10 million in the political risk line. This change is based on a claims department review in the quarter ended September 30, 2010, of a number of notices and outstanding claims. The claims were predominantly in the 2008 and 2009 accident years. |
| • |
Adverse development of $3 million in the aviation line. This line was impacted by adverse claim development within the airline hull book, predominantly in the 2009 accident year. |
The net prior period development for the quarter ended September 30, 2009, was the net result of several underlying adverse and favorable movements, driven by the following principal changes.
| • |
Net favorable development of $107 million on long-tail business including: |
| • |
Favorable development of $190 million on the 2005 and prior accident years in casualty (primary and excess) and financial lines. The detailed reviews completed in the quarter ended September 30, 2009, noted improvements in the experience relative to the expectations of prior detailed analyses, including case-specific savings on several significant 2001-2003 bankers’ professional indemnity claims. Due to the greater level of maturity of these years, increasing weight was given to the emerged loss experience. |
| • |
Adverse development of $60 million relating to the 2008 accident year for financial lines in connection with exposure to financial frauds. This amount was based on a claims review in the quarter ended September 30, 2009, of notifications and potential exposure. During this review, we obtained assessments from external legal counsel of the governing law on each potential claim and assessed all other claimant information, to arrive at the provision for each case. |
| • |
Adverse development of $10 million for subprime claims in the 2008 accident year for financial lines. This increase reflects an updated claims review in the quarter ended September 30, 2009, of all notified claims. |
| • |
Adverse development of $10 million driven predominantly by a court ruling in a major Continental European country on “quality of life” damages that was expected to increase casualty claim severities. The increases were focused in the 2006-2008 accident years. |
63
| • |
Net favorable development of $12 million on short-tail business including: |
| • |
Favorable development of $13 million on aviation. In combination with the detailed review in the quarter on all of aviation, case-specific reductions on products liability claims, primarily in the 2005 and prior accident years, led to a $19 million release, while adverse airline liability experience on the 2006-2008 accident years led to a $6 million strengthening. |
| • |
Favorable development of $5 million on A&H lines. A review of development patterns conducted in the quarter ended September 30, 2009, coupled with the recent favorable loss activity led to reserve releases for the 2006 and 2007 accident years. |
| • |
Favorable development of $3 million on political risk. For the 2006 and prior accident years, there was favorable development of $11 million in connection with a potential settlement on South American exposure. On the other hand, there was adverse movement of $8 million on the 2007 and 2008 accident years in connection with a number of reported structured trade credit claims in excess of expectations, along with the review of all other activity. |
| • |
Adverse development of $6 million on property and energy lines in the 2007 and 2008 accident years. A review of the activity in the quarter ended September 30, 2009, and applicable reinsurance recoverables led to a strengthening of reserves related to these years. |
Global Reinsurance
Global Reinsurance experienced net favorable prior period development of $49 million in the quarter ended September 30, 2010, compared with net favorable prior period development of $39 million in the prior year quarter. The net prior period development for the quarter ended September 30, 2010, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
| • |
Net favorable development of $47 million on long-tail business including: |
| • |
Favorable development of $27 million in the medical malpractice lines of business principally in treaty years 2002-2006, favorable development of $15 million in the professional liability/D&O line of business primarily in treaty years 2003-2007, and favorable development of $5 million in the workers’ compensation line of business primarily in treaty years 2004-2005. These developments were the result of reserve studies on these lines of business completed during the quarter ended September 30, 2010, which revealed that experience has been relatively favorable compared with assumptions. |
| • |
Net favorable development of $2 million on short-tail business based on reserve studies completed during the quarter ended September 30, 2010, none of which were significant. |
The net prior period development for the quarter ended September 30, 2009, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
| • |
Net favorable development of $39 million on long-tail business including: |
| • |
Favorable development of $24 million in the medical malpractice lines of business principally in treaty years 2004-2006 and favorable development of $15 million in the professional liability/D&O line of business primarily in treaty years 2004-2006. These developments were the result of reserve studies on these lines of business completed during the quarter ended September 30, 2009, which revealed that experience has been relatively favorable compared with assumptions. |
Life
Life experienced net favorable prior period development of $4 million in the quarter ended September 30, 2010, compared with no net prior period development in the quarter ended September 30, 2009. The net prior period development for the quarter ended September 30, 2010, was the net result of several underlying favorable and adverse movements in the A&H line primarily in accident year 2009.
64
Segment Operating Results – Three and Nine Months Ended September 30, 2010 and 2009
The discussions that follow include tables that show our segment operating results for the three and nine months ended September 30, 2010 and 2009.
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. For more information on each of our segments refer to “Segment Information” in our 2009 Form 10-K.
Insurance – North American
The Insurance – North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes our wholesale divisions ACE Westchester and ACE Bermuda and our retail divisions ACE USA (including ACE Canada), ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine).
|
Three Months Ended
September 30 |
% Change |
Nine Months Ended
September 30 |
% Change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Net premiums written |
$ | 1,445 | $ | 1,374 | 5 | % | $ | 4,278 | $ | 4,220 | 1 | % | ||||||||||||
|
Net premiums earned |
1,444 | 1,467 | (2 | )% | 4,140 | 4,319 | (4 | )% | ||||||||||||||||
|
Losses and loss expenses |
1,026 | 1,053 | (3 | )% | 2,888 | 3,054 | (5 | )% | ||||||||||||||||
|
Policy acquisition costs |
165 | 142 | 16 | % | 447 | 394 | 13 | % | ||||||||||||||||
|
Administrative expenses |
112 | 146 | (23 | )% | 407 | 433 | (6 | )% | ||||||||||||||||
|
Underwriting income |
141 | 126 | 12 | % | 398 | 438 | (9 | )% | ||||||||||||||||
|
Net investment income |
287 | 278 | 3 | % | 852 | 816 | 4 | % | ||||||||||||||||
|
Net realized gains (losses) |
(2 | ) | (25 | ) | 92 | % | 163 | (242 | ) | NM | ||||||||||||||
|
Interest expense |
6 | — | NM | 6 | — | NM | ||||||||||||||||||
|
Other (income) expense |
(20 | ) | 4 | NM | (21 | ) | 9 | NM | ||||||||||||||||
|
Income tax expense |
108 | 47 | 130 | % | 322 | 219 | 47 | % | ||||||||||||||||
|
Net income |
$ | 332 | $ | 328 | 1 | % | $ | 1,106 | $ | 784 | 41 | % | ||||||||||||
|
Loss and loss expense ratio |
71.0 | % | 71.7 | % | 69.8 | % | 70.7 | % | ||||||||||||||||
|
Policy acquisition cost ratio |
11.4 | % | 9.7 | % | 10.8 | % | 9.1 | % | ||||||||||||||||
|
Administrative expense ratio |
7.8 | % | 9.9 | % | 9.8 | % | 10.0 | % | ||||||||||||||||
|
Combined ratio |
90.2 | % | 91.3 | % | 90.4 | % | 89.8 | % | ||||||||||||||||
Insurance – North American reported an increase in net premiums written for the three and nine months ended September 30, 2010, primarily due to growth in our high net worth personal lines and for the third quarter of 2010, also due to a large transaction within our financial solutions unit. Our personal lines business continued to build on the momentum of the first half of 2010, reporting growth in homeowners and auto insurance, as well as specialty offerings. Net premiums written for the quarter ended September 30, 2010, were reduced by approximately $24 million in connection with the commutation of an assumed loss portfolio compared with nil impact in the prior year quarter. The nine months ended September 30, 2010 and 2009, included net premiums written of approximately $73 million and $126 million, respectively, related to assumed loss portfolio business. For the three and nine months ended September 30, 2010, this segment’s retail division reported less new business and renewed policies across several lines of business, reflecting a decline in value of exposures, competitive market conditions, and our adherence to underwriting discipline. These factors were especially evident in our national accounts, as well as property lines of business. The retail division reported growth in A&H and medical as well as increased production retention in professional risk lines and favorable foreign exchange impact on Canadian business. Construction and workers’ compensation lines in our retail division
65
increased in the nine month period. Net premiums written in our wholesale operation were stable in the quarter ended September 30, 2010, compared to the prior year quarter, as declines in crop business, due to lower commodity prices, were offset by new commercial risk business. For the nine months ended September 30, 2010, wholesale net premiums written declined compared with the prior year period, primarily due to the impact of the annual first quarter crop settlement and lower commodity pricing, partially offset by growth in commercial risk, property, and professional lines. During the first quarter of each calendar year, we receive the results from the previous crop year which typically require us to make adjustments to previously estimated premiums, losses and loss expenses, and profit share commission. The annual first quarter crop settlement increased net premiums written by approximately $60 million in the nine months ended September 30, 2010, compared with approximately $150 million in the prior year period.
The following two tables provide a line of business breakdown of Insurance – North American’s net premiums earned for the periods indicated.
|
Three Months Ended
September 30 |
% Change |
Nine Months Ended
September 30 |
% Change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Property and all other |
$ | 466 | $ | 496 | (6 | )% | $ | 1,179 | $ | 1,361 | (13 | )% | ||||||||||||
|
Casualty |
903 | 904 | (0 | )% | 2,742 | 2,766 | (1 | )% | ||||||||||||||||
|
Personal accident (A&H) |
75 | 67 | 12 | % | 219 | 192 | 14 | % | ||||||||||||||||
|
Net premiums earned |
$ | 1,444 | $ | 1,467 | (2 | )% | $ | 4,140 | $ | 4,319 | (4 | )% | ||||||||||||
|
2010 % of
Total |
2009 % of
Total |
2010 % of
Total |
2009 % of
Total |
|||||||||||||||||||||
|
Property and all other |
32 | % | 34 | % | 29 | % | 32 | % | ||||||||||||||||
|
Casualty |
63 | % | 62 | % | 66 | % | 64 | % | ||||||||||||||||
|
Personal accident (A&H) |
5 | % | 4 | % | 5 | % | 4 | % | ||||||||||||||||
|
Net premiums earned |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
Insurance – North American reported a decline in net premiums earned in the three and nine months ended September 30, 2010, compared with the prior year periods, primarily due to the impact of the decline in crop and risk management business, lower wholesale professional and casualty business, and decreases in retail property. These decreases were partially offset by increases in workers’ compensation, professional risk, A&H, and personal lines, as well as favorable foreign exchange impact.
The following table shows the impact of catastrophe losses and related reinstatement premiums, and prior period development on our loss and loss expense ratio for the periods indicated.
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Loss and loss expense ratio, as reported |
71.0 | % | 71.7 | % | 69.8 | % | 70.7 | % | ||||||||
|
Catastrophe losses and related reinstatement premiums |
(1.0 | )% | (1.6 | )% | (3.0 | )% | (1.1 | )% | ||||||||
|
Prior period development |
2.4 | % | 3.0 | % | 4.7 | % | 3.0 | % | ||||||||
|
Loss and loss expense ratio, adjusted |
72.4 | % | 73.1 | % | 71.5 | % | 72.6 | % | ||||||||
Insurance – North American’s net catastrophe losses were $17 million and $122 million in the three and nine months ended September 30, 2010, respectively, compared with $24 million and $48 million in the prior year periods, respectively. The catastrophe losses for the three and nine months ended September 30, 2010, were
66
primarily related to severe weather-related events in the U.S. and, to a lesser extent for the nine-month period, earthquakes in Haiti and Chile. The catastrophe losses for the prior year periods included an earthquake in Asia and several weather-related events in the United States. Insurance – North American experienced net favorable prior period development of $35 million and $153 million in the three and nine months ended September 30, 2010, respectively. This compares with net favorable prior period development of $45 million and $129 million in the prior year periods. Refer to “Prior Period Development” for more information. For the quarter ended September 30, 2010, the decline in Insurance – North American’s adjusted loss and loss expense ratio was primarily due to favorable changes in ACE USA’s mix of business. The nine months ended September 30, 2010, also benefited from the annual first quarter crop settlement which had a favorable impact on the loss ratio, compared with the prior year period.
Insurance – North American’s policy acquisition cost ratio increased in the three and nine months ended September 30, 2010, compared with the prior year periods. For the quarter ended September 30, 2010, the increase was primarily related to premium tax benefits recorded in the prior year quarter. For the nine month period, the increase was also due to the impact of the first quarter crop settlement which generated higher profit-share commissions and a lower adjustment to net premiums earned compared with the prior year period. In addition, for the three and nine months ended September 30, 2010, our retail units experienced a shift in mix of business towards higher commission specialty casualty business, professional, and personal lines. Insurance – North American’s administrative expense ratio decreased in the three and nine months ended September 30, 2010, primarily due to higher net results generated by our third party claims administration business, ESIS, the results of which are included within our administrative expenses. ESIS generated $52 million in net results in the quarter ended September 30, 2010, primarily from non-recurring sources. Administrative expenses in the prior year quarter included $7 million in net results from ESIS.
Insurance – Overseas General
The Insurance – Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international A&H and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets, our London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment.
|
Three Months
Ended
September 30 |
% Change |
Nine Months
Ended
September 30 |
% Change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Net premiums written |
$ | 1,205 | $ | 1,203 | 0 | % | $ | 3,927 | $ | 3,795 | 3 | % | ||||||||||||
|
Net premiums earned |
1,321 | 1,317 | 0 | % | 3,835 | 3,747 | 2 | % | ||||||||||||||||
|
Losses and loss expenses |
605 | 631 | (4 | )% | 1,950 | 1,879 | 4 | % | ||||||||||||||||
|
Policy benefits |
— | — | — | % | 4 | 3 | 33 | % | ||||||||||||||||
|
Policy acquisition costs |
326 | 316 | 3 | % | 905 | 869 | 4 | % | ||||||||||||||||
|
Administrative expenses |
204 | 204 | 0 | % | 613 | 569 | 8 | % | ||||||||||||||||
|
Underwriting income |
186 | 166 | 12 | % | 363 | 427 | (15 | )% | ||||||||||||||||
|
Net investment income |
118 | 121 | (2 | )% | 347 | 355 | (2 | )% | ||||||||||||||||
|
Net realized gains (losses) |
32 | 40 | (20 | )% | 102 | (40 | ) | NM | ||||||||||||||||
|
Other (income) expense |
(4 | ) | 3 | NM | (5 | ) | 12 | NM | ||||||||||||||||
|
Income tax expense |
63 | 56 | 13 | % | 136 | 131 | 4 | % | ||||||||||||||||
|
Net income |
$ | 277 | $ | 268 | 3 | % | $ | 681 | $ | 599 | 14 | % | ||||||||||||
|
Loss and loss expense ratio |
45.8 | % | 48.0 | % | 50.9 | % | 50.2 | % | ||||||||||||||||
|
Policy acquisition cost ratio |
24.7 | % | 24.0 | % | 23.6 | % | 23.2 | % | ||||||||||||||||
|
Administrative expense ratio |
15.5 | % | 15.4 | % | 16.0 | % | 15.2 | % | ||||||||||||||||
|
Combined ratio |
86.0 | % | 87.4 | % | 90.5 | % | 88.6 | % | ||||||||||||||||
67
|
Three Months Ended
September 30, 2010 |
||||||||||||
| P&C | A&H | Total | ||||||||||
|
Net premiums written: |
||||||||||||
|
Growth in original currency |
0.8 | % | 2.1 | % | 1.2 | % | ||||||
|
Foreign exchange effect |
(1.2 | )% | (1.1 | )% | (1.1 | )% | ||||||
|
Growth as reported in U.S. dollars |
(0.4 | )% | 1.0 | % | 0.1 | % | ||||||
|
Net premiums earned: |
||||||||||||
|
Growth in original currency |
1.9 | % | 2.4 | % | 2.0 | % | ||||||
|
Foreign exchange effect |
(2.2 | )% | (1.3 | )% | (1.8 | )% | ||||||
|
Growth as reported in U.S. dollars |
(0.3 | )% | 1.1 | % | 0.2 | % | ||||||
Insurance – Overseas General’s net premiums written were stable in the quarter ended September 30, 2010, as modest growth in our international retail operations was offset by unfavorable foreign exchange impact and reduced production in our London wholesale business. The unfavorable foreign exchange impact represented a reversal of a favorable foreign exchange impact for the first half of 2010. Refer to the table above for the impact of foreign exchange on net premiums written and earned. In the current periods, on a constant dollar basis, our international retail P&C business reported growth in U.K. business, and benefited from new accounts in Asia Pacific and Latin America, as well as emerging markets. A&H improved in the second and third quarters of 2010 on the strength of new business in Asia Pacific and Latin America. The personal lines business increased during the three and nine months ended September 30, 2010, primarily due to an increase in production retention as well new business in Europe and Latin America. Our London wholesale business unit reported lower production within most product lines, as we continue to decline business submitted at prices we deem to be inadequate from an underwriting perspective. For the nine months ended September 30, 2010, net premiums written and earned were reduced by approximately $33 million due to reinstatement premiums expensed primarily in connection with first quarter catastrophe activity.
Insurance – Overseas General’s net premiums earned were stable in the quarter ended September 30, 2010, as the modest growth in our international retail operations, including personal lines, was offset by unfavorable foreign exchange impact and reduced production in our London wholesale business. For the nine month period, net premiums earned increased primarily due to favorable foreign exchange impact, partially offset by lower wholesale writings and reinstatement premiums expensed in connection with first quarter catastrophe activity.
68
The following two tables provide a line of business and regional breakdown of Insurance – Overseas General’s net premiums earned for the periods indicated.
|
Three Months
Ended
September 30 |
% Change |
Nine Months
Ended
September 30 |
% Change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Line of Business |
||||||||||||||||||||||||
|
Property and all other |
$ | 457 | $ | 451 | 1 | % | $ | 1,301 | $ | 1,293 | 1 | % | ||||||||||||
|
Casualty |
358 | 366 | (2 | )% | 1,052 | 1,038 | 1 | % | ||||||||||||||||
|
Personal accident (A&H) |
506 | 500 | 1 | % | 1,482 | 1,416 | 5 | % | ||||||||||||||||
|
Net premiums earned |
$ | 1,321 | $ | 1,317 | 0 | % | $ | 3,835 | $ | 3,747 | 2 | % | ||||||||||||
|
Region |
||||||||||||||||||||||||
|
Europe |
$ | 582 | $ | 591 | (2 | )% | $ | 1,680 | $ | 1,686 | (0 | )% | ||||||||||||
|
Asia Pacific |
202 | 199 | 2 | % | 608 | 562 | 8 | % | ||||||||||||||||
|
Far East |
119 | 115 | 3 | % | 337 | 334 | 1 | % | ||||||||||||||||
|
Latin America |
232 | 200 | 16 | % | 666 | 554 | 20 | % | ||||||||||||||||
| 1,135 | 1,105 | 3 | % | 3,291 | 3,136 | 5 | % | |||||||||||||||||
|
ACE Global Markets |
186 | 212 | (12 | )% | 544 | 611 | (11 | )% | ||||||||||||||||
|
Net premiums earned |
$ | 1,321 | $ | 1,317 | 0 | % | $ | 3,835 | $ | 3,747 | 2 | % | ||||||||||||
|
Three Months
Ended
September 30 |
Nine Months
Ended
September 30 |
|||||||||||||||||||||||
|
2010
% of Total |
2009
% of Total |
2010
% of Total |
2009
% of Total |
|||||||||||||||||||||
|
Line of Business |
||||||||||||||||||||||||
|
Property and all other |
35 | % | 34 | % | 34 | % | 34 | % | ||||||||||||||||
|
Casualty |
27 | % | 28 | % | 27 | % | 28 | % | ||||||||||||||||
|
Personal accident (A&H) |
38 | % | 38 | % | 39 | % | 38 | % | ||||||||||||||||
|
Net premiums earned |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
|
Region |
||||||||||||||||||||||||
|
Europe |
44 | % | 45 | % | 44 | % | 45 | % | ||||||||||||||||
|
Asia Pacific |
15 | % | 15 | % | 16 | % | 15 | % | ||||||||||||||||
|
Far East |
9 | % | 9 | % | 9 | % | 9 | % | ||||||||||||||||
|
Latin America |
18 | % | 15 | % | 17 | % | 15 | % | ||||||||||||||||
| 86 | % | 84 | % | 86 | % | 84 | % | |||||||||||||||||
|
ACE Global Markets |
14 | % | 16 | % | 14 | % | 16 | % | ||||||||||||||||
|
Net premiums earned |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
The following table shows the impact of catastrophe losses and related reinstatement premiums and prior period development on our loss and loss expense ratio for the periods indicated.
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Loss and loss expense ratio, as reported |
45.8 | % | 48.0 | % | 50.9 | % | 50.2 | % | ||||||||
|
Catastrophe losses and related reinstatement premiums |
(2.1 | )% | (1.3 | )% | (3.1 | )% | (1.1 | )% | ||||||||
|
Prior period development |
8.8 | % | 9.0 | % | 5.1 | % | 4.5 | % | ||||||||
|
Loss and loss expense ratio, adjusted |
52.5 | % | 55.7 | % | 52.9 | % | 53.6 | % | ||||||||
69
Net catastrophe losses were $25 million and $107 million for the three and nine months ended September 30, 2010, respectively, compared with $16 million and $41 million in the prior year periods, respectively. The catastrophe losses for the quarter ended September 30, 2010, were primarily related to an earthquake impacting New Zealand and a hurricane in Mexico. For the nine months ended September 30, 2010, catastrophe losses also included earthquakes in Chile and Mexico, storms in Australia and Europe, and additional activity related to first quarter 2010 catastrophes. Insurance – Overseas General experienced net favorable prior period development of $117 million and $199 million in the three and nine months ended September 30, 2010, respectively, compared with favorable prior period developments of $119 million and $169 million, respectively, in prior year periods. Refer to “Prior Period Development” for more information. The adjusted loss and loss expense ratio for the three and nine months ended September 30, 2010, decreased primarily due to improved current accident year loss experience compared with the prior year periods in our retail business, partially offset by an increase in current year accident losses in our wholesale business.
Insurance – Overseas General’s policy acquisition cost ratio increased in the quarter ended September 30, 2010, compared with the prior year quarter, primarily due to an increase in acquisition costs in our London wholesale business. For the nine months ended September 30, 2010, the increase in the policy acquisition cost ratio was primarily due to unfavorable foreign exchange impact, changes in mix of business, and catastrophe-related reinstatement premiums expensed. Insurance – Overseas General’s administrative expense ratio increased in the nine months ended September 30, 2010, compared with the prior year period primarily due to higher administrative expenses, the impact of reinstatement premiums expensed, and reduced wholesale production.
Global Reinsurance
The Global Reinsurance segment represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverage to a diverse array of primary P&C companies.
|
Three Months
Ended
September 30 |
% change |
Nine Months
Ended
September 30 |
% change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Net premiums written |
$ | 272 | $ | 206 | 32 | % | $ | 932 | $ | 894 | 4 | % | ||||||||||||
|
Net premiums earned |
271 | 247 | 10 | % | 803 | 726 | 11 | % | ||||||||||||||||
|
Losses and loss expenses |
137 | 80 | 71 | % | 391 | 223 | 75 | % | ||||||||||||||||
|
Policy acquisition costs |
51 | 50 | 2 | % | 153 | 147 | 4 | % | ||||||||||||||||
|
Administrative expenses |
14 | 15 | (7 | )% | 41 | 41 | 0 | % | ||||||||||||||||
|
Underwriting income |
69 | 102 | (32 | )% | 218 | 315 | (31 | )% | ||||||||||||||||
|
Net investment income |
71 | 65 | 9 | % | 213 | 210 | 1 | % | ||||||||||||||||
|
Net realized gains (losses) |
10 | (11 | ) | NM | 69 | (47 | ) | NM | ||||||||||||||||
|
Other (income) expense |
(10 | ) | (1 | ) | NM | (16 | ) | — | NM | |||||||||||||||
|
Income tax expense |
12 | 9 | 33 | % | 31 | 38 | (18 | )% | ||||||||||||||||
|
Net income |
$ | 148 | $ | 148 | 0 | % | $ | 485 | $ | 440 | 10 | % | ||||||||||||
|
Loss and loss expense ratio |
50.4 | % | 32.5 | % | 48.7 | % | 30.7 | % | ||||||||||||||||
|
Policy acquisition cost ratio |
19.0 | % | 20.1 | % | 19.0 | % | 20.2 | % | ||||||||||||||||
|
Administrative expense ratio |
4.9 | % | 5.9 | % | 5.1 | % | 5.6 | % | ||||||||||||||||
|
Combined ratio |
74.3 | % | 58.5 | % | 72.8 | % | 56.5 | % | ||||||||||||||||
Global Reinsurance reported an increase in net premiums written in the three and nine months ended September 30, 2010, compared with the prior year periods, primarily due to a significant new workers’
70
compensation treaty recorded in our U.S. operation. For the nine months ended September 30, 2010, the new business recorded in the third quarter of 2010, was offset by generally competitive conditions across most of Global Reinsurance’s product lines and regions of operations.
The following tables provide a line of business breakdown of Global Reinsurance’s net premiums earned for the periods indicated.
|
Three Months Ended
September 30 |
% Change |
Nine Months Ended
September 30 |
% Change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10
vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Property and all other |
$ | 62 | $ | 60 | 3 | % | $ | 179 | $ | 197 | (9 | )% | ||||||||||||
|
Casualty |
138 | 113 | 22 | % | 412 | 318 | 30 | % | ||||||||||||||||
|
Property catastrophe |
71 | 74 | (4 | )% | 212 | 211 | 0 | % | ||||||||||||||||
|
Net premiums earned |
$ | 271 | $ | 247 | 10 | % | $ | 803 | $ | 726 | 11 | % | ||||||||||||
|
2010
% of Total |
2009
% of Total |
2010
% of Total |
2009
% of Total |
|||||||||||||||||||||
|
Property and all other |
23 | % | 24 | % | 22 | % | 27 | % | ||||||||||||||||
|
Casualty |
51 | % | 46 | % | 51 | % | 44 | % | ||||||||||||||||
|
Property catastrophe |
26 | % | 30 | % | 27 | % | 29 | % | ||||||||||||||||
|
Net premiums earned |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||
Global Reinsurance’s net premiums earned increased in the three and nine months ended September 30, 2010, compared with the prior year periods, primarily due to the significant new workers’ compensation business bound and higher casualty reinsurance production in prior periods in our North American operations.
The following table shows the impact of catastrophe losses and related reinstatement premiums and prior period development on this segment’s loss and loss expense ratio for the periods indicated.
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Loss and loss expense ratio, as reported |
50.4 | % | 32.5 | % | 48.7 | % | 30.7 | % | ||||||||
|
Catastrophe losses and related reinstatement premiums |
(18.3 | )% | (2.0 | )% | (10.6 | )% | (3.4 | )% | ||||||||
|
Prior period development |
18.1 | % | 15.9 | % | 11.8 | % | 18.1 | % | ||||||||
|
Loss and loss expense ratio, adjusted |
50.2 | % | 46.4 | % | 49.9 | % | 45.4 | % | ||||||||
Global Reinsurance recorded net catastrophe losses of $49 million and $86 million in the three and nine months ended September 30, 2010, respectively, compared with net catastrophe losses of $5 million and $25 million in the prior year periods, respectively. Catastrophe losses for the quarter ended September 30, 2010, were primarily related to an earthquake in New Zealand. Catastrophe losses in the nine months ended September 30, 2010, also included storms in Australia and an earthquake in Chile. Global Reinsurance experienced net favorable prior period development of $49 million and $94 million in the three and nine months ended September 30, 2010, respectively. This compares with net favorable prior period development of $39 million and $131 million, for the three and nine months ended September 30, 2009, respectively. Refer to “Prior Period Development” for more information. The increase in the adjusted loss and loss expense ratio was due to a change in business mix which resulted in a greater proportion of casualty business which typically generates higher loss ratios than property business.
71
Global Reinsurance’s policy acquisition costs ratio decreased in the quarter ended September 30, 2010, compared with the prior year quarter, primarily due to the new workers’ compensation treaty business which did not generate acquisition costs. For the nine months ended September 30, 2010, policy acquisition costs were also reduced as a result of lower commission in our U.S. operations, partially offset by changes in business mix. The administrative expense ratio decreased in the three and nine months ended September 30, 2010, compared with the prior year periods, primarily due to the increase in net premiums earned.
Life
The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. We assess the performance of our life business based on life underwriting income which includes net investment income.
|
Three Months
Ended
September 30 |
% Change |
Nine Months
Ended
September 30 |
% Change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Net premiums written |
$ | 373 | $ | 372 | 0 | % | $ | 1,149 | $ | 1,085 | 6 | % | ||||||||||||
|
Net premiums earned |
386 | 362 | 7 | % | 1,154 | 1,061 | 9 | % | ||||||||||||||||
|
Losses and loss expenses |
119 | 121 | (2 | )% | 379 | 366 | 4 | % | ||||||||||||||||
|
Policy benefits |
93 | 79 | 18 | % | 263 | 253 | 4 | % | ||||||||||||||||
|
Policy acquisition costs |
65 | 59 | 10 | % | 192 | 161 | 19 | % | ||||||||||||||||
|
Administrative expenses |
59 | 51 | 16 | % | 171 | 173 | (1 | )% | ||||||||||||||||
|
Net investment income |
43 | 43 | 0 | % | 129 | 132 | (2 | )% | ||||||||||||||||
|
Life underwriting income |
93 | 95 | (2 | )% | 278 | 240 | 16 | % | ||||||||||||||||
|
Net realized gains (losses) |
(85 | ) | (212 | ) | 60 | % | (197 | ) | (95 | ) | (107 | )% | ||||||||||||
|
Other (income) expense |
5 | — | NM | 11 | 1 | NM | ||||||||||||||||||
|
Income tax expense |
16 | 17 | (6 | )% | 46 | 37 | 24 | % | ||||||||||||||||
|
Net income (loss) |
$ | (13 | ) | $ | (134 | ) | 90 | % | $ | 24 | $ | 107 | (78 | )% | ||||||||||
The following table provides a line of business breakdown of life underwriting income for the periods indicated.
|
Three Months
Ended
September 30 |
% change |
Nine Months
Ended
September 30 |
% change | |||||||||||||||||||||
| 2010 | 2009 |
Q-10 vs.
Q-09 |
2010 | 2009 |
YTD-10 vs.
YTD-09 |
|||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
Life reinsurance |
$ | 43 | $ | 41 | 5 | % | $ | 131 | $ | 109 | 20 | % | ||||||||||||
|
Life insurance |
(4 | ) | (5 | ) | 20 | % | (20 | ) | (16 | ) | (25 | )% | ||||||||||||
|
A&H |
54 | 59 | (8 | )% | 167 | 147 | 14 | % | ||||||||||||||||
|
Life underwriting income |
$ | 93 | $ | 95 | (2 | )% | $ | 278 | $ | 240 | 16 | % | ||||||||||||
Life underwriting income decreased in the quarter ended September 30, 2010, compared with the prior year quarter, primarily due to modestly lower A&H business. For the nine months ended September 30, 2010, life underwriting income increased, primarily due to increased A&H premium retention as well as lower administrative costs due to operating efficiencies in North American supplemental A&H. In addition, for the nine months ended September 30, 2010, life reinsurance benefited from favorable market movements in the first quarter relative to the prior year period. ACE Life generated a modest underwriting loss due to on-going development costs in its businesses.
Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported guaranteed minimum income benefits (GMIB) reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. During the
72
three months ended September 30, 2010, realized losses were primarily associated with the impact of falling interest rates on the net fair value of reported GMIB reinsurance liabilities, partially offset by realized gains due to rising equity markets net of derivative losses. During the nine months ended September 30, 2010, realized losses were primarily associated with an increasing net fair value of reported GMIB reinsurance liabilities resulting substantially from the impact of falling interest rates.
Other Income and Expense Items
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Equity in net (income) loss of partially-owned entities |
$ | (40 | ) | $ | 42 | $ | (63 | ) | $ | 11 | ||||||
|
Noncontrolling interest expense |
4 | 1 | 13 | 3 | ||||||||||||
|
Federal excise and capital taxes |
4 | 3 | 10 | 9 | ||||||||||||
|
Other |
7 | 5 | 14 | 21 | ||||||||||||
|
Other (income) expense |
$ | (25 | ) | $ | 51 | $ | (26 | ) | $ | 44 | ||||||
Other (income) expense primarily comprises our equity in net income of investment funds, limited partnerships, partially-owned investment companies, Huatai Insurance Company of China, Limited, and Huatai Life Insurance Company of China, Limited, which are included in equity in net income of partially-owned entities. Other (income) expense also includes certain federal excise and capital taxes incurred as a result of capital management initiatives. These transactions are considered capital in nature and are excluded from underwriting results.
Net Investment Income
|
Three Months Ended
September 30 |
Nine Months Ended
September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Fixed maturities |
$ | 519 | $ | 514 | $ | 1,550 | $ | 1,473 | ||||||||
|
Short-term investments |
9 | 8 | 23 | 31 | ||||||||||||
|
Equity securities |
5 | 9 | 16 | 38 | ||||||||||||
|
Other |
11 | 15 | 27 | 44 | ||||||||||||
|
Gross investment income |
544 | 546 | 1,616 | 1,586 | ||||||||||||
|
Investment expenses |
(28 | ) | (35 | ) | (78 | ) | (67 | ) | ||||||||
|
Net investment income |
$ | 516 | $ | 511 | $ | 1,538 | $ | 1,519 | ||||||||
Net investment income is influenced by a number of factors including the amounts and timing of inward and outward cash flows, the level of interest rates, and changes in overall asset allocation. Net investment income increased one percent in the three and nine months ended September 30, 2010, compared with the prior year periods. Positive operating cash flows, which have resulted in a higher overall average invested asset base, were partially offset by lower yields on new investments and short-term securities. The investment portfolio’s average market yield on fixed maturities was 3.2 percent and 4.3 percent at September 30, 2010 and 2009, respectively. Average market yield on fixed maturities represents the weighted average yield to maturity of our fixed income portfolio based on the market prices of the holdings at that date.
Net Realized and Unrealized Gains (Losses)
We take a long-term view with our investment strategy and our investment managers manage our investment portfolio to maximize total return within certain specific guidelines designed to minimize risk. The majority of our investment portfolio is available for sale and reported at fair value. Our held to maturity investment portfolio is reported at amortized cost.
73
The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when we record an Other-than-temporary impairment (OTTI) charge in net income. For a discussion related to how we assess OTTI for all of our investments, including credit- related OTTI, and the related impact on net income, refer to Note 3 d) to the Consolidated Financial Statements. Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GMIB reinsurance. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
The following tables present our pre-tax net realized and unrealized gains (losses), as well a breakdown of our OTTI and other net realized gains (losses) on investments for the periods indicated.
|
Three Months Ended
September 30, 2010 |
Three Months Ended
September 30, 2009 |
|||||||||||||||||||||||
|
Net
Realized Gains (Losses) |
Net
Unrealized Gains (Losses) |
Net
Impact |
Net
Realized Gains (Losses) |
Net
Unrealized Gains (Losses) |
Net
Impact |
|||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
Fixed maturities and short-term investments |
$ | 113 | $ | 795 | $ | 908 | $ | (1 | ) | $ | 1,602 | $ | 1,601 | |||||||||||
|
Equity securities |
7 | 14 | 21 | 1 | 177 | 178 | ||||||||||||||||||
|
Other |
(8 | ) | 24 | 16 | (16 | ) | 213 | 197 | ||||||||||||||||
|
Subtotal |
112 | 833 | 945 | (16 | ) | 1,992 | 1,976 | |||||||||||||||||
|
Derivatives |
||||||||||||||||||||||||
|
Equity and fixed income derivatives |
(1 | ) | — | (1 | ) | 28 | — | 28 | ||||||||||||||||
|
Fair value adjustment on insurance derivatives |
25 | — | 25 | (65 | ) | — | (65 | ) | ||||||||||||||||
|
S&P put option and futures |
(110 | ) | — | (110 | ) | (144 | ) | — | (144 | ) | ||||||||||||||
|
Fair value adjustment on other derivatives |
(14 | ) | — | (14 | ) | (19 | ) | — | (19 | ) | ||||||||||||||
|
Subtotal derivatives |
(100 | ) | — | (100 | ) | (200 | ) | — | (200 | ) | ||||||||||||||
|
Foreign exchange gains (losses) |
(62 | ) | — | (62 | ) | (7 | ) | — | (7 | ) | ||||||||||||||
|
Total gains (losses) |
$ | (50 | ) | $ | 833 | $ | 783 | $ | (223 | ) | $ | 1,992 | $ | 1,769 | ||||||||||
|
Nine Months Ended
September 30, 2010 |
Nine Months Ended
September 30, 2009 |
|||||||||||||||||||||||
|
Net
Realized Gains (Losses) |
Net
Unrealized Gains (Losses) |
Net
Impact |
Net
Realized Gains (Losses) |
Net
Unrealized Gains (Losses) |
Net
Impact |
|||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
Fixed maturities and short-term investments |
$ | 271 | $ | 1,626 | $ | 1,897 | $ | (120 | ) | $ | 2,736 | $ | 2,616 | |||||||||||
|
Equity securities |
84 | (41 | ) | 43 | (180 | ) | 198 | 18 | ||||||||||||||||
|
Other |
(16 | ) | 92 | 76 | (133 | ) | 269 | 136 | ||||||||||||||||
|
Subtotal |
339 | 1,677 | 2,016 | (433 | ) | 3,203 | 2,770 | |||||||||||||||||
|
Derivatives |
||||||||||||||||||||||||
|
Equity and fixed income derivatives |
23 | — | 23 | 62 | — | 62 | ||||||||||||||||||
|
Fair value adjustment on insurance derivatives |
(180 | ) | — | (180 | ) | 218 | — | 218 | ||||||||||||||||
|
S&P put option and futures |
(26 | ) | — | (26 | ) | (300 | ) | — | (300 | ) | ||||||||||||||
|
Fair value adjustment on other derivatives |
(19 | ) | — | (19 | ) | (85 | ) | — | (85 | ) | ||||||||||||||
|
Subtotal derivatives |
(202 | ) | — | (202 | ) | (105 | ) | — | (105 | ) | ||||||||||||||
|
Foreign exchange gains (losses) |
(10 | ) | — | (10 | ) | (31 | ) | — | (31 | ) | ||||||||||||||
|
Total gains (losses) |
$ | 127 | $ | 1,677 | $ | 1,804 | $ | (569 | ) | $ | 3,203 | $ | 2,634 | |||||||||||
74
|
Three Months Ended
September 30, 2010 |
Three Months Ended
September 30, 2009 |
|||||||||||||||||||||||
| OTTI |
Other
Net Realized Gains (Losses) |
Net
Realized Gains (Losses) |
OTTI |
Other
Net Realized Gains (Losses) |
Net
Realized Gains (Losses) |
|||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
Fixed maturities and short-term investments |
$ | (19 | ) | $ | 132 | $ | 113 | $ | (39 | ) | $ | 38 | $ | (1 | ) | |||||||||
|
Equity securities |
— | 7 | 7 | — | 1 | 1 | ||||||||||||||||||
|
Other |
— | (8 | ) | (8 | ) | (19 | ) | 3 | (16 | ) | ||||||||||||||
|
Total investment portfolio gains (losses) |
$ | (19 | ) | $ | 131 | $ | 112 | $ | (58 | ) | $ | 42 | $ | (16 | ) | |||||||||
|
Nine Months Ended
September 30, 2010 |
Nine Months Ended
September 30, 2009 |
|||||||||||||||||||||||
| OTTI |
Other
Net Realized Gains (Losses) |
Net
Realized Gains (Losses) |
OTTI |
Other
Net Realized Gains (Losses) |
Net
Realized Gains (Losses) |
|||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
Fixed maturities and short-term investments |
$ | (42 | ) | $ | 313 | $ | 271 | $ | (217 | ) | $ | 97 | $ | (120 | ) | |||||||||
|
Equity securities |
— | 84 | 84 | (26 | ) | (154 | ) | (180 | ) | |||||||||||||||
|
Other |
(13 | ) | (3 | ) | (16 | ) | (121 | ) | (12 | ) | (133 | ) | ||||||||||||
|
Total investment portfolio gains (losses) |
$ | (55 | ) | $ | 394 | $ | 339 | $ | (364 | ) | $ | (69 | ) | $ | (433 | ) | ||||||||
Our net realized gains in the three and nine months ended September 30, 2010, included write-downs of $19 million and $55 million, respectively, as a result of an other-than-temporary decline in fair value of certain securities. This compares with write-downs of $58 million and $364 million in the prior year periods.
At September 30, 2010, our investment portfolios held by U.S. legal entities included approximately $106 million of gross unrealized losses on fixed income investments. Our tax planning strategy related to these losses is based on our view that we will hold our fixed income investments until they recover their cost. As such, we have recognized a deferred tax asset of approximately $37 million related to these fixed income investments. This strategy allows us to recognize the associated deferred tax asset related to these fixed income investments as we do not believe these losses will ever be realized.
We engage in a securities lending program which involves lending investments to other institutions for short periods of time. ACE invests the collateral received in securities of high credit quality and liquidity, with the objective of maintaining a stable principal balance. Certain investments purchased with the securities lending collateral declined in value resulting in an unrealized loss of $24 million at September 30, 2010. The unrealized loss is attributable to fluctuations in market values of the underlying performing debt instruments held by the respective mutual funds, rather than default of a debt issuer. We concluded that the decline in value is temporary.
Investments
Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of AA (with approximately one half invested in AAA securities), as rated by the independent investment rating service Standard and Poor’s (S&P). The portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. Our Other investments principally comprise direct investments, investment funds, and limited partnerships. We hold no collateralized debt obligations or collateralized loan obligations in our investment portfolio and we provide no credit default protection. We have long-standing global credit limits for our entire portfolio across the organization. Exposures are aggregated, monitored, and actively managed by our Global
75
Credit Committee, comprised of senior executives, including our Chief Financial Officer, our Chief Risk Officer, our Chief Investment Officer, and our Treasurer. We also have well-established, strict contractual investment rules requiring managers to maintain highly diversified exposures to individual issuers and closely monitor investment manager compliance with portfolio guidelines.
As part of the Company’s fixed income diversification strategy, ACE has decided to hold to maturity certain residential agency mortgage-backed securities that have shorter term durations. Because the Company has the intent to hold these securities to maturity, a transfer of such securities with a fair value of $2.9 billion was made during the three months ended September 30, 2010, from Fixed maturities available for sale to Fixed maturities held to maturity.
The average duration of our fixed income securities, including the effect of options and swaps, was 3.6 years at September 30, 2010, and 3.7 years at December 31, 2009. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.7 billion at September 30, 2010. We experienced net unrealized gains of $1.7 billion for the nine months ended September 30, 2010, primarily due to continued tightening of credit spreads through the first nine months of 2010.
The following table shows the fair value and cost/amortized cost of our invested assets at September 30, 2010, and December 31, 2009.
| September 30, 2010 | December 31, 2009 | |||||||||||||||
|
Fair
Value |
Cost/
Amortized Cost |
Fair
Value |
Cost/
Amortized Cost |
|||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Fixed maturities available for sale |
$ | 41,103 | $ | 39,089 | $ | 39,525 | $ | 38,985 | ||||||||
|
Fixed maturities held to maturity |
6,104 | 5,977 | 3,561 | 3,481 | ||||||||||||
|
Short-term investments |
1,857 | 1,857 | 1,667 | 1,667 | ||||||||||||
| 49,064 | 46,923 | 44,753 | 44,133 | |||||||||||||
|
Equity securities |
415 | 387 | 467 | 398 | ||||||||||||
|
Other investments |
1,619 | 1,449 | 1,375 | 1,258 | ||||||||||||
|
Total investments |
$ | 51,098 | $ | 48,759 | $ | 46,595 | $ | 45,789 | ||||||||
The fair value of our total investments increased $4.5 billion during the nine months ended September 30, 2010. The increase was primarily due to unrealized appreciation and the investing of operating cash flows.
76
The following tables show the market value of our fixed maturities and short-term investments at September 30, 2010, and December 31, 2009. The first table lists investments according to type and the second according to S&P credit rating.
| September 30, 2010 | December 31, 2009 | |||||||||||||||
|
Market
Value |
Percentage
of Total |
Market
Value |
Percentage
of Total |
|||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||
|
Treasury |
$ | 2,168 | 4 | % | $ | 2,068 | 5 | % | ||||||||
|
Agency |
2,242 | 5 | % | 2,698 | 6 | % | ||||||||||
|
Corporate and asset-backed securities |
16,186 | 33 | % | 13,537 | 30 | % | ||||||||||
|
Mortgage-backed securities |
12,074 | 25 | % | 11,311 | 25 | % | ||||||||||
|
Municipal |
2,207 | 4 | % | 2,300 | 5 | % | ||||||||||
|
Non-U.S. |
12,330 | 25 | % | 11,172 | 25 | % | ||||||||||
|
Short-term investments |
1,857 | 4 | % | 1,667 | 4 | % | ||||||||||
|
Total |
$ | 49,064 | 100 | % | $ | 44,753 | 100 | % | ||||||||
|
AAA |
$ | 24,145 | 49 | % | $ | 22,884 | 51 | % | ||||||||
|
AA |
4,367 | 9 | % | 4,021 | 9 | % | ||||||||||
|
A |
8,594 | 17 | % | 7,461 | 17 | % | ||||||||||
|
BBB |
5,647 | 11 | % | 4,910 | 11 | % | ||||||||||
|
BB |
3,213 | 7 | % | 2,866 | 6 | % | ||||||||||
|
B |
2,362 | 5 | % | 2,029 | 5 | % | ||||||||||
|
Other |
736 | 2 | % | 582 | 1 | % | ||||||||||
|
Total |
$ | 49,064 | 100 | % | $ | 44,753 | 100 | % | ||||||||
77
The table below summarizes the market value of our non-U.S. fixed income portfolio by country/sovereign for non-U.S. government securities at September 30, 2010.
| Market Value | ||||
|
(in millions of U.S.
dollars) |
||||
|
United Kingdom |
$ | 1,136 | ||
|
Canada |
885 | |||
|
Germany |
568 | |||
|
Japan |
371 | |||
|
France |
210 | |||
|
Province of Ontario |
190 | |||
|
Brazil |
184 | |||
|
Province of Quebec |
140 | |||
|
Switzerland |
138 | |||
|
State of Queensland |
105 | |||
|
Republic of Korea |
95 | |||
|
United Mexican States |
95 | |||
|
Thailand |
93 | |||
|
Australia |
66 | |||
|
State of New South Wales |
62 | |||
|
Taiwan |
54 | |||
|
State of Victoria |
49 | |||
|
New Zealand |
49 | |||
|
Austria |
46 | |||
|
People’s Republic of China |
41 | |||
|
Qatar |
36 | |||
|
Province of Manitoba |
35 | |||
|
State of Western Australia |
33 | |||
|
Province of British Columbia |
32 | |||
|
Province of Alberta Canada |
29 | |||
|
Other Non-U.S. Government |
394 | |||
|
Non-U.S. Government Securities |
5,136 | |||
|
Non-U.S. Corporate |
7,194 | |||
| $ | 12,330 | |||
ACE’s non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. 87 percent of our non-U.S. fixed income portfolio is denominated in G7 currencies. The average credit quality of our non-U.S. fixed income securities is AA and 53 percent of our holdings are rated AAA or guaranteed by governments or quasi-government agencies. Our corporate bond holdings are highly diversified across industries and geographies. Issuer limits are based on credit rating (AA – two percent, A – one percent, BBB – 0.5 percent of the total portfolio) and are monitored on a daily basis by ACE via an internal compliance system. With respect to the $7.2 billion in non-U.S. corporate fixed income securities in the table above, approximately $345 million relates to investments in Spain and Italy. Investments in Ireland and Portugal total $37 million. We have inconsequential corporate fixed income exposure to Greece.
78
The table below summarizes our largest exposures to corporate bonds by market value at September 30, 2010.
| Market Value | ||||
|
(in millions of U.S.
dollars) |
||||
|
General Electric Co |
$ | 479 | ||
|
JP Morgan Chase & Co |
456 | |||
|
Bank of America Corp |
436 | |||
|
Citigroup Inc |
329 | |||
|
Verizon Communications Inc |
312 | |||
|
The Goldman Sachs Group Inc |
308 | |||
|
Wells Fargo & Co |
301 | |||
|
Morgan Stanley |
290 | |||
|
AT&T INC |
253 | |||
|
HSBC Holdings Plc |
240 | |||
|
Credit Suisse Group |
200 | |||
|
Barclays PLC |
188 | |||
|
Comcast Corp |
157 | |||
|
Kraft Foods Inc |
154 | |||
|
Lloyds Banking Group Plc |
153 | |||
|
UBS AG |
151 | |||
|
American Express Co |
138 | |||
|
Time Warner Cable Inc |
132 | |||
|
ConocoPhillips |
123 | |||
|
Exxon Mobil Corp |
120 | |||
|
Royal Bank of Scotland Group Plc |
117 | |||
|
Pfizer Inc |
112 | |||
|
Dominion Resources Inc/VA |
107 | |||
|
Anheuser-Busch InBev NV |
107 | |||
|
Roche Holding AG |
101 | |||
|
Total |
$ | 5,464 | ||
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Mortgage-backed securities
Additional details on the mortgage-backed component of our investment portfolio at September 30, 2010, are provided below:
Mortgage-backed securities
Market Value
(in millions of U.S. dollars)
| S&P Credit Rating | ||||||||||||||||||||||||
| AAA | AA | A | BBB |
BB and
below |
Total | |||||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||||||||||
|
Residential mortgage-backed (RMBS) |
||||||||||||||||||||||||
|
Agency RMBS |
$ | 9,342 | $ | — | $ | — | $ | — | $ | — | $ | 9,342 | ||||||||||||
|
Non-agency RMBS |
406 | 22 | 23 | 49 | 802 | 1,302 | ||||||||||||||||||
|
Total RMBS |
9,748 | 22 | 23 | 49 | 802 | 10,644 | ||||||||||||||||||
|
Commercial mortgage-backed |
1,393 | 20 | 14 | 3 | — | 1,430 | ||||||||||||||||||
|
Total mortgage-backed securities |
$ | 11,141 | $ | 42 | $ | 37 | $ | 52 | $ | 802 | $ | 12,074 | ||||||||||||
Mortgage-backed securities
Amortized Cost
(in millions of U.S. dollars)
| S&P Credit Rating | ||||||||||||||||||||||||
| AAA | AA | A | BBB |
BB and
below |
Total | |||||||||||||||||||
|
Mortgage-backed securities |
||||||||||||||||||||||||
|
Residential mortgage-backed (RMBS) |
||||||||||||||||||||||||
|
Agency RMBS |
$ | 9,122 | $ | — | $ | — | $ | — | $ | — | $ | 9,122 | ||||||||||||
|
Non-agency RMBS |
426 | 26 | 24 | 58 | 951 | 1,485 | ||||||||||||||||||
|
Total RMBS |
9,548 | 26 | 24 | 58 | 951 | 10,607 | ||||||||||||||||||
|
Commercial mortgage-backed |
1,306 | 18 | 13 | 3 | — | 1,340 | ||||||||||||||||||
|
Total mortgage-backed securities |
$ | 10,854 | $ | 44 | $ | 37 | $ | 61 | $ | 951 | $ | 11,947 | ||||||||||||
Our mortgage-backed securities are rated predominantly AAA and comprise approximately 25 percent of our fixed income portfolio. This compares with a 36 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at the end of the third quarter of 2010. The minimum rating for our initial purchases of mortgage -backed securities is AAA.
Agency RMBS represent securities which have been issued by Federal agencies (Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation) with implied or explicit government guarantees. These represent 88 percent of our total RMBS portfolio. With respect to our non-agency RMBS, these are backed by prime collateral and are broadly diversified in over 230,000 loans. This portfolio’s loan-to-value ratio is approximately 70 percent with an average Fair Isaac Corporation (FICO) score of 730. With this conservative loan-to-value ratio and subordinated collateral of 13 percent, the cumulative 5-year foreclosure rate would have to rise to 19 percent and real estate values would have to fall 19 percent from their levels at the end of the third quarter of 2010, before principal is impaired. The foreclosure rate for ACE’s non-agency RMBS portfolio was eight percent at the end of the third quarter of 2010.
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Our commercial mortgage-backed securities (CMBS) are rated predominantly AAA, broadly diversified with over 17,500 loans, and 83 percent of the portfolio was issued before 2006. The average loan-to-value ratio is approximately 68 percent with a debt service coverage ratio in excess of 1.7 and weighted-average subordinated collateral of 33 percent. The cumulative foreclosure rate would have to rise to 41 percent and commercial real estate values would have to fall more than eight percent from their levels at the end of the third quarter of 2010, before principal is impaired. The foreclosure rate for ACE’s CMBS portfolio at the end of the third quarter of 2010, was approximately two and a half percent.
Below-investment grade corporate fixed income portfolio
Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. At September 30, 2010, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 13 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes approximately 600 issuers, with the greatest single exposure being $76 million.
We manage high yield bonds as a distinct and separate asset class from investment grade bonds. The allocation to high yield bonds is explicitly set by internal management and is targeted to securities in the upper tier of credit quality (BB/B). Our minimum rating for initial purchase is BB/B. Six external investment managers are responsible for high yield security selection and portfolio construction. Our high yield managers have a conservative approach to credit selection and very low historical default experience. Holdings are highly diversified across industries and subject to a 1.5 percent issuer limit as a percentage of high yield allocation. We monitor position limits daily through an internal compliance system. Derivative and structured securities (e.g. credit default swaps and collateralized mortgage obligations) are not permitted in the high-yield portfolio.
Reinsurance recoverable on ceded reinsurance
The composition of our reinsurance recoverable at September 30, 2010, and December 31, 2009, is as follows:
|
September 30
2010 |
December 31
2009 |
|||||||
| (in millions of U.S. dollars) | ||||||||
|
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance |
$ | 12,750 | $ | 12,745 | ||||
|
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance |
725 | 850 | ||||||
|
Net reinsurance recoverable on losses and loss expenses |
$ | 13,475 | $ | 13,595 | ||||
|
Reinsurance recoverable on policy benefits |
$ | 290 | $ | 298 | ||||
We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. The decrease in net reinsurance recoverable on losses and loss expenses was primarily due to collections of reinsurance recoverable on paid losses and loss expenses in the active operations during the nine months ended September 30, 2010.
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Unpaid losses and loss expenses
As an insurance and reinsurance company, we are required by applicable laws and regulations and GAAP to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The estimate of the liabilities includes provisions for claims that have been reported but are unpaid at the balance sheet date (case reserves) and for future obligations on claims that have been incurred but not reported (IBNR) at the balance sheet date (IBNR may also include a provision for additional development on reported claims in instances where the case reserve is viewed to be potentially insufficient). Loss reserves also include an estimate of expenses associated with processing and settling unpaid claims (loss expenses). At September 30, 2010, our gross unpaid loss and loss expense reserves were $37.7 billion and our net unpaid loss and loss expense reserves were $25 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for the time value of money.
|
Gross
Losses |
Reinsurance
Recoverable (1) |
Net
Losses |
||||||||||
| (in millions of U.S. dollars) | ||||||||||||
|
Balance at December 31, 2009 |
$ | 37,783 | $ | 12,745 | $ | 25,038 | ||||||
|
Losses and loss expenses incurred |
8,505 | 2,897 | 5,608 | |||||||||
|
Losses and loss expenses paid |
(8,325 | ) | (2,844 | ) | (5,481 | ) | ||||||
|
Other (including foreign exchange translation) |
(221 | ) | (48 | ) | (173 | ) | ||||||
|
Balance at September 30, 2010 |
$ | 37,742 | $ | 12,750 | $ | 24,992 | ||||||
| (1) |
Net of provision for uncollectible reinsurance |
The process of establishing loss reserves for property and casualty claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments based on circumstances known at the date of accrual.
The following table shows our total reserves segregated between case reserves (including loss expense reserves) and IBNR reserves at September 30, 2010, and December 31, 2009.
| September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross | Ceded | Net | Gross | Ceded | Net | |||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
Case reserves |
$ | 17,089 | $ | 6,395 | $ | 10,694 | $ | 17,307 | $ | 6,664 | $ | 10,643 | ||||||||||||
|
IBNR reserves |
20,653 | 6,355 | 14,298 | 20,476 | 6,081 | 14,395 | ||||||||||||||||||
|
Total |
$ | 37,742 | $ | 12,750 | $ | 24,992 | $ | 37,783 | $ | 12,745 | $ | 25,038 | ||||||||||||
Asbestos and Environmental (A&E) and Other Run-off Liabilities
There was no unexpected A&E reserve activity during the nine months ended September 30, 2010.
The following is an update of the section entitled “Brandywine run-off entities” within Note 7 of our 2009 Form 10-K:
In addition to housing a significant portion of ACE’s A&E exposure, our Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. ACE’s Brandywine operations consist of Brandywine Holdings Corporation and its two subsidiary insurance companies, Century Indemnity Company, a Pennsylvania insurer (Century) and Century International Reinsurance Company Ltd., a Bermuda insurer (CIRC). Century Reinsurance Company, a Pennsylvania insurer, was merged with Century effective December 31, 2009, to achieve administrative efficiencies. During the quarter ended June 30, 2010, in order to
82
better align assets and liabilities, Brandywine Holdings Corporation transferred its ownership of CIRC stock to Century. Thus, Century (which reinsures substantially all of CIRC’s liabilities) became the direct parent of CIRC and, as discussed below, Century’s statutory surplus rose above the $25 million required by the 1996 Pennsylvania Insurance Department Restructuring Order. The realignment of CIRC as a subsidiary of Century increased Century’s surplus and strengthened its ability to meet its future obligations, including its obligations as a reinsurer of the ACE active companies.
Our active insurance subsidiary , ACE American Insurance Company, provides reinsurance coverage to Century in the amount of $800 million under an aggregate excess of loss agreement (the XOL). The XOL operates to maintain Century’s statutory surplus at $25 million. The available cover under the XOL has varied historically due to, among other things, the sale of certain subsidiaries of Brandywine Holdings Corporation, the cession of certain reinsurance bad debts by Century to affiliated companies pursuant to existing agreements, and movement in loss reserves and reinsurance recoveries. The transfer of CIRC stock described above resulted in (a) the elimination of Century’s reserve cession to the XOL and (b) an increase in Century’s surplus by $26 million to $51 million as of June 30, 2010. Post transaction, usage of the XOL at June 30, 2010 was $60 million on a statutory basis due entirely to past cessions of paid losses (ceded reserves were Nil). Usage of the XOL on an undiscounted basis would have been $302 million, including $60 million of paid losses and $242 million of ceded reserves. Century’s statutory reserves are carried on a discounted basis as prescribed by the Restructuring Order. Century’s increased statutory surplus position allowed it to satisfy certain balances payable to ACE active companies under another affiliate reinsurance agreement. Due to a contractual provision, these balances were prohibited from being paid to ACE active companies while Century was ceding statutory reserves under the XOL.
For more information on our A&E exposure, refer to our 2009 Form 10-K.
Fair value measurements
The provisions of Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements, define fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establish a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified.
The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect our judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ACE makes decisions regarding the categorization of assets or liabilities within the valuation hierarchy based on the inputs used to determine respective fair values at the balance sheet date. Accordingly, transfers between levels within the valuation hierarchy are determined on the same basis.
While the Company obtains values for the majority of the investment securities it holds from one or more pricing services, it is ultimately management’s responsibility to determine whether the values obtained and recorded in the financial statements are representative of fair value. We periodically update our understanding of the methodologies used by our pricing services in order to validate that the prices obtained from those services are consistent with the GAAP definition of fair value as an exit price. Based on our understanding of the methodologies used by our pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. We do not typically adjust prices obtained from pricing services.
83
At September 30, 2010, our Level 3 assets represented four percent of our assets that are measured at fair value and three percent of our total assets. Our Level 3 liabilities represented 16 percent of our liabilities that are measured at fair value and one percent of our total liabilities at September 30, 2010. During the nine months ended September 30, 2010, we transferred $67 million out of our Level 3 assets. Refer to Note 8 to the Consolidated Financial Statements for a description of the valuation techniques and inputs used to determine fair values for our financial instruments carried or disclosed at fair value by valuation hierarchy (Levels 1, 2, and 3) as well as a roll-forward of Level 3 financial instruments for the three and nine months ended September 30, 2010 and 2009.
Guaranteed minimum income benefits (GMIB) derivatives
Under life reinsurance programs covering living benefit guarantees, we assume the risk of GMIBs associated with variable annuity (VA) contracts. Our GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value. We believe that the most meaningful presentation of these derivatives is to reflect cash inflows or revenue as net premiums earned, and to record estimates of the average modeled value of future cash outflows as incurred losses. Accordingly, we recognize benefit reserves consistent with the provisions of ASC Topic 944, Financial Services-Insurance , (Topic 944) related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit reserves are reflected as policy benefits expense, which is included in life underwriting income. The incremental difference between fair value and benefit reserves is reflected in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheet and related changes in fair value are reflected in Net realized gains (losses) in the consolidated statement of operations. We intend to hold these derivative contracts to maturity (i.e., the expiration of the underlying liabilities through lapse, annuitization, death, or expiration of the reinsurance contract). At maturity, the cumulative gains and losses will net to zero (excluding cumulative hedge gains or losses) because, over time, the insurance liability will be increased or decreased to equal our obligation. For a sensitivity discussion of the effect of changes in interest rates, equity indices, and other assumptions on the fair value of GMIBs, and the resulting impact on our net income, refer to Item 3. Refer to Note 2 j) to the Consolidated Financial Statements, under Item 8 of our 2009 Form 10-K, for further description of this product and related accounting treatment.
The fair value of GMIB reinsurance is estimated using an internal valuation model which includes current market information and estimates of policyholder behavior from the perspective of a theoretical market participant that would assume these liabilities. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including interest rates, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our Consolidated Financial Statements, and the differences may be material.
The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.
A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.
84
Key factors affecting the lapse rate assumption include investment performance and policy duration. We generally assume that lapse rates increase with policy duration with a significant increase in rates after the end of the surrender charge period. As investment performance of underlying fund investments declines, and guarantees become more valuable, lapse rates are anticipated to decrease thereby increasing the expected value of claims on minimum guarantees and thus, benefit reserves and the incremental fair value liability.
Key factors affecting the GMIB annuitization rate include investment performance and the level of interest rates after the GMIB waiting period. As investment performance of underlying fund investments declines, the monthly income available to a policyholder who annuitizes their account value falls; this makes the GMIB more valuable. As the GMIB becomes more valuable, our modeling assumes that annuitization rates will increase, resulting in higher benefit reserves and fair value liability. The same is true in an environment where long-term interest rates are decreasing.
Based on our quarterly review, we made changes during the second quarter of 2010, to our VA valuation model that individually both increased and decreased our fair value liability. The aggregate result of these changes decreased our realized loss by $207 million, down to a loss of $158 million, inclusive of the benefits realized on derivative hedge instruments held. The changes to our valuation model were as follows:
| • |
Adjusted the likelihood that policyholders will exercise their contractual options to be consistent with emerging market participant expectations of future behaviour; |
| • |
Revised our annuitization assumption to increase the amount of annuitizations for policies that are deep in the money, based on a recent study of our annuitization experience; and |
| • |
Changed our inputs for interest rate and equity volatilities, moving to an approach that we believe is consistent with how a market participant would interpret limited market data. |
Based on the Company’s third quarter 2010 valuation review, no changes were made to actuarial or behavior assumptions. ACE made minor technical refinements to the model with a favorable net income impact of approximately $2 million.
During the three and nine months ended September 30, 2010, we recorded realized gains of $25 million and realized losses of $180 million, respectively, for GMIB reinsurance. During the three months ended September 30, 2010, realized gains were primarily associated with a decreasing net fair value of reported GMIB reinsurance liabilities due to rising equity markets, partially offset by realized losses due to falling interest rates. During the nine months ended September 30, 2010, realized losses were primarily associated with an increasing net fair value of reported GMIB reinsurance liabilities resulting substantially from the impact of falling interest rates. This excludes realized losses of $110 million and $26 million, during the three and nine months ended September 30, 2010, respectively, on derivative hedge instruments held to partially offset the risk in the VA guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment. Refer to “Net Realized Gains (Losses)” for a breakdown of the realized gains on GMIB reinsurance and the realized losses on the derivatives for the quarters ended September 30, 2010, and 2009.
ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of VA guarantees. Risk management begins with underwriting a prospective client and guarantee design, with particular focus on protecting ACE’s position from policyholder options that, because of anti-selective behavior, could adversely impact our obligation.
A second layer of risk management is the structure of the reinsurance contracts. All VA guarantee reinsurance contracts include some form of annual or aggregate claim limit(s). The exact limits vary by contract but some examples of typical contract provisions include:
| • |
annual claim limits, as a percentage of reinsured account or guaranteed value, for GMDBs and GMIBs; and |
85
| • |
annual annuitization rate limits, as a percentage of annuitization eligible account or guaranteed value, for GMIBs. |
A third layer of risk management is the hedging strategy which is focused on mitigating long-term economic losses at a portfolio level. ACE Tempest Life Re owned financial market instruments as part of the hedging strategy with a fair value of $32 million and $47 million at September 30, 2010, and December 31, 2009, respectively. The instruments are substantially collateralized by our counterparties, on a daily basis.
We also limit the aggregate amount of variable annuity reinsurance guarantee risk we are willing to assume. The last substantive U.S. transaction was quoted in mid-2007 and the last transaction in Japan was quoted in late 2007. ACE Tempest Life Re did not quote on new or renewal variable annuity transactions in 2008, 2009, or the first nine months of 2010, and the aggregate number of policyholders is currently decreasing through policyholder withdrawals and deaths at a rate of 5-10 percent annually.
Note that GMIB claims cannot occur for any reinsured policy until it has reached the end of its “waiting period”. The vast majority of policies we reinsure reach the end of their “waiting periods” in 2013 or later, as shown in the table below.
| Year of first annuitization eligibility |
Percent of
living benefit account values |
|||
|
2010 and prior |
1 | % | ||
|
2011 |
0 | % | ||
|
2012 |
7 | % | ||
|
2013 |
24 | % | ||
|
2014 |
19 | % | ||
|
2015 |
5 | % | ||
|
2016 |
6 | % | ||
|
2017 |
18 | % | ||
|
2018 and after |
20 | % | ||
|
Total |
100 | % | ||
The following table provides the historical cash flows under these policies for the periods indicated. The amounts represent accrued past premium received and claims paid, split by benefit type.
|
Three
Months Ended September 30 |
Nine
Months Ended September 30 |
|||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||
|
Death Benefits (GMDB) |
||||||||||||||||
|
Premium |
$ | 26 | $ | 28 | $ | 81 | $ | 80 | ||||||||
|
Less paid claims |
32 | 33 | 93 | 119 | ||||||||||||
|
Net |
$ | (6 | ) | $ | (5 | ) | $ | (12 | ) | $ | (39 | ) | ||||
|
Living Benefits (Includes GMIB and GMAB) |
||||||||||||||||
|
Premium |
$ | 41 | $ | 41 | $ | 121 | $ | 121 | ||||||||
|
Less paid claims |
1 | 1 | 2 | 4 | ||||||||||||
|
Net |
$ | 40 | $ | 40 | $ | 119 | $ | 117 | ||||||||
|
Total VA Guaranteed Benefits |
||||||||||||||||
|
Premium |
$ | 67 | $ | 69 | $ | 202 | $ | 201 | ||||||||
|
Less paid claims |
33 | 34 | 95 | 123 | ||||||||||||
|
Net |
$ | 34 | $ | 35 | $ | 107 | $ | 78 | ||||||||
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Death Benefits (GMDB)
For premiums and claims from VA contracts reinsuring GMDBs, at current market levels, we expect approximately $120 million of claims and $92 million of premium on death benefits over the next 12 months.
Living Benefits (includes GMIB and GMAB)
Premiums and claims from VA contracts reinsuring predominantly GMIBs and Guaranteed Minimum Accumulation Benefits (GMAB) are collectively known as “Living Benefits”. Substantially all of our living benefit reinsurance clients’ policyholders are currently ineligible to trigger a claim payment. The vast majority of these policyholders begin to become eligible in 2013. At current market levels, we expect approximately $1 million of claims and $149 million of premium on living benefits over the next 12 months.
Capital
At September 30, 2010, the capital required to support the VA guaranty business was approximately $475 million.
Collateral
In order for its U.S.-domiciled clients to obtain statutory reserve credit, ACE Tempest Life Re holds collateral on behalf of its clients in the form of qualified assets in trust or letters of credit, in an amount sufficient for them to obtain statutory reserve credit. On December 31, 2009, a new statutory reserve guideline adopted by the National Association of Insurance Commissioners took effect in the U.S. called Actuarial Guideline 43 that governs statutory reserve calculation for VA guarantees. In many cases, this resulted in an increase to ceded statutory reserves from our U.S.-domiciled clients and the collateral ACE Tempest Life Re holds on their behalf. ACE Tempest Life Re has access to both letter of credit capacity and trust eligible assets that are sufficient (based on current estimates) to meet the funding requirements. The timing of the calculation and amount of the collateral varies by client according to the particulars of the reinsurance treaty and the statutory reserve guidelines of the client’s state of domicile.
Claim limits
Approximately 65 percent of the GMDB guaranteed value has an annual claim limit expressed as two percent of the aggregate total account value reinsured. The remainder of the GMDB guaranteed value is covered under treaties with limits calculated on other bases – either annual, aggregate, or at an individual policy level. The majority of this remainder has an annual limit calculated as a percentage of the total guaranteed value reinsured, with the percentage varying by contract from 0.22 percent to 1.8 percent.
Catastrophe management
We continue to closely monitor our catastrophe risk accumulation around the world. The following modeled loss information reflects ACE’s in-force portfolio at July 1, 2010, and reinsurance program at July 1, 2010.
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The table below shows our modeled annual aggregate pre-tax probable maximum loss (PML), net of reinsurance, for 100-year and 250-year return periods for U.S. hurricanes and California earthquakes. The table also shows corresponding pre-tax industry losses for each of the return periods for U.S. hurricanes and California earthquakes. For example, according to the model, for the 1-in-100 return period scenario, there is a one percent chance that ACE’s losses incurred in any year from U.S. hurricanes could be in excess of $1.159 billion (or five percent of our total shareholders’ equity at September 30, 2010). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $136.313 billion.
| U.S. Hurricanes | California Earthquakes | |||||||||||||||||||||||
|
Modeled Annual Aggregate Net PML |
% of Total
Shareholders’ Equity |
% of Total
Shareholders’ Equity |
||||||||||||||||||||||
| ACE | Industry | ACE | Industry | |||||||||||||||||||||
| (in millions of U.S. dollars, except for percentages) | ||||||||||||||||||||||||
|
1-in-100 |
$ | 1,159 | 5 | % | $ | 136,313 | $ | 792 | 3 | % | $ | 36,603 | ||||||||||||
|
1-in-250 |
$ | 1,531 | 7 | % | $ | 197,935 | $ | 906 | 4 | % | $ | 58,528 | ||||||||||||
The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between ACE’s loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent ACE’s potential maximum exposures and it is highly likely that ACE’s actual incurred losses would vary materially from the modeled estimates.
Natural catastrophe property reinsurance program
ACE’s core property catastrophe reinsurance program provides protection against natural catastrophes impacting its primary property operations (i.e., excluding assumed reinsurance) and consists of two separate towers.
The first tower, for losses arising out of North America, our core traditional program renewed on January 1, 2010, for a period of one year, and we have purchased reinsurance coverage in various layers that provide $450 million in excess of $500 million in all-risk coverage. Each layer of this core program has a single additional limit available for reinstatement post-loss event on the same terms as the original limit. In addition to the foregoing, we have in place a multi-year, peril-specific program from a major reinsurer that is backed by its credit worthiness and the issuance of fully collateralized catastrophe bonds (the Calabash program). Under this coverage, we have $86 million part of $200 million of U.S. hurricane coverage in excess of an attachment point of approximately $575 million. While this coverage attaches at a level within our core program, any recoveries from this program shall be for ACE’s sole benefit and effectively reduce the net loss under the retention. In addition, the Calabash program also provides $86 million of U.S. earthquake coverage with a territorial scope of California, the Pacific Northwest, and the central U.S. In addition, we purchased another $14 million of the same earthquake coverage as the Calabash program to provide a full $100 million of earthquake coverage excess of approximately $961 million. These multi-year programs do not have a reinstatement feature. To keep the expected loss the same each year of these multi-year covers, the attachment point is adjusted annually, either up or down, based upon an independent modeling firm’s review of the exposure data underlying each program. Due to exposure reductions and model change, the attachment for the Calabash program declined from $712 million in 2009 to $575 million in 2010, for the $86 million of wind protection and from $1.11 billion in 2009 to approximately $961 million in 2010, for earthquake protection. The Calabash program expires in June 2012 and the next reset will occur in January 2011.
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Effective May 2010, we purchased an additional layer of traditional catastrophe protection providing $150 million in coverage in excess of $950 million, with one additional limit that would be reinstated post-loss event on the same terms as the original limit. Earthquake protection under the Calabash program will inure to the benefit of this new layer. That means, with respect to the perils of California, the Pacific Northwest, and the Central U.S earthquake risks, this layer attaches at $950 million and if the Calabash program has not otherwise been exhausted, the Calabash Program will then provide coverage from $961 million to $1.061 billion and then this traditional layer will respond again from approximately $1.062 billion to $1.151 billion.
With the addition of this new layer, our 2010 North American catastrophe program now has approximately $113 million more in coverage for first event U.S. hurricane protection and $65 million more in first event California earthquake protection than the program that was in effect in 2009. We consider our retention to be approximately $500 million for our North American catastrophe reinsurance program but this will depend upon the nature of the loss and the interplay between the underlying per risk programs and certain other catastrophe programs purchased by individual business units. These other catastrophe programs have the potential to reduce our effective retention below $500 million.
The second tower is our international catastrophe program effective July 1, 2010, to June 30, 2011, covering losses arising outside the United States. However, we expanded the geographic scope of the coverage to include the states of Alaska and Hawaii in the first two core layers of this program. In addition, we raised the retention of our first reinsurance layer from $50 million to $75 million. Our first layer is now $75 million in excess of a $75 million retention with two reinstatements. This layer was 70 percent placed with reinsurers. Our second layer was 100 percent placed and provides $150 million in protection in excess of $150 million with one reinstatement. We also purchased a $150 million in excess of $300 million layer that covers Europe and worldwide earthquake exposure. Above these pillars of cover is an additional treaty that provides $50 million of protection with one reinstatement (Umbrella 1). However, Umbrella 1 may also be exhausted by certain property per risk losses so it is not certain that it will be available to us for a catastrophe event. In addition, we purchased another $50 million layer above Umbrella 1.
With respect to the July 1, 2010, to June 30, 2011, treaty period, we also purchased certain underlying regional catastrophe covers for our ACE Overseas General and ACE Bermuda business units. These covers include a Latin America and Caribbean catastrophe cover that is $65 million in excess of $10 million, an Australia, Africa, and Asia (excludes Japan) catastrophe cover that is $40 million in excess of $10 million. For Japanese business written locally, we also purchased a Japan underlying catastrophe cover that is placed in local currency, which equates to approximately $40 million in excess of $15 million. Finally, we bought a layer of $25 million in excess of $50 million for our Australia, Africa, and Asia as well as Japanese exposures, with the underlying programs inuring to the benefit of this component. With respect to these four regional underlying covers, we placed 55 percent of the layer with reinsurers, and each has two reinstatements.
In summary, for our international catastrophe exposures, we purchased $550 million in limits for earthquake protection outside the contiguous United States. For Europe, for all perils, the limit is now $550 million. For other perils in the rest of the world, excluding the contiguous United States, the limit is now $400 million. In comparison to last year’s program, we have increased the limits purchased for Europe by $69 million and for Japan wind by $72 million and Japan earthquake by $222 million. In addition, we increased our retention in Europe by approximately $31 million and in Japan by $34 million relative to last year.
We regularly review our reinsurance protection and corresponding property catastrophe exposures. This may or may not lead to the purchase of additional reinsurance prior to a program’s renewal date. In addition, prior to each renewal date, we consider how much, if any, coverage we intend to buy and we may make material changes to the current structure in light of various factors, including modeled PML assessment at various return periods, reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations.
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Crop insurance
We are, and have been since the 1980s, one of the leading writers of crop insurance in the U.S. and conduct that business through an MGA subsidiary of Rain and Hail. As discussed under “Transactions”, during the third quarter of 2010, we announced that we had signed a definitive agreement to acquire all of the outstanding common stock of Rain and Hail not currently owned by us. We currently own approximately 20 percent of the outstanding common stock of Rain and Hail.
We provide protection throughout the U.S. and are therefore geographically diversified, which reduces the risk of exposure to a single event or a heavy accumulation of losses in any one region. Our crop insurance business comprises two components – multi-peril crop insurance (MPCI) and hail insurance.
The MPCI program is a partnership with the U.S. Department of Agriculture (USDA). The policies cover revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. Generally, policies have deductibles ranging from 10 percent to 50 percent of the insured’s risk. The USDA’s Risk Management Agency (RMA) sets the policy terms and conditions, rates and forms, and is also responsible for setting compliance standards. As a participating company, we report all details of policies underwritten to the RMA and are party to a Standard Reinsurance Agreement (SRA), which sets out the relationship between private insurance companies and the federal government concerning the terms and conditions regarding the risks each will bear. In addition to the pro-rata and excess of loss reinsurance protections inherent in the SRA, we cede business on a quota-share basis to third-party reinsurers and further protect our net retained position through the purchase of stop-loss reinsurance in the private market place. In July 2010, the RMA released a final version of a new SRA (the 2011 SRA), replacing the prior agreement which expired on June 30, 2010. The 2011 SRA applies to the 2011 Crop year, and therefore we expect minimal impact from the new agreement on our 2010 financial results. Similar to the recently expired SRA, the 2011 SRA contains the pro rata and state stop-loss provisions which continue to allow companies to limit the exposure of any one state or group of states on their underwriting results. Generally, it also continues to allow companies to selectively retain the more attractive risks while ceding the historically less profitable risks to the federal government. While the 2011 SRA does reduce the potential underwriting profit, it also decreases the maximum underwriting loss, compared with the prior version. Despite the potential underwriting profitability reduction, we believe the 2011 SRA allows for an acceptable rate of return in 2011.
Our hail program is a private offering. We use industry data to develop our own rates and forms for the coverage offered. The policy primarily protects farmers against yield reduction caused by hail and/or fire, and related costs such as transit to storage. We offer various deductibles to allow the grower to partially self-insure for a reduced premium cost. We limit our hail exposures through the use of township liability limits, quota-share reinsurance cessions, and stop-loss reinsurance on our net retained hail business.
On the MPCI business, we recognize net premiums written as we receive acreage reports from the policyholders on the various crops throughout the U.S. The program has specific timeframes as to when producers must report acreage to us. These reports allow us to determine the actual premium associated with the liability that is being planted. Once the net premium written has been booked, the premium is then earned over the growing season for the crops. Given the major crops that are covered in the program, we typically see a substantial written premium impact in the second and third quarters and the earned premium is also more concentrated in the second and third quarters. Premium is earned on the hail program over the coverage period of the policy. Given the very short nature of the growing season, most hail business is typically written in the second and third quarters with the earned premium also more heavily occurring during this time frame. We regularly receive reports from our MGA relating to the previous crop year(s), resulting in adjustments to previously reported premiums, losses and loss expenses, and profit share commissions. The adjustments are typically more significant in the first quarter of the year (annual first quarter settlement), compared with other periods.
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Liquidity
We anticipate that positive cash flows from operations (underwriting activities and investment income) should be sufficient to cover cash outflows under most loss scenarios through 2010. Should the need arise, we generally have access to the capital markets and available credit facilities. At September 30, 2010, our available credit lines totaled $2.5 billion and usage to support issued letters of credit was $1.3 billion. This compares with available credit lines of $2.5 billion and usage of $1.5 billion at December 31, 2009. Our access to funds under existing credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Our existing credit facilities have remaining terms expiring between 2012 and 2014 and require that we maintain certain financial covenants, all of which we met at September 30, 2010. Should any of our existing credit providers experience financial difficulty, we may be required to replace credit sources, possibly in a difficult market. There has also been recent consolidation in the banking industry which could lead to increased reliance on and exposure to particular institutions. If we cannot obtain adequate capital or sources of credit on favorable terms, on a timely basis or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities . Refer to “Credit facilities” in our 2009 Form 10-K.
The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies. During the nine months ended September 30, 2010, we were able to meet all of our obligations, including the payments of dividends declared on our Common Shares with our net cash flows.
As discussed under “Transactions”, during the third and fourth quarters of 2010, we signed definitive agreements with respect to acquisitions that we expect will cost us approximately $1.725 billion, subject to adjustments to reflect the book values of the acquired entities. ACE expects to fund the purchase price of the transactions using available cash and/or short-term reverse repurchase agreements.
We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the nine months ended September 30, 2010 and 2009, ACE Limited did not receive any dividends from its Bermuda subsidiaries.
The payment of any dividends from ACE Global Markets or its subsidiaries is subject to applicable U.K. insurance laws and regulations. In addition, the release of funds by Syndicate 2488 to subsidiaries of ACE Global Markets is subject to regulations promulgated by the Society of Lloyd’s. The U.S. insurance subsidiaries of ACE INA may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary’s domicile (or, if applicable, “commercial domicile”). ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
ACE Limited did not receive any dividends from ACE Global Markets or ACE INA during the nine months ended September 30, 2010 and 2009. The debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.
Cash Flows
Sources of liquidity include cash from operations, routine sales of investments, and financing arrangements. The following is a discussion of our cash flows for the nine months ended September 30, 2010 and 2009.
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Our consolidated net cash flows from operating activities were $2.8 billion in the nine months ended September 30, 2010, compared with $2.3 billion in the prior year period. Net loss and loss expenses paid were $5.5 billion in the nine months ended September 30, 2010, compared with $5.2 billion in the prior year period. Operating cash flow increased in the nine months ended September 30, 2010, in part due to net collections of insurance and reinsurance balances. Operating cash flow in the comparable period for 2009 included higher than typical net claim payments in connection with prior year catastrophes and other individual large losses, and an increase in tax payments. In addition, during the nine months ended September 30, 2009, operating cash flow was adversely impacted by the return of collateral collected in 2008.
Our consolidated net cash flows used for investing activities were $2.7 billion in the nine months ended September 30, 2010, compared with $2.4 billion in the prior year period. Net investing activities for the indicated periods were related primarily to net purchases of fixed maturities.
Our consolidated net cash flows used for financing activities were $282 million in the nine months ended September 30, 2010, compared with net cash flows used for financing activities of $30 million in the prior year period. Net cash flows used for financing activities in the nine months ended September 30, 2010 and 2009, included dividends paid on our Common Shares of $323 million and $283 million, respectively. For the prior year period net cash flows used for financing activities also included net proceeds from the issuance, in June 2009, of $500 million in long-term debt and the net repayment of reverse repurchase agreements of $250 million.
Both internal and external forces influence our financial condition, results of operations, and cash flows. Claim settlements, premium levels, and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us, and the settlement of the liability for that loss.
From time to time, we utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs. We use these instruments on a limited basis to address short-term cash timing differences without disrupting our investment portfolio holdings and settle the transactions with future operating cash flows. At September 30, 2010, there were no reverse repurchase agreements outstanding.
Capital Resources
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at September 30, 2010, and December 31, 2009.
|
September 30
2010 |
December 31
2009 |
|||||||
|
(in millions of U.S.
dollars, except for
|
||||||||
|
Short-term debt |
$ | 155 | $ | 161 | ||||
|
Long-term debt |
3,158 | 3,158 | ||||||
|
Total debt |
3,313 | 3,319 | ||||||
|
Trust preferred securities |
309 | 309 | ||||||
|
Total shareholders’ equity |
22,845 | 19,667 | ||||||
|
Total capitalization |
$ | 26,467 | $ | 23,295 | ||||
|
Ratio of debt to total capitalization |
12.5 | % | 14.2 | % | ||||
|
Ratio of debt plus trust preferred securities to total capitalization |
13.7 | % | 15.6 | % | ||||
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Total shareholders’ equity increased $3.2 billion in the nine months ended September 30, 2010. The following table reports the significant movements in our shareholders’ equity for the nine months ended September 30, 2010.
| September 30, 2010 | ||||
|
(in millions of U.S. dollars) |
||||
|
Balance at December 31, 2009 |
$ | 19,667 | ||
|
Net income |
2,107 | |||
|
Dividends declared on Common Shares |
(330 | ) | ||
|
Change in net unrealized appreciation (depreciation) on investments, net of tax |
1,311 | |||
|
Share-based compensation expense |
101 | |||
|
Other movements, net of tax |
(11 | ) | ||
|
Balance at September 30, 2010 |
$ | 22,845 | ||
As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities, which includes Common Shares, up to $250 million. At September 30, 2010, this authorization had not been utilized. We generally maintain shelf registration capacity at all times in order to allow capital market access for refinancing as well as for unforeseen or opportunistic capital needs. Our currently effective unlimited shelf registration statement expires in December 2011.
Dividends
We have paid dividends each quarter since we became a public company in 1993. Since the third quarter of 2008, we have paid dividends by way of a par value reduction distribution. The following table represents dividends paid per Common Share to shareholders of record on each of the following dates:
|
Shareholders of record as of: |
Dividends paid as of: | |||
|
December 17, 2009 |
January 11, 2010 | $0.31 (CHF 0.32) | ||
|
March 31, 2010 |
April 12, 2010 | $0.31 (CHF 0.33) | ||
|
July 27, 2010 |
August 17, 2010 | $0.33 (CHF 0.34) | ||
|
October 1, 2010 |
October 22, 2010 | $0.33 (CHF 0.32) |
For the foreseeable future, subject to shareholder approval, we expect to make distributions to shareholders as a repayment of share capital in the form of a reduction in par value (or qualified paid-in capital) rather than through ordinary dividends. At the Annual General Meeting held in May 2010, the Company’s shareholders approved a par value reduction in an aggregate Swiss franc amount, pursuant to a formula, equal to $1.32 per share, which we refer to as the Base Annual Dividend. The Base Annual Dividend is payable in four installments, provided that each of the Swiss franc installments will be adjusted pursuant to the formula so that the actual Swiss franc par value reduction amount for each installment will equal $0.33, subject to an aggregate upward adjustment, which we refer to as the Dividend Cap, for the four installments of 50 percent of the Base Annual Dividend.
Application of the formula means that the Swiss franc amount of each installment will be determined in advance of distribution while the U.S. dollar value of the installment will remain $0.33 unless and until the Dividend Cap is reached. Par value reduction that would otherwise exceed the Dividend Cap will be reduced to equal the Swiss franc amount remaining available under the Dividend Cap and the U.S. dollar amount distributed will be the then-applicable U.S. dollar equivalent of that Swiss franc amount.
Should we determine to pay dividends other than by a reduction in par value, under Swiss law, such dividends (other than by reductions in par value) may be paid out only if the corporation has sufficient distributable profits from previous business years, or if the reserves of the corporation are sufficient to allow distribution of a
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dividend. The Board of Directors of a Swiss corporation may propose that a dividend be paid, but cannot itself set the dividend. The Company auditors must confirm that the dividend proposal of the board of directors conforms with Swiss statutory law. Prior to the distribution of dividends, five percent of the annual profits must be allocated to the general reserve until the amount of general reserves has reached twenty percent of the paid-in nominal share capital. Our Swiss Articles of Association can provide for a higher general reserve or for the creation of further reserves setting forth their purpose and use. Once this level has been reached and maintained, the shareholders may approve a distribution of each year’s profit within the framework of applicable legal requirements. Dividends paid from retained earnings are usually due and payable immediately after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statute of limitations in respect of claims for dividend payments is five years.
Recent accounting pronouncements
Refer to Note 2 to the Consolidated Financial Statements, for a discussion of new accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to Item 7A included in our 2009 Form 10-K.
Reinsurance of GMDB and GMIB guarantees
Our net income is directly impacted by changes in the benefit reserves calculated in connection with the reinsurance of variable annuity guarantees, primarily GMDB and GMIB. The benefit reserves are calculated in accordance with the provisions of Topic 944, related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit reserves are reflected as policy benefits expense, which is included in life underwriting income. In addition, our net income is directly impacted by the change in the fair value of the GMIB liability (FVL), which is classified as a derivative for accounting purposes. The FVL established for a GMIB reinsurance contract represents the difference between the fair value of the contract and the benefit reserves. Changes in the FVL, net of associated changes in the calculated benefit reserves, are reflected as realized gains or losses.
ACE views its variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance with the probability of long-term economic loss relatively small, at the time of pricing. Adverse changes in market factors and policyholder behavior will have an impact on both life underwriting income and net income. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term economic risk and reward.
At September 30, 2010, management established benefit reserves based on the benefit ratio calculated using assumptions reflecting management’s best estimate of the future performance of the variable annuity line of business. Management exercises judgment in determining the extent to which short-term market movements impact the benefit reserves. The benefit reserves are based on the calculation of a long-term benefit ratio (or loss ratio) for the variable annuity guarantee reinsurance. Despite the long-term nature of the risk, the benefit ratio calculation is impacted by short-term market movements that may be judged by management to be temporary or transient. Management’s best estimate reflected a judgment that the equity markets will exhibit sub-par growth over the next several years. Management regularly examines both quantitative and qualitative analysis and for the quarter ended September 30, 2010, determined that no change to the benefit ratio was warranted. The benefit ratio used to establish the benefit reserves at September 30, 2010, has averaged less than 1/4 standard deviation from the calculated benefit ratios, averaging the periodic results from the time the benefit ratio was changed during the first quarter of 2009 until September 30, 2010.
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Topic 944 requires ACE to “regularly evaluate estimates used and adjust the liability balance… if actual experience or other evidence suggests that earlier assumptions should be revised.” ACE evaluates its estimates regularly and management uses judgment to determine the extent to which the assumptions underlying the benefit ratio calculation used to establish benefit reserves should be adjusted. The benefit ratio will be calculated based on management’s expectation for the short-term and long-term performance of the variable annuity guarantee liability. Management’s quantitative analysis includes a review of the differential between the benefit ratio used at the most recent valuation date and the benefit ratio calculated on subsequent dates. The differential is measured in terms of the standard deviation of the distribution of benefit ratios (reflecting 1,000 stochastic scenarios) calculated on subsequent dates. As an example, if, on average, the benefit ratio used at the most recent valuation date falls within 1/2 a standard deviation of the mean of the distribution of benefit ratios calculated periodically since the most recent change in benefit ratio, management may elect not to adjust the benefit ratio used to generate the benefit reserves at the quarter-end valuation date.
Further, if due to changes in equity and credit market conditions, the benefit ratio used at the most recent valuation date differs from the mean of the periodically calculated distribution of benefit ratios by less than 1 standard deviation, management will consider current market conditions when determining its expectations of future payout obligations, particularly as those market conditions relate to shorter-term payout obligations.
Finally, if due to changes in equity and credit market conditions, the benefit ratio used at the most recent valuation date differs from the mean of the periodically calculated distribution of benefit ratios by more than 1 standard deviation for a sustained and prolonged period of time, management will give substantial weight to prevailing market conditions when determining its expectations of future payout obligations. As an example, based on management’s current expectations as of the publication of this document, all else being equal, the S&P 500 index would need to remain below a level of 800 for a prolonged period of time in order for management to give substantial weight to current market conditions.
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The benefit reserves and FVL calculations are directly affected by market factors, including equity levels, interest rate levels, credit risk, and implied volatilities, as well as policyholder behaviors, such as annuitization and lapse rates. The tables below show the sensitivity, at September 30, 2010, of the benefit reserves and FVL associated with the variable annuity guarantee reinsurance portfolio. In addition, the tables below show the sensitivity of the fair value of specific derivative instruments held (hedge value), which includes only those instruments owned at the reporting date, to partially offset the risk in the variable annuity guarantee reinsurance portfolio.
| Worldwide Equity Shock | ||||||||||||||||||||||||||
|
Interest Rate Shock |
+10% | Flat | -10% | -20% | -30% | -40% | ||||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||||
|
+100 bps |
(Increase)/decrease in benefit reserves |
$ | 68 | $ | 17 | $ | (55 | ) | $ | (157 | ) | $ | (297 | ) | $ | (485 | ) | |||||||||
|
(Increase)/decrease in FVL |
274 | 164 | 22 | (161 | ) | (379 | ) | (600 | ) | |||||||||||||||||
|
Increase/(decrease) in hedge value |
(115 | ) | (8 | ) | 101 | 211 | 323 | 437 | ||||||||||||||||||
|
Increase/(decrease) in net income |
$ | 227 | $ | 173 | $ | 68 | $ | (107 | ) | $ | (353 | ) | $ | (648 | ) | |||||||||||
|
Flat |
(Increase)/decrease in benefit reserves |
$ | 52 | $ | — | $ | (75 | ) | $ | (182 | ) | $ | (330 | ) | $ | (527 | ) | |||||||||
|
(Increase)/decrease in FVL |
165 | — | (217 | ) | (468 | ) | (730 | ) | (990 | ) | ||||||||||||||||
|
Increase/(decrease) in hedge value |
(108 | ) | — | 109 | 220 | 333 | 448 | |||||||||||||||||||
|
Increase/(decrease) in net income |
$ | 109 | $ | — | $ | (183 | ) | $ | (430 | ) | $ | (727 | ) | $ | (1,069 | ) | ||||||||||
|
-100 bps |
(Increase)/decrease in benefit reserves |
$ | 35 | $ | (19 | ) | $ | (97 | ) | $ | (212 | ) | $ | (368 | ) | $ | (575 | ) | ||||||||
|
(Increase)/decrease in FVL |
(72 | ) | (321 | ) | (600 | ) | (899 | ) | (1,205 | ) | (1,495 | ) | ||||||||||||||
|
Increase/(decrease) in hedge value |
(100 | ) | 8 | 119 | 230 | 344 | 458 | |||||||||||||||||||
|
Increase/(decrease) in net income |
$ | (137 | ) | $ | (332 | ) | $ | (578 | ) | $ | (881 | ) | $ | (1,229 | ) | $ | (1,612 | ) | ||||||||
|
Sensitivities to Other Economic Variables |
A-rated
Credit Spreads |
Interest Rate
Volatility |
Equity
Volatility |
|||||||||||||||||||||
| +100 | -100 | +2% | -2% | +2% | -2% | |||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
(Increase)/decrease in benefit reserves |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
|
(Increase)/decrease in FVL |
60 | (75 | ) | (3 | ) | — | (19 | ) | 16 | |||||||||||||||
|
Increase/(decrease) in hedge value |
— | — | — | — | 4 | (4 | ) | |||||||||||||||||
|
Increase/(decrease) in net income |
$ | 60 | $ | (75 | ) | $ | (3 | ) | $ | — | $ | (15 | ) | $ | 12 | |||||||||
|
Sensitivities to Actuarial Assumptions |
Mortality | Lapses | Annuitization | |||||||||||||||||||||
| +10% | -10% | +25% | - 25% | +25% | -25% | |||||||||||||||||||
| (in millions of U.S. dollars) | ||||||||||||||||||||||||
|
(Increase)/decrease in benefit reserves |
$ | (21 | ) | $ | 22 | $ | 32 | $ | (40 | ) | $ | (16 | ) | $ | 19 | |||||||||
|
(Increase)/decrease in FVL |
10 | (9 | ) | 106 | (141 | ) | (92 | ) | 91 | |||||||||||||||
|
Increase/(decrease) in hedge value |
— | — | — | — | — | — | ||||||||||||||||||
|
Increase/(decrease) in net income |
$ | (11 | ) | $ | 13 | $ | 138 | $ | (181 | ) | $ | (108 | ) | $ | 110 | |||||||||
The above tables assume benefit reserves and FVL using the benefit ratio calculated at September 30, 2010. Additionally, the above table assumes equity shocks impact all global equity markets equally and that the interest rate shock is a parallel shift in the U.S. yield curve. Although our liabilities have sensitivity to global equity markets, we would suggest using the S&P 500 as a proxy and although our liabilities have sensitivity to global interest rates at various points on the yield curve, we would suggest using the 10-year U.S. Treasury yield as a proxy. A change in A-rated credit spreads (A-rated credit spreads are a proxy for both ACE’s own credit spreads and the credit spreads of the ceding insurers), impacts the rate used to discount cash flows in the fair value model. The hedge sensitivity is from September 30, 2010, market levels.
The above sensitivities are not directly additive because changes in one factor will affect the sensitivity to changes in other factors. Also, the sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. The calculation of the benefit reserves and FVL is based on internal models
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that include assumptions regarding future policyholder behavior, including lapse, annuitization, and asset allocation. These assumptions impact both the absolute level of the benefit reserves and the FVL as well as the sensitivities to changes in market factors shown above. Additionally, actual sensitivity of our benefit reserves, FVL, and net income may differ from those disclosed in the tables above due to differences between short-term market movements and management judgment regarding the long-term assumptions implicit in our benefit ratio. Furthermore, the sensitivities above could vary by multiples of the sensitivities in the tables above.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized, and reported within time periods specified in the rules and forms of the SEC and accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the quarter ended September 30, 2010, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
97
ACE LIMITED
PART II – OTHER INFORMATION
Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures.
While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of the matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results, or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.
Information on the insurance industry investigations and related matters is set forth in Note 5 d) to our Consolidated Financial Statements.
The following supplements the risk factors that could have a material impact on our results of operations or financial condition as described under “Risk Factors” in Item 1A. of Part I of our 2009 Form 10-K and under “Risk Factors” in Item 1A. of Part II of our quarterly report on Form 10-Q for the quarter ended June 30, 2010, and should be read in conjunction with those disclosures. The Risk Factor listed in our 2009 Form 10-K under the subheading, “The integration of acquired companies may not be as successful as we anticipate.” is amended and restated to read in its entirety as set forth below.
The integration of acquired companies may not be as successful as we anticipate.
Acquisitions involve numerous risks, including operational, strategic, and financial risks such as potential liabilities associated with the acquired business. Difficulties in integrating an acquired company may result in the acquired company performing differently than we currently expect or in our failure to realize anticipated expense-related efficiencies. Our existing businesses could also be negatively impacted by acquisitions.
There is also the potential that proposed acquisitions that have been publicly announced will not be consummated, even if a definitive agreement has been signed by the parties. If an agreement is terminated before closing, the result would be that our proposed acquisition would not occur, which could among other things adversely impact our stock price and future operations. For example, in the third quarter of 2010, we executed a definitive agreement to acquire all of the outstanding common stock of United States-based Rain and Hail Insurance Service, Inc. not currently owned by ACE. While we expect this acquisition to ultimately be completed, there is risk that this transaction will not close, for example if agreed-upon conditions to the closing are not satisfied.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases by the Company of its Common Shares during the three months ended September 30, 2010.
98
Issuer’s Purchases of Equity Securities
|
Period |
Total
Number of Shares Purchased* |
Average Price
Paid per Share |
Total Number of
Shares Purchased as Part of Publicly Announced Plan** |
Approximate Dollar
Value of Shares that May Yet be Purchased Under the Plan** |
||||||||||||
|
July 1 through July 31 |
2,214 | $ | 50.85 | — | $ | 250 million | ||||||||||
|
August 1 through August 31 |
530 | $ | 52.87 | — | $ | 250 million | ||||||||||
|
September 1 through September 30 |
2,831 | $ | 54.61 | — | $ | 250 million | ||||||||||
|
Total |
5,575 | |||||||||||||||
| * | For the quarter ended September 30, 2010, this column represents the surrender to the Company of 5,575 Common Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees. |
| ** | As part of ACE’s capital management program, in November 2001, the Company’s Board of Directors authorized the repurchase of any ACE issued debt or capital securities, including Common Shares, up to $250 million. At September 30, 2010, this authorization had not been utilized. |
Item 6. Exhibits
Refer to the Exhibit Index.
99
ACE LIMITED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ACE LIMITED | ||||
|
November 5, 2010 |
/ S / E VAN G. G REENBERG |
|||
| Evan G. Greenberg | ||||
|
Chairman and Chief Executive Officer |
||||
|
November 5, 2010 |
/ S / P HILIP V. B ANCROFT |
|||
| Philip V. Bancroft | ||||
| Chief Financial Officer | ||||
100
|
Incorporated by Reference |
Filed
|
|||||||||||
|
Exhibit
|
Exhibit Description |
Form |
Original
|
Date Filed |
SEC File
|
|||||||
| 3.1 | Organizational Regulations of the Company, as amended and restated. | 8-K | 3 | August 12, 2010 | 001-11778 | |||||||
| 3.2 | Articles of Association of the Company, as amended and restated | 8-K | 3 | October 1, 2010 | 001-11778 | |||||||
| 4.1 | Organizational Regulations of the Company, as amended and restated. | 8-K | 4 | August 12, 2010 | 001-11778 | |||||||
| 4.2 | Articles of Association of the Company, as amended and restated | 8-K | 4 | October 1, 2010 | 001-11778 | |||||||
| 10.1 | Agreement and Plan of Merger by and among Rain and Hail Insurance Service, Inc., Steve C. Harms, as shareholders’ representative, ACE American Insurance Company, Raha Iowa Acquisition Corp. and ACE Limited. | X | ||||||||||
| 31.1 | Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 31.2 | Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. | X | ||||||||||
| 101.1 | The following financial information from ACE Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 formatted in XBRL: (i) Consolidated Balance Sheet at September 30, 2010, and December 31, 2009; (ii) Consolidated Statement of Operations and Comprehensive Income for the three months and nine months ended September 30, 2010 and 2009; (iii) Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2010 and 2009; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009; and (v) Notes to the Interim Consolidated Financial Statements. | X | ||||||||||
101
No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
|---|
| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
|---|
No information found
No Customers Found
Suppliers
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
|---|