What drove the increase in ACE's 2000 earnings?

Net income rose to $543 million from $365 million. Most of the gain came from a full year of ACE INA results, which added about $100 million, and from $82 million of income from ACE Financial Services, acquired in December 1999. ACE Global Reinsurance added about $78 million because 2000 had far fewer catastrophe losses than 1999. Net realized investment losses of $39 million partly offset these gains.

Is the company's reserve position reliable?

Management says its $17.4 billion gross reserve for unpaid losses and loss expenses is adequate and has been reviewed by independent actuaries. The filing also says the process is inherently imprecise and that final liabilities could be significantly greater or less than estimates. Asbestos and environmental exposures are a particular source of uncertainty. The 1999 A&E figure was corrected downward by $910 million, which is a reason to watch future reserve development closely. Reinsurance recoverables of $9.0 billion, net of a $710 million allowance, carry collection risk.

Why was operating cash flow negative, and should investors worry?

Operating cash flow was negative $427 million. The main cause is claim payments on ACE INA's run-off book of reserves acquired with CIGNA's property and casualty operations, which totaled $3.8 billion of net loss payments in 2000. Management says the company's ongoing businesses still generate positive operating cash flow and that its cash, routine investment sales and credit facilities are sufficient. Investors should still monitor cash flow because it depends heavily on claim settlement timing.

How is ACE financing its growth and acquisitions?

The ACE INA acquisition was financed mostly through commercial paper that was later replaced by permanent capital. Permanent financing included senior notes, trust preferred and capital securities totaling about $875 million, $311 million of FELINE PRIDES, and a $400 million net common share offering in September 2000. Total debt and trust preferred securities were about $2.7 billion at year-end 2000, down from $3.1 billion. The company also has a $800 million 364-day credit facility, a $250 million five-year facility, and other letter-of-credit facilities that support Lloyd's and reinsurance operations.

What legal and tax risks does the filing disclose?

The company filed an 8-K in December 2000 disclosing legal action against CIGNA for breach of contract related to the $3.45 billion ACE INA acquisition. Management says its ordinary business litigation will not materially affect financial condition. On taxes, ACE and its Bermuda subsidiaries say they are not subject to U.S. income tax because they do not conduct U.S. business, but the filing acknowledges the IRS could contend otherwise, which could materially affect shareholders' equity and earnings. Cayman Islands and Bermuda tax exemptions run to 2013 and March 2016, respectively.

CB 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 2001. Cited figures are marked; the original filing is the authoritative source.

This 10-K for fiscal 2000 is filed by ACE Limited, a Cayman Islands holding company with its business office in Bermuda.

The filing's header refers to Chubb Ltd (CB), but the document content describes ACE Limited (ticker ACL, changing to ACE). The company reported a sharp recovery in 2000. Net income rose 49% to $543 million^a ($2.31 diluted EPS, versus $1.85 in 1999).

Gross premiums written nearly doubled to $7.6 billion^b, driven mainly by a full year of ACE INA, acquired from CIGNA in July 1999 for $3.45 billion, and by a larger share of Lloyd's Syndicate 2488. The combined ratio improved to 95.5% from 99.5%, and the loss and loss expense ratio fell to 64.7% from 66.0%. Total assets were $31.7 billion and shareholders' equity was $5.4 billion, or $23.25 diluted book value per share.

The company also returned to a more favorable pricing environment as the commercial insurance market hardened in 2000. The main risks for investors are reserve adequacy, the run-off book, and cash flow. Operating cash flow was negative $427 million^c, reflecting large loss payments from acquired ACE INA reserves, and gross unpaid losses rose to $17.4 billion.

Asbestos and environmental exposures total $2.2 billion^d gross ($752 million net), and management says reserves are adequate but acknowledges that ultimate losses could differ materially. Reinsurance recoverables of about $9.0 billion net of allowances, and the reinsurance disputes they can produce, are a further risk.

The company also has a legal action against CIGNA for breach of contract related to the ACE INA acquisition, and it faces potential U.S. tax exposure if the IRS challenged its non-U.S. tax position. Financing was extensive, including $311 million of FELINE PRIDES, $875 million of trust preferred securities, and a $400 million share offering in September 2000, which also supported a $412 million guarantee of ACE INA subordinated notes.

02—Key points

Key Highlights

Net income rose 49% to $543 million in 2000 from $365 million in 1999; diluted EPS was $2.31 versus $1.85. Income excluding realized gains and non-recurring items increased 76% to $582 million.
Gross premiums written grew 96% to $7.59 billion, mainly from a full year of ACE INA (acquired July 2, 1999) and a 20% increase in ACE's capacity on Lloyd's Syndicate 2488, which reached about $1 billion for 2001.
Combined ratio improved to 95.5% from 99.5%, with the loss and loss expense ratio at 64.7% and the underwriting and administrative expense ratio at 30.8%. ACE Global Reinsurance's combined ratio fell to 37.8% as 2000 catastrophe losses were light.
Total assets of $31.7 billion and shareholders' equity of $5.42 billion; diluted book value per share was $23.25, up from $20.28.
Operating cash flow was negative $427 million because of large loss payments on run-off ACE INA reserves; gross unpaid losses and loss expenses reached $17.4 billion, with $8.1 billion recoverable from reinsurers.
Asbestos and environmental exposures total $2.2 billion gross and $752 million net; management believes reserves are adequate, but it cannot rule out additional reserves that could have a material adverse effect.
Shareholder returns: quarterly dividends rose to $0.13 per share from $0.11, with total 2000 dividends of $0.50 per share; the stock closed at $38.00 on March 15, 2001, versus a 2000 quarterly high of $43.56.

03—Questions

Frequently Asked Questions

What drove the increase in ACE's 2000 earnings?
Net income rose to $543 million from $365 million. Most of the gain came from a full year of ACE INA results, which added about $100 million, and from $82 million of income from ACE Financial Services, acquired in December 1999. ACE Global Reinsurance added about $78 million because 2000 had far fewer catastrophe losses than 1999. Net realized investment losses of $39 million partly offset these gains.
Is the company's reserve position reliable?
Management says its $17.4 billion gross reserve for unpaid losses and loss expenses is adequate and has been reviewed by independent actuaries. The filing also says the process is inherently imprecise and that final liabilities could be significantly greater or less than estimates. Asbestos and environmental exposures are a particular source of uncertainty. The 1999 A&E figure was corrected downward by $910 million, which is a reason to watch future reserve development closely. Reinsurance recoverables of $9.0 billion, net of a $710 million allowance, carry collection risk.
Why was operating cash flow negative, and should investors worry?
Operating cash flow was negative $427 million. The main cause is claim payments on ACE INA's run-off book of reserves acquired with CIGNA's property and casualty operations, which totaled $3.8 billion of net loss payments in 2000. Management says the company's ongoing businesses still generate positive operating cash flow and that its cash, routine investment sales and credit facilities are sufficient. Investors should still monitor cash flow because it depends heavily on claim settlement timing.
How is ACE financing its growth and acquisitions?
The ACE INA acquisition was financed mostly through commercial paper that was later replaced by permanent capital. Permanent financing included senior notes, trust preferred and capital securities totaling about $875 million, $311 million of FELINE PRIDES, and a $400 million net common share offering in September 2000. Total debt and trust preferred securities were about $2.7 billion at year-end 2000, down from $3.1 billion. The company also has a $800 million 364-day credit facility, a $250 million five-year facility, and other letter-of-credit facilities that support Lloyd's and reinsurance operations.
What legal and tax risks does the filing disclose?
The company filed an 8-K in December 2000 disclosing legal action against CIGNA for breach of contract related to the $3.45 billion ACE INA acquisition. Management says its ordinary business litigation will not materially affect financial condition. On taxes, ACE and its Bermuda subsidiaries say they are not subject to U.S. income tax because they do not conduct U.S. business, but the filing acknowledges the IRS could contend otherwise, which could materially affect shareholders' equity and earnings. Cayman Islands and Bermuda tax exemptions run to 2013 and March 2016, respectively.

04—Continue

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