Why did ACE's net income fall so much in this period?

Net income dropped to $365 million from $560 million, mainly because of higher losses from property catastrophes in 1999 and adverse prior-period development, plus a sharp rise in the loss ratio after the lower-margin ACE INA domestic business was added. Realized investment gains also fell to $42 million from $188 million, and interest expense rose with the acquisition debt.

How was the ACE INA acquisition financed, and what does it mean for leverage?

The $3.45 billion cash purchase was funded with $1.025 billion of available cash, a $400 million hybrid trust preferred security, and the remainder through commercial paper. Permanent financing followed with senior notes, subordinated notes and trust preferred securities. Management intends to replace much of the commercial paper with newly issued ordinary shares or hybrid securities, so future dilution and refinancing execution are important watch items.

What are the main reserve risks investors should understand?

Gross unpaid losses are $16.5 billion, of which $7.6 billion is recoverable from reinsurers, and the company recorded a $758 million allowance for uncollectible reinsurance. Asbestos and environmental claims carry substantial uncertainty and are difficult to estimate, and management explicitly stated that additional reserves could be needed and could be material.

How strong is the company's competitive and rating position?

ACE Bermuda is rated A+ by A.M. Best and its claims-paying ability is rated A+ by S&P, while Tempest Re and the Lloyd's market are rated A by A.M. Best. The parent's senior debt is rated A2 by Moody's, A- by S&P and 'a' by A.M. Best, and ACE Financial Services' ratings were lowered to match the parent in January 2000. Management says it faces intense competition and softening prices in most lines, which could pressure future underwriting margins.

What did management say about the outlook for 2000?

Management said that continued softness in pricing and broader coverage terms may reduce premium volumes and raise combined ratios, and that operating income for fiscal 2000 is expected to be lower than otherwise anticipated if market conditions remain unchanged. It also noted that reduced investment income from the Bermuda operations, following the use of cash to fund the ACE INA acquisition, will weigh on results.

CB 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 2000. Cited figures are marked; the original filing is the authoritative source.

ACE Limited (filed under the CB-era disclosure, referenced in the document as ACE Limited, NYSE: ACL) closed fiscal 1999 (the 15-month transition period ended December 31, 1999, with the fiscal year-end changed from September 30) as a substantially larger company following two major acquisitions: CIGNA's international and domestic property & casualty operations (ACE INA, closed July 2, 1999 for $3.45 billion^a in cash) and Capital Re Corporation (closed December 30, 1999, renamed ACE Financial Services).

Total assets rose to $30.1 billion^b from $8.8 billion, shareholders' equity rose to $4.5 billion, and gross premiums written reached $3.9 billion versus $1.2 billion in fiscal 1998. Note that the filing's own text describes the 1999 year as twelve months ended December 31, 1999 for income statement purposes, while the MD&A also references a 15-month period for loss development analysis; investors should treat cross-period comparisons with care. Profitability weakened sharply.

Net income fell to $365 million^c (diluted EPS $1.85) from $560 million (EPS $2.96) in fiscal 1998. Income excluding realized gains and non-recurring items declined 21% to $330 million, driven by property catastrophe losses (including Taiwan, Turkey, Greece, Mexico earthquakes, Hurricane Floyd, and European windstorms), adverse development on pre-September 1998 property cat losses, and a higher loss ratio from the lower-quality ACE INA domestic book. The consolidated loss and loss expense ratio rose to 66.0% from 57.8%, and the combined ratio deteriorated to 99.5% from 88.2%.

Management also flagged softening pricing and expanding coverage terms across its markets, and guided to lower operating income for fiscal 2000 if market conditions persist. Balance sheet risk increased materially. Debt and trust preferred obligations rose to roughly $3.1 billion^d from $250 million, largely to fund the ACE INA acquisition, and the company is relying on commercial paper that management intends to refinance with equity or hybrid securities.

Net unpaid losses and loss expenses are $8.9 billion (gross $16.5 billion), with loss reserves to capital and surplus at 200.2% versus 65.9% a year earlier. Asbestos and environmental exposures grew to $3.1 billion gross ($967 million net), and management acknowledged that additional reserves could be needed. Ratings were A2/A-/A.M.

Best 'a' at the parent level, with ACE Financial Services ratings lowered to mirror the parent in January 2000. The company also disclosed that a $400 million share offering was contemplated to refinance the Rhino trust preferred securities, which could be remarketed if the share price fell below roughly $18.83.

02—Key points

Key Highlights

Total assets grew to $30.1 billion from $8.8 billion, and shareholders' equity increased to $4.5 billion, reflecting the ACE INA (CIGNA P&C) and Capital Re acquisitions.
Net income declined 35% to $365 million (diluted EPS $1.85) from $560 million (EPS $2.96) in fiscal 1998; income excluding realized gains and non-recurring items fell 21% to $330 million.
Gross premiums written rose to $3.9 billion from $1.2 billion, with ACE USA and ACE International contributing most of the increase.
Underwriting deteriorated: the loss ratio rose to 66.0% from 57.8% and the combined ratio to 99.5% from 88.2%, driven by catastrophe losses and the ACE INA business mix.
Debt and trust preferred obligations increased to about $3.1 billion from $250 million, and loss reserves to capital and surplus rose to 200.2% from 65.9%.
Gross unpaid losses and loss expenses reached $16.5 billion, including $3.1 billion of gross asbestos and environmental exposures, with management stating additional reserves may be required.
Shares traded at $18 11/16 on March 23, 2000, down from a 1998 high of $42 1/8, and the company's Rhino trust preferred remarketing trigger (about $18.83) sits close to that level.

03—Questions

Frequently Asked Questions

Why did ACE's net income fall so much in this period?
Net income dropped to $365 million from $560 million, mainly because of higher losses from property catastrophes in 1999 and adverse prior-period development, plus a sharp rise in the loss ratio after the lower-margin ACE INA domestic business was added. Realized investment gains also fell to $42 million from $188 million, and interest expense rose with the acquisition debt.
How was the ACE INA acquisition financed, and what does it mean for leverage?
The $3.45 billion cash purchase was funded with $1.025 billion of available cash, a $400 million hybrid trust preferred security, and the remainder through commercial paper. Permanent financing followed with senior notes, subordinated notes and trust preferred securities. Management intends to replace much of the commercial paper with newly issued ordinary shares or hybrid securities, so future dilution and refinancing execution are important watch items.
What are the main reserve risks investors should understand?
Gross unpaid losses are $16.5 billion, of which $7.6 billion is recoverable from reinsurers, and the company recorded a $758 million allowance for uncollectible reinsurance. Asbestos and environmental claims carry substantial uncertainty and are difficult to estimate, and management explicitly stated that additional reserves could be needed and could be material.
How strong is the company's competitive and rating position?
ACE Bermuda is rated A+ by A.M. Best and its claims-paying ability is rated A+ by S&P, while Tempest Re and the Lloyd's market are rated A by A.M. Best. The parent's senior debt is rated A2 by Moody's, A- by S&P and 'a' by A.M. Best, and ACE Financial Services' ratings were lowered to match the parent in January 2000. Management says it faces intense competition and softening prices in most lines, which could pressure future underwriting margins.
What did management say about the outlook for 2000?
Management said that continued softness in pricing and broader coverage terms may reduce premium volumes and raise combined ratios, and that operating income for fiscal 2000 is expected to be lower than otherwise anticipated if market conditions remain unchanged. It also noted that reduced investment income from the Bermuda operations, following the use of cash to fund the ACE INA acquisition, will weigh on results.

04—Continue

← View all 10-K filings