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ACE > SEC Filings for ACE > Form 10-Q on 30-Jul-2014All Recent SEC Filings

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Form 10-Q for ACE LTD


30-Jul-2014

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 and six months ended June 30, 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 (www.acegroup.com) 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 44 Overview 46 Financial Highlights 46 Consolidated Operating Results 47 Prior Period Development 50 Segment Operating Results 54 Other Income and Expense Items 63 Net Investment Income 64 Net Realized and Unrealized Gains (Losses) 64 Investments 66 Critical Accounting Estimates 69 Reinsurance Recoverable on Ceded Reinsurance 69 Unpaid Losses and Loss Expenses 70 Asbestos and Environmental (A&E) and Other Run-off Liabilities 70 Fair Value Measurements 70 Guaranteed Living Benefits (GLB) Derivatives 71 Catastrophe Management 74 Natural Catastrophe Property Reinsurance Program 74 Crop Insurance 75 Liquidity 76 Capital Resources 77


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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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Overview
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 June 30, 2014, we had total assets of $97 billion and shareholders' equity of $30 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. For more information on our segments refer to "Segment Information" in our 2013 Form 10-K.

We have grown our business through increased premium volume, expansion of product offerings and geographic reach, and acquisitions of other companies. The Insurance - Overseas General segment has recently expanded its operations through the following acquisitions:

The Siam Commercial Samaggi Insurance PCL (Samaggi) (we and our local partner acquired 60.86 percent ownership on April 28, 2014, and subsequently acquired an additional 32.17 percent ownership through a mandatory tender offer, which expired on June 17, 2014);

ABA Seguros (May 2, 2013); and

Fianzas Monterrey (April 1, 2013).

The consolidated financial statements include results of acquired businesses from the acquisition dates. Refer to Note 2 to the Consolidated Financial Statements for additional information on our acquisitions.


Financial Highlights for the Three Months Ended June 30, 2014

Net income was $779 million compared with $891 million in the prior year period.

Total company net premiums written increased 3.8 percent, or 4.5 percent on a constant-dollar basis.

The P&C combined ratio was 87.7 percent compared with 87.9 percent in the prior year period.

The current accident year P&C combined ratio excluding catastrophe losses was 88.9 percent compared with 89.2 percent in the prior year period.

The P&C expense ratio was 29.3 percent compared with 29.2 percent in the prior year period.

Total pre-tax and after-tax catastrophe losses including reinstatement premiums were $80 million (2.1 percentage points of the combined ratio) and $67 million, respectively, compared with $81 million (2.3 percentage points of the combined ratio) and $66 million, respectively, in the prior year period.

Favorable prior period development pre-tax and after-tax were $126 million (3.3 percentage points of the combined ratio) and $106 million, respectively, compared with $128 million (3.6 percentage points of the combined ratio) and $109 million, respectively, in the prior year period.

Operating cash flow was $846 million for the quarter.

Net investment income increased 4.2 percent to $556 million.

Share repurchases totaled $237 million, or approximately 2.3 million shares, during the quarter.


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Consolidated Operating Results - Three and Six Months Ended June 30, 2014 and
2013
                                      Three Months Ended                        Six Months Ended
                                                 June 30     % Change                    June 30       % Change
(in millions of U.S. dollars,                                Q-14 vs.                                YTD-14 vs.
except for percentages)                2014         2013         Q-13           2014        2013         YTD-13
Net premiums written             $    4,559      $ 4,391          3.8  %   $   8,744     $ 8,189            6.8  %
Net premiums earned                   4,332        4,067          6.5  %       8,302       7,640            8.7  %
Net investment income                   556          534          4.2  %       1,109       1,065            4.1  %
Net realized gains (losses)             (73 )        104           NM           (177 )       310             NM
Total revenues                        4,815        4,705          2.3  %       9,234       9,015            2.4  %
Losses and loss expenses              2,388        2,250          6.1  %       4,549       4,176            8.9  %
Policy benefits                         144          110         30.9  %         258         241            7.1  %
Policy acquisition costs                758          665         14.0  %       1,486       1,279           16.2  %
Administrative expenses                 566          564          0.4  %       1,101       1,078            2.1  %
Interest expense                         72           73         (1.4 )%         143         133            7.5  %
Other (income) expense                  (25 )         37           NM            (42 )        27             NM
Total expenses                        3,903        3,699          5.5  %       7,495       6,934            8.1  %
Income before income tax                912        1,006         (9.3 )%       1,739       2,081          (16.4 )%
Income tax expense                      133          115         15.7  %         226         237           (4.6 )%
Net income                       $      779      $   891        (12.5 )%   $   1,513     $ 1,844          (18.0 )%
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                                Six Months Ended
                                                       June 30     % Change                            June 30       % Change
(in millions of U.S. dollars,                                      Q-14 vs.                                        YTD-14 vs.
except for percentages)                 2014              2013         Q-13              2014             2013         YTD-13
Commercial P&C (retail and
wholesale)                       $     2,067      $      1,964          5.2  %   $      4,076     $      3,846            6.0 %
Personal and small commercial
lines                                    614               522         17.6  %          1,124              891           26.1 %
Reinsurance                              278               292         (4.9 )%            586              571            2.5 %
Property, casualty, and all
other                                  2,959             2,778          6.5  %          5,786            5,308            9.0 %
Agriculture                              388               453        (14.2 )%            582              566            3.0 %
Personal accident (A&H)                  961               925          3.9  %          1,878            1,839            2.1 %
Life                                     251               235          6.9  %            498              476            4.6 %
Total consolidated               $     4,559      $      4,391          3.8  %   $      8,744     $      8,189            6.8 %
Total consolidated - constant
dollars (C$) (1)                                  $      4,362          4.5  %                    $      8,097            8.0 %

                                        2014              2013                           2014             2013
                                  % of Total        % of Total                     % of Total       % of Total
Commercial P&C (retail and
wholesale)                                45 %              45 %                           46 %             47 %
Personal and small commercial
lines                                     14 %              12 %                           13 %             11 %
Reinsurance                                6 %               6 %                            7 %              7 %
Property, casualty, and all
other                                     65 %              63 %                           66 %             65 %
Agriculture                                8 %              11 %                            7 %              7 %
Personal accident (A&H)                   21 %              21 %                           21 %             22 %
Life                                       6 %               5 %                            6 %              6 %
Total consolidated                       100 %             100 %                          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 June 30, 2014 in our Insurance - Overseas General segment on a constant-dollar basis from new business writings in all product lines - A&H, personal lines, and P&C. In addition, the acquisitions of ABA Seguros in May 2013 and Samaggi in April 2014 added to premium growth. The impact of foreign exchange adversely impacted growth on an as reported basis. Our Insurance - North American P&C segment also reported increases in net premiums written in our retail division from growth across a broad range of our product portfolio including our risk management business, surety, professional, general and specialty casualty, and A&H lines of business reflecting higher production and strong renewal retention. In addition, we grew net premiums written in our Commercial Risk Services division, primarily specialty and program business, and our personal lines division, primarily in the homeowners and automobile business offered through ACE Private Risk Services. Our wholesale and specialty division contributed to the increase in net premiums written from higher production in our property, casualty, and professional lines of business. Our Insurance - North American Agriculture segment reported a decrease in net premiums written primarily due to lower Multiple Peril Crop Insurance (MPCI) production reflecting lower commodity prices, partially offset by higher premium retention primarily as a result of the non-renewal of a third-party proportional reinsurance agreement.

For the six months ended June 30, 2014, net premiums written increased in our Insurance - Overseas General and Insurance - North American P&C segments due primarily to the factors described above. The acquisition of Fianzas Monterrey in April 2013 also added to premium growth in our Insurance - Overseas General segment. In addition, net premiums written increased in our Insurance - North American Agriculture segment, primarily due to decreased premium cessions to the U.S. government and to third-party reinsurers.

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,


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typically traditional life contracts, generally are recognized as earned when due from policyholders. Net premiums earned increased for the three and six months ended June 30, 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.

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

                                   Three Months Ended          Six Months Ended
                                              June 30                   June 30
                                  2014           2013        2014          2013
Loss and loss expense ratio       58.4 %         58.7 %      58.0 %        58.0 %
Policy acquisition cost ratio     16.6 %         15.9 %      17.1 %        16.5 %
Administrative expense ratio      12.7 %         13.3 %      13.1 %        13.6 %
Combined ratio                    87.7 %         87.9 %      88.2 %        88.1 %

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          Six Months Ended
                                                                      June 30                   June 30
                                                         2014            2013        2014          2013
Loss and loss expense ratio, as reported                 58.4  %         58.7  %     58.0  %       58.0  %
Catastrophe losses and related reinstatement premiums    (2.1 )%         (2.3 )%     (1.8 )%       (1.7 )%
Prior period development                                  3.3  %          3.6  %      2.4  %        3.0  %
Loss and loss expense ratio, adjusted                    59.6  %         60.0  %     58.6  %       59.3  %

Total net pre-tax catastrophe losses, excluding related reinstatement premiums, were $80 million and $133 million for the three and six months ended June 30, 2014, compared with $81 million and $113 million in the prior year periods, respectively. Catastrophe losses through June 30, 2014 were primarily related to severe weather-related events in the U.S., Japan, and Australia, and flooding and hailstorms in Europe. Catastrophe losses in the prior year periods were primarily related to flooding in Canada and Australia and severe storms in the U.S. The adjusted loss and loss expense ratio decreased for the three and six months ended June 30, 2014 primarily due to both mix of business and underwriting actions improving loss ratios on several portfolios.
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 $126 million and $188 million for the three and six months ended June 30, 2014, respectively. This compares with net favorable prior period development of $128 million and $198 million in the prior year periods, respectively. Refer to "Prior Period Development" for additional information.

Net investment income for the three and six months ended June 30, 2014 was $556 million and $1.1 billion compared with $534 million and $1.1 billion for the prior year periods, respectively. 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 and six months ended June 30, 2014 primarily due to a change in the mix of business to products and regions that have a higher acquisition ratio.


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Our administrative expense ratio decreased for the three months ended June 30, 2014 primarily due to growth in net premiums earned that outpaced the growth in administrative expenses, and the impact of the acquisitions described above, which include lower administrative expenses than our other businesses. In addition, the prior year included an expense adjustment that unfavorably impacted the prior year administrative expense ratio. A similar adjustment did not occur in the current year.

Our administrative expense ratio decreased for the six months ended June 30, . . .

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