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ACE > SEC Filings for ACE > Form 10-Q on 2-May-2014All Recent SEC Filings

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Form 10-Q for ACE LTD


Quarterly Report

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 months ended March 31, 2014.

All comparisons in this discussion are to the corresponding prior year periods unless otherwise indicated.

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, 2013 (2013 Form 10-K).

Other Information
We routinely post important information for investors on our website ( under the Investor Information 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 Information portion of our website, in addition to following our press releases, SEC filings, 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.
MD&A Index Page Forward-Looking Statements 40 Overview 42 Financial Highlights 43 Consolidated Operating Results 43 Prior Period Development 46 Segment Operating Results 48 Other Income and Expense Items 55 Net Investment Income 56 Net Realized and Unrealized Gains (Losses) 57 Investments 57 Critical Accounting Estimates 61 Reinsurance Recoverable on Ceded Reinsurance 61 Unpaid Losses and Loss Expenses 61 Asbestos and Environmental (A&E) and Other Run-off Liabilities 62 Fair Value Measurements 62 Guaranteed Living Benefits (GLB) Derivatives 63 Catastrophe Management 65 Natural Catastrophe Property Reinsurance Program 65 Crop Insurance 66 Liquidity 67 Capital Resources 68

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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 U.S. Securities and Exchange Commission (SEC), include but are not limited to:
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; and rain and snow), nuclear accidents, 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 or to perform environmental remediation following a catastrophic event; and

complex coverage and regulatory issues such as whether losses occurred from storm surge or flooding and related lawsuits;

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;

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, the impact of bankruptcy protection sought by various asbestos producers and other related businesses, and the timing of loss payments;

changes to our assessment as to whether it is more likely than not that we will be required to sell, or have the intent to sell, available for sale fixed maturity investments before their anticipated recovery;

infection rates and severity of pandemics and their effects on our business operations and claims activity;

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 condition, and financing plans;

general economic and business conditions resulting from volatility in the stock and credit markets and the depth and duration of potential recession;

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;

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 (D&O) and errors and omissions (E&O) insurance; and

claims and litigation arising out of such disclosures or practices by other companies;

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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 being a Swiss corporation, 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;

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, including information systems and security, 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," "foresee," "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.

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ACE Limited is the Swiss-incorporated holding company of the ACE Group of Companies. ACE Limited, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, we, us, or our) are a global insurance and reinsurance organization, serving the needs of a diverse group of clients worldwide. At March 31, 2014, we had total assets of $95 billion and shareholders' equity of $29 billion. ACE opened its first business office in Bermuda, in 1985, and continues to maintain operations in Bermuda.

We operate through five business segments: Insurance - North American P&C, Insurance - North American Agriculture, Insurance - Overseas General, Global Reinsurance, and Life.

The Insurance - North American P&C segment comprises operations in the U.S., Canada, and Bermuda. This segment includes our retail divisions: ACE USA (including ACE Canada), ACE Commercial Risk Services, and ACE Private Risk Services; our wholesale and specialty divisions of ACE Westchester and ACE Bermuda; and various run-off operations, including Brandywine Holdings Corporation (Brandywine). Our retail products range from commercial lines with service offerings such as risk management programs, specialty commercial P&C, and A&H, coverages to personal lines including homeowners, automobile, liability, valuables, and marine coverages. Our wholesale and specialty products include excess and surplus property, D&O, professional liability, inland marine, specialty casualty, environmental, and political risk.

The Insurance - North American Agriculture segment comprises Rain and Hail Insurance Service, Inc. (Rain and Hail), which provides comprehensive Multiple Peril Crop Insurance (MPCI) and crop-hail insurance, and ACE Agribusiness, which offers farm and ranch coverages as well as specialty P&C coverages for companies that manufacture, process and distribute agriculture products. The MPCI program is offered in conjunction with the U.S. Department of Agriculture (USDA). 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). The SRA sets out the relationship between private insurance companies and the Federal Crop Insurance Corporation (FCIC) concerning the terms and conditions regarding the risks each will bear including the pro-rata and state stop-loss provisions which allow companies to limit the exposure of any one state or group of states on their underwriting results. In addition to the pro-rata and excess of loss reinsurance protections inherent in the SRA, we also purchase third-party proportional and stop-loss reinsurance for our MPCI business to reduce our exposure. Refer to "Crop Insurance" for additional information.

The Insurance - Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the wholesale insurance business of ACE Global Markets (AGM); and the international supplemental A&H business of Combined Insurance (Combined). ACE International has a presence in major developed markets and growing economies serving multinational clients and local customers. A significant amount of our global business is with local companies, offering traditional and specialty P&C products including D&O, professional liability, specialty personal lines, and energy products. ACE International expanded its global business through the acquisitions of ABA Seguros on May 2, 2013 and Fianzas Monterrey on April 1, 2013 (Mexican Acquisitions). Refer to Note 2 to the Consolidated Financial Statements for additional information on these acquisitions. The consolidated financial statements include the results of the acquired businesses from the acquisition dates. AGM offers specialty products including aviation, marine, financial lines, energy, and political risk. Our international A&H business primarily focuses on personal accident and supplemental medical.

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. The Global Reinsurance segment also includes AGM's reinsurance operations. Global Reinsurance markets reinsurance products worldwide under the ACE Tempest Re brand name and provides solutions for small to mid-sized clients and multinational ceding companies including licensed reinsurance capabilities, property and workers' compensation catastrophe, loss-warranty, stop-loss cover, marine and aviation programs.

The Life segment comprises 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 our segments refer to "Segment Information" in our 2013 Form 10-K.

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Financial Highlights for the Three Months Ended March 31, 2014

Net income was $734 million compared with $953 million in the prior year period.

Total company net premiums written increased 10.2 percent, or 12.1 percent on a constant-dollar basis (3.8 percentage points attributable to our 2013 Mexican Acquisitions).

The P&C combined ratio was 88.8 percent compared with 88.2 percent in the prior year period.

The current accident year P&C combined ratio excluding catastrophe losses was 88.9 percent compared with 89.4 percent in the prior year period.

Total pre-tax and after-tax catastrophe losses including reinstatement premiums were $53 million (1.5 percentage points of the combined ratio) and $43 million, respectively, compared with $32 million (1.0 percentage point of the combined ratio) and $28 million, respectively, in the prior year period.

Favorable prior period development pre-tax was $62 million (1.6 percentage points of the combined ratio) compared with $70 million (2.2 percentage points of the combined ratio) in the prior year period.

Operating cash flow was $1.25 billion for the quarter.

Net investment income increased 4.1 percent to $553 million.

Share repurchases totaled $332 million, or approximately 3.5 million shares, during the quarter.

Consolidated Operating Results - Three Months Ended March 31, 2014 and 2013
                                                              Three Months Ended
                                                                        March 31     % Change
                                                                                     Q-14 vs.
(in millions of U.S. dollars, except for percentages)          2014         2013         Q-13
Net premiums written                                     $    4,185      $ 3,798         10.2  %
Net premiums earned                                           3,970        3,573         11.1  %
Net investment income                                           553          531          4.1  %
Net realized gains (losses)                                    (104 )        206           NM
Total revenues                                                4,419        4,310          2.5  %
Losses and loss expenses                                      2,161        1,926         12.2  %
Policy benefits                                                 114          131        (13.0 )%
Policy acquisition costs                                        728          614         18.6  %
Administrative expenses                                         535          514          4.1  %
Interest expense                                                 71           60         18.3  %
Other (income) expense                                          (17 )        (10 )       70.0  %
Total expenses                                                3,592        3,235         11.0  %
Income before income tax                                        827        1,075        (23.1 )%
Income tax expense                                               93          122        (23.8 )%
Net income                                               $      734      $   953        (23.0 )%
NM - not meaningful

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The following tables present a breakdown of consolidated net premiums written for the periods indicated:

                                                                    Three Months Ended
                                                                              March 31     % Change
                                                                                           Q-14 vs.
(in millions of U.S. dollars, except for percentages)           2014              2013         Q-13
Commercial P&C (retail and wholesale)                    $     2,009      $      1,882          6.7 %
Personal and small commercial lines                              510               369         38.3 %
Reinsurance                                                      308               279         10.3 %
Property, casualty, and all other                              2,827             2,530         11.7 %
Agriculture                                                      194               113         72.1 %
Personal accident (A&H)                                          917               914          0.3 %
Life                                                             247               241          2.5 %
Total consolidated                                       $     4,185      $      3,798         10.2 %
Total consolidated - constant dollars (C$) (1)                            $      3,735         12.1 %

                                                                2014              2013
                                                          % of Total        % of Total
Commercial P&C (retail and wholesale)                             48 %              50 %
Personal and small commercial lines                               12 %              10 %
Reinsurance                                                        7 %               7 %
Property, casualty, and all other                                 67 %              67 %
Agriculture                                                        5 %               3 %
Personal accident (A&H)                                           22 %              24 %
Life                                                               6 %               6 %
Total consolidated                                               100 %             100 %

(1) On a constant-dollar basis. Amounts are calculated by translating prior period results using the same local currency rates as the comparable current period.

Net premiums written reflect the premiums we retain after purchasing reinsurance protection. Net premiums written increased for the three months ended March 31, 2014 in our Insurance - Overseas General segment on a constant-dollar basis from new business writings in our retail operations including A&H and personal lines. The acquisitions of ABA Seguros in May 2013 and Fianzas Monterrey in April 2013 (Mexican Acquisitions) also added to premium growth. The impact of foreign exchange adversely impacted growth in the quarter on an as reported basis. Our Insurance - North American P&C segment reported increases in net premiums written primarily in our retail division from growth across a broad range of our product portfolio including our risk management business, specialty casualty, property, A&H, surety, and professional lines of business reflecting higher production and strong renewal retention. In addition, net premiums written increased in both our Insurance - North American Agriculture segment, primarily due to decreased premium cessions to the U.S. government and to third-party reinsurers, and in our Global Reinsurance segment, primarily from new business written.

Net premiums earned for short-duration contracts, typically P&C contracts, generally reflect the portion of net premiums written that were recorded as revenues for the period as the exposure periods expire. Net premiums earned for long-duration contracts, typically traditional life contracts, generally are recognized as earned when due from policyholders. Net premiums earned increased for the three months ended March 31, 2014 primarily due to the increase in net premiums written as described above.

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.

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The following table presents our consolidated loss and loss expense ratio, policy acquisition cost ratio, administrative expense ratio, and combined ratio:

                                   Three Months Ended
                                             March 31
                                  2014           2013
Loss and loss expense ratio       57.7 %         57.1 %
Policy acquisition cost ratio     17.7 %         17.2 %
Administrative expense ratio      13.4 %         13.9 %
Combined ratio                    88.8 %         88.2 %

The following table presents the impact of catastrophe losses and related reinstatement premiums and the impact of prior period reserve development on our consolidated loss and loss expense ratio:

                                                           Three Months Ended
                                                                     March 31
                                                         2014            2013
Loss and loss expense ratio, as reported                 57.7  %         57.1  %
Catastrophe losses and related reinstatement premiums    (1.5 )%         (1.0 )%
Prior period development                                  1.3  %          2.2  %
Loss and loss expense ratio, adjusted                    57.5  %         58.3  %

Total net pre-tax catastrophe losses, excluding related reinstatement premiums, were $53 million for the three months ended March 31, 2014, compared with $32 million in the prior year period. Catastrophe losses through March 31, 2014 were primarily related to severe weather-related events in the U.S. and Japan, and flooding in Europe. Catastrophe losses in the prior year period were primarily related to flooding in Australia and severe storms in the U.S. The adjusted loss and loss expense ratio decreased for the three months ended March 31, 2014 primarily due to the reduction in the current accident year loss ratio across several lines of business in several regions.
Prior period development arises from changes to loss estimates recognized in the current year that relate to loss events that occurred in previous calendar years and excludes the effect of losses from the development of earned premium from previous accident years. We experienced net favorable prior period development of $62 million and $70 million for the three months ended March 31, 2014 and 2013, respectively. Refer to "Prior Period Development" for additional information.

Net investment income for the three months ended March 31, 2014 was $553 million compared with $531 million for the prior year period. Refer to "Net Investment Income" and "Investments" for additional information.

Policy acquisition costs consist of commissions, premium taxes, and certain underwriting costs related directly to the successful acquisition of a new or renewal insurance contract. Our policy acquisition cost ratio increased for the three months ended March 31, 2014 primarily due to a change in the mix of business towards products that have a higher acquisition ratio.

Our administrative expense ratio decreased for the three months ended March 31, 2014 primarily due to an increase in our Insurance - North American Agriculture . . .

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