01—Abstract
Summary
Summary of the 10-K filed February 28, 2014. Cited figures are marked; the original filing is the authoritative source.
ACE Limited, Swiss-incorporated holding company of the ACE Group of Companies, reported a record year in 2013.
At December 31, 2013 the company had total assets of $95 billiona and shareholders' equity of $29 billion, and employed approximately 20,000 people. Net income rose 38.9 percent to $3.76 billion, diluted earnings per share were $10.92 versus $7.89 in 2012, and the P&C combined ratio improved to 88.0 percent from 93.9 percent. Total net premiums earned were $16.6 billion, up 6.0 percent, and net premiums written were $17.0 billion, up 5.9 percent.
Favorable prior period development of $530 millionb contributed 3.7 percentage points to the combined ratio, and catastrophe losses fell to $227 million pre-tax from $638 million in 2012. Growth came from the Insurance – Overseas General segment, which accounted for 38 percent of 2013 net premiums earned, helped by the acquisitions of ABA Seguros and Fianzas Monterrey in Mexico. Net investment income declined 1.7 percent to $2.1 billion, reflecting lower reinvestment rates.
Management described Global Reinsurance as facing flat-to-declining rates and competition, and said it did not expect near-term growth there, while Combined Insurance's business was down for the year. The filing reports operating cash flow of $4.0 billionc and a $2.0 billion share repurchase authorization for 2014, with $1.62 billion remaining as of February 27, 2014.
Dividends were increased 24 percent to $0.63d per quarter for installments paid in 2014. Key risks flagged in the filing include reserve adequacy, with net unpaid losses of $26.8 billion and asbestos and environmental (A&E) liabilities representing about 4.9 percent of loss liabilities; ongoing adverse development in the Brandywine and Westchester run-off operations ($193 million in 2013); exposure to catastrophes, including a gap in North American Named Storm coverage from June 1 to June 30, 2014; and fair value volatility in the variable annuity guarantee reinsurance business, which produced a $929 million realized gain on GLB liabilities in 2013.
02—Key points
Key Highlights
- Net income rose 38.9 percent to a record $3.76 billion, with diluted EPS of $10.92 versus $7.89 in 2012.
- P&C combined ratio improved to 88.0 percent from 93.9 percent, including $530 million of favorable prior period development.
- Net premiums written grew 5.9 percent to $17.0 billion; Insurance – Overseas General net premiums earned rose 10.3 percent to $6.3 billion, aided by Mexican acquisitions.
- Catastrophe losses including reinstatement premiums were $227 million pre-tax, down from $638 million in 2012.
- Net investment income declined 1.7 percent to $2.1 billion due to lower reinvestment rates.
- Operating cash flow was $4.0 billion; the board authorized up to $2.0 billion of share repurchases through December 31, 2014, with $1.62 billion remaining at February 27, 2014.
- Net unpaid losses and loss expenses stood at $26.8 billion, with A&E liabilities about 4.9 percent of loss liabilities; Brandywine and Westchester run-off added $193 million of adverse development.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 28, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $19.26B$17.94B | +7.4% |
| Interest Expense | $275.00M$250.00M | +10.0% |
| Net Income | $3.76B$2.71B | +38.9% |
| EPS (Basic) | $11.02$7.96 | +38.4% |
| EPS (Diluted) | $10.92$7.89 | +38.4% |
| Shares Outstanding (Basic) | 340.91M339.84M | +0.3% |
| Shares Outstanding (Diluted) | 344.15M342.75M | +0.4% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2013 net income?
Net income rose to $3.76 billion from $2.71 billion, supported by higher underwriting income across segments, a P&C combined ratio of 88.0 percent versus 93.9 percent, lower catastrophe losses, and $504 million of net realized gains. Net realized gains included a $929 million gain on guaranteed living benefit liabilities, partly offset by a $579 million loss on S&P put options and futures.
How much capital is available for shareholder returns?
Shareholders approved a dividend increase of 24 percent to $0.63 per quarter for the final two installments of 2013, paid January 31, 2014 and by the end of April 2014. Dividends declared in 2013 totaled $2.02 per share. The company repurchased $290 million of shares in 2013 and, from January 1 through February 27, 2014, repurchased 3,437,082 shares for $326 million. The filing states the company plans to target up to $1.5 billion of repurchases in 2014.
What are the main risks around loss reserves?
Net unpaid losses and loss expenses were $26.8 billion at year-end 2013. The filing states that a five percent change in net loss reserves equals $1.3 billion, about five percent of shareholders' equity. Asbestos and environmental liabilities were approximately 4.9 percent of total loss liabilities, and the filing says future additions to reserves, if needed, could have a material adverse effect.
How exposed is ACE to catastrophe losses?
The modeled 1-in-100 year annual aggregate net PML for U.S. hurricanes was $2.235 billion, or 7.8 percent of shareholders' equity. The North American catastrophe program renewed January 1, 2014 without Named Storm coverage, leaving a gap from June 1 through June 30, 2014, with coverage intended by July 1, 2014.
What does the variable annuity reinsurance business mean for earnings volatility?
ACE assumed guaranteed minimum death and living benefit risks on variable annuities, ceasing new writing in 2007. Results are sensitive to interest rates, equity markets, and policyholder behavior. In 2013 the company recorded realized gains of $929 million on GLB liabilities, but also recorded a $104 million loss from a lapse assumption change and a $92 million out-of-period gain tied to a valuation model error.
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