How much did the September 11, 2001 attacks cost ACE?

ACE recorded $650 million of net losses and loss expenses from the attacks, on estimated gross losses of about $1.9 billion before roughly $1.3 billion of reinsurance recoveries. After tax, the impact on net income was about $559 million. Management said the estimate is based on currently available information and that business interruption claims or other coverage developments could increase the liability.

Why did ACE swing from a profit to a loss in 2001?

The main drivers were the September 11 losses ($559 million after tax), $94 million of prior-year reserve strengthening (mainly in international casualty), about $55 million of Mid-Western U.S. storm losses, and an income tax benefit of $79 million. Higher loss ratios at ACE Bermuda and ACE Global Markets were largely attributable to these events, while underlying performance at ACE USA and ACE Global Reinsurance was comparatively stable.

Is ACE's loss reserve position adequate, and what are the main reserve risks?

Management believes its $20.7 billion of gross loss reserves is adequate, and independent actuaries agreed that the methods and assumptions were reasonable. However, the company disclosed a cumulative deficiency of $1.13 billion for 1999 and prior years, largely in U.S. asbestos and environmental liabilities in the Brandywine run-off unit. About $500 million of that was covered by reinsurance placed when the risks were written, and $600 million was ceded to National Indemnity (Berkshire Hathaway). Management noted that future reserve changes could be material.

How did the company fund its growth and capital needs?

ACE completed a public offering of 32.89 million ordinary shares in October 2001, raising about $1.1 billion net, used mainly to expand underwriting capacity after September 11. Debt to total capitalization was 20% at year end, and the company reported $1.35 billion of operating cash flow. ACE also had about $1.05 billion of credit facilities and a shelf registration with $627 million still available. Short-term debt rose to $495 million, including $395 million of repurchase agreements.

What is the outlook for pricing and the Lloyd's business?

Management said prices were rising in most lines following September 11, with reduced available capacity and changing terms and conditions. ACE Global Markets increased its capacity for the 2002 year of account by 24% to $1.3 billion and planned to own 99.6% of Lloyd's Syndicate 2488 in 2002, rising to 100% in 2003. Property catastrophe reinsurance rates rose about 23% on January 2002 renewals. ACE also said that proposed Lloyd's reforms would not affect its reported U.S. GAAP results.

CB 10-K FY2001 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 18, 2002. Cited figures are marked; the original filing is the authoritative source.

This 10-K for fiscal 2001 from ACE Limited, the Bermuda-based predecessor of today's Chubb (which later adopted the CB ticker), reports a difficult year.

ACE posted a net loss of $146.4 million^a, or $(0.74) per diluted share, compared with net income of $543 million ($2.31 per diluted share) in 2000. The swing reflects the September 11, 2001 terrorist attacks, which cost the company $650 million in net losses and loss expenses (about $559 million after tax), plus $94 million of prior-year reserve strengthening, mainly in international casualty lines. Excluding realized investment losses, non-recurring items and a $23 million accounting change, the loss was $69 million, versus $582 million of income in 2000.

The loss and loss expense ratio rose to 82.6% from 64.7%, and the combined ratio reached 111.7% from 95.5%, meaning underwriting lost money in 2001. Top-line growth was strong. Gross premiums written rose 34% to $10.2 billion^b, driven by ACE USA, ACE International, and the financial solutions business at ACE Bermuda.

Management reported that post-September 11 pricing firmed sharply across property, aviation, excess casualty, and professional lines, which should support future margins. Balance sheet strength improved: shareholders' equity grew 13% to $6.1 billion^c after a $1.1 billion public share offering in October 2001, total assets reached $37.2 billion, and debt to total capitalization was 20%. Operating cash flow was $1.35 billion.

Management also said its debt rating watch was lifted after year end. Key risks for investors are reserve adequacy and legacy exposures.

Gross loss reserves reached $20.7 billion^d, and the company disclosed a cumulative deficiency of $1.13 billion for 1999 and prior years, concentrated in ACE INA's run-off book (including asbestos and environmental claims, of which about $2.2 billion gross is reserved). Reinsurance recoverables of $11.4 billion, of which about 90% are with reinsurers rated A- or better, also carry collection risk, and the company's results remain sensitive to catastrophes and to the outcome of September 11 claims, which management acknowledges could prove materially different from current estimates.

02—Key points

Key Highlights

Net loss of $146.4 million (diluted EPS of $(0.74)) in 2001, versus net income of $543 million in 2000, driven largely by the $650 million net September 11 loss
Combined ratio deteriorated to 111.7% from 95.5%, with the loss and loss expense ratio up to 82.6% from 64.7%; ex-September 11 and other one-time items the loss ratio would have been about 68.8%
Gross premiums written grew 34% to $10.2 billion, with ACE USA ($4.4 billion) and ACE International ($2.3 billion) the largest contributors
Shareholders' equity rose 13% to $6.1 billion after a $1.1 billion share offering in October 2001; diluted book value per share was $23.59
Gross unpaid losses and loss expenses reached $20.7 billion, with a disclosed $1.13 billion cumulative reserve deficiency for 1999 and prior years, mainly in the ACE INA run-off book
Post-September 11 market pricing firmed significantly, with reported rate increases of roughly 20-30% in excess liability, 50-100% in excess property, and 20-25% in professional lines, supporting improved future underwriting prospects
Quarterly dividend raised to $0.15 per share from $0.13 in 2000; total 2001 dividends declared were $0.58 per share, and debt to total capitalization was 20%

03—Questions

Frequently Asked Questions

How much did the September 11, 2001 attacks cost ACE?
ACE recorded $650 million of net losses and loss expenses from the attacks, on estimated gross losses of about $1.9 billion before roughly $1.3 billion of reinsurance recoveries. After tax, the impact on net income was about $559 million. Management said the estimate is based on currently available information and that business interruption claims or other coverage developments could increase the liability.
Why did ACE swing from a profit to a loss in 2001?
The main drivers were the September 11 losses ($559 million after tax), $94 million of prior-year reserve strengthening (mainly in international casualty), about $55 million of Mid-Western U.S. storm losses, and an income tax benefit of $79 million. Higher loss ratios at ACE Bermuda and ACE Global Markets were largely attributable to these events, while underlying performance at ACE USA and ACE Global Reinsurance was comparatively stable.
Is ACE's loss reserve position adequate, and what are the main reserve risks?
Management believes its $20.7 billion of gross loss reserves is adequate, and independent actuaries agreed that the methods and assumptions were reasonable. However, the company disclosed a cumulative deficiency of $1.13 billion for 1999 and prior years, largely in U.S. asbestos and environmental liabilities in the Brandywine run-off unit. About $500 million of that was covered by reinsurance placed when the risks were written, and $600 million was ceded to National Indemnity (Berkshire Hathaway). Management noted that future reserve changes could be material.
How did the company fund its growth and capital needs?
ACE completed a public offering of 32.89 million ordinary shares in October 2001, raising about $1.1 billion net, used mainly to expand underwriting capacity after September 11. Debt to total capitalization was 20% at year end, and the company reported $1.35 billion of operating cash flow. ACE also had about $1.05 billion of credit facilities and a shelf registration with $627 million still available. Short-term debt rose to $495 million, including $395 million of repurchase agreements.
What is the outlook for pricing and the Lloyd's business?
Management said prices were rising in most lines following September 11, with reduced available capacity and changing terms and conditions. ACE Global Markets increased its capacity for the 2002 year of account by 24% to $1.3 billion and planned to own 99.6% of Lloyd's Syndicate 2488 in 2002, rising to 100% in 2003. Property catastrophe reinsurance rates rose about 23% on January 2002 renewals. ACE also said that proposed Lloyd's reforms would not affect its reported U.S. GAAP results.

04—Continue

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