ACE LIMITED ANNUAL REPORT 2013 ACE Limited A ACE HAS A CULTURE C Bärengasse 32 E CH-8001 Zurich L Switzerland IM OF EXECUTION—WE GET IT DONE. I T E www.acegroup.com D WE ARE CAN-DO PEOPLE. A N N U A L R E P O R T 2 0 1 3 002CSN38D1 ACE Group is one of the world’s largest multiline property and casualty insurers. With operations in 54 countries, ACE provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients. ACE Limited, the parent company of ACE Group, is listed on the New York This annual report contains trademarks, trade names Stock Exchange (NYSE: ACE) and is a and service marks owned by ACE Limited and component of the S&P 500 index. its subsidiaries. In addition, this report contains trademarks, trade names or service marks of companies other than ACE, which belong to their respective owners. This report is printed on paper containing 55% recycled and 30% post-consumer fibers. These papers are certified to the international standards of the Forest Stewardship Council (FSC), which promotes responsible management of the world’s forests. It was printed by Allied Printing, an FSC-certified printer. Design: Rob Frankle for Leo Burnett Business In January 2013, ACE introduced a new brand promise: “We bring a can-do attitude to everything we do.” ACE employees around the globe immediately identified with the new promise, seeing themselves as energetic, disciplined, optimistic and driven to deliver results for their customers and business partners. “We’re not kidding ourselves that we currently deliver on this promise every day to every customer around the world,” explained ACE Chairman & CEO Evan Greenberg at the time. “But I think as an ACE family, we can wear this promise and be inspired by it. Our job collectively is to make that promise a reality.” CONTENTS Financial Summary 2 To My Fellow ACE Shareholders 5 A Local Presence Globally 13 Business Segment Overview 14 Insurance – Overseas General 16 Insurance – North American P&C and Insurance – North American Agriculture 18 Global Reinsurance 20 Life 22 ACE Limited Board of Directors 24 Officers and Executives 25 Shareholder Information 26 Form 10-K Swiss Statutory Financial Statements Environmental Statement FINANCIAL SUMMARY (in millions of U.S. dollars except per share data and ratios) Years Ended Percentage Dec. 31, 2013 Dec. 31, 2012 Change Gross premiums written $22,828 $21,4134 7% Net premiums written 17,025 15,9264 7% Net premiums earned 16,613 15,5424 7% Operating income1 3,217 2,624 23% Net income 3,758 2,706 39% Diluted earnings per share – Net Income 10.92 7.89 38% Diluted earnings per share – Operating Income1 9.35 7.65 22% Combined ratio2 88.0% 93.9% NM Total assets 94,510 92,545 2% Shareholders’ equity 28,825 27,531 5% Book value per share 84.83 80.90 5% Tangible book value per share 68.93 66.28 4% Operating return on equity3 12.2% 11.0% NM Five-Year Financial Performance Compound annual growth rates and averages, 2009-2013 Shareholders’ equity 15.0% Book value per share 14.5% Tangible book value per share 16.7% Average operating return on equity3 12.5% Average combined ratio2 91.0% (1) Operating income or income excluding net realized gains (losses), net of tax, is a non-GAAP measure. We have chosen to make this disclosure because it enhances the understanding of our results from operations by highlighting the underlying profitability of our insurance business. We exclude net realized gains (losses) because the amount of these gains (losses) is heavily influenced by, and fluctuates in part according to, the availability of market opportunities. (2) The combined ratio is the sum of the loss and loss expense ratio, policy acquisition cost ratio, and administrative expense ratio. (3) Calculated using operating income divided by average shareholders’ equity for the period excluding unrealized gains (losses) on investments after tax. (4) On a constant-dollar basis, which means amounts are calculated by translating prior period results using the same local currency rates as the comparable current period. On an as-reported basis, gross premiums written, net premiums written, and net premiums earned were $21.6 billion, $16.1 billion, and $15.7 billion, respectively, in 2012. The term constant dollar is used elsewhere in this annual report. NM – not meaningful 2 Combined Ratio vs. Peers ACE’s underwriting results outperformed the averages of North American and global peers over the last 5 years. 105% Averages 1 year 3 year 5 year 100% North American Peers1 94.2% 99.5% 98.0% Global Peers2 96.4% 97.3% 96.9% 95% ACE 88.0% 92.2% 91.0% 90% 1 AIG, Chubb, CNA, Hartford, Travelers, XL 2 Allianz, AXA, Munich Re, QBE, RSA, Zurich 85% 2009 2010 2011 2012 2013 Operating ROE vs. Peers ACE’s operating return on equity has exceeded the averages of North American and global peers over the last 5 years. 16% Averages 1 year 3 year 5 year 12% ACE 12.2% 11.3% 12.5% Global Peers2 5.6% 7.7% 9.5% 8% North American Peers1 10.9% 8.1% 8.0% 4% 1 AIG, Chubb, CNA, Hartford, Travelers, XL 2 Allianz, AXA, Munich Re, QBE, RSA, Zurich 0% 2009 2010 2011 2012 2013 Premium Distribution by Product 2013 Net Premiums Written Property/Other 20% Casualty 34% A&H 21% Life 6% Agriculture 10% Personal Lines 9% Geographic Sources of Premium 2013 Gross Premiums Written Europe 19% United States 52% Asia 12% Latin America 9% Bermuda/Canada 8% 3 Evan G. Greenberg Chairman and Chief Executive Officer TO MY FELLOW ACE SHAREHOLDERS ACE had an excellent year in 2013. We produced We are in a profession where you don’t know the true record operating and net income as a result of cost of your goods when you sell them and the future is strong premium revenue growth and near-record unknowable, so it’s best to post reserves prudently and margins. We continued to invest and expand our protect the balance sheet and shareholder capital. It’s easy to make current-year results look good by posting product offerings, deepen our geographic presence deficient or optimistic reserves, and we will not knowingly and improve our technical capabilities to take do that. But remember, we are in the risk business. When advantage of current opportunities and better you assess the quality of our calendar year underwriting position ourselves for future ones. Without a doubt, earnings, the contribution from positive prior period reserve I have never been more confident in the future of development is as meaningful as the terrific current this great company. year’s performance. After-tax operating income was $3.2 billion, up nearly Beyond underwriting, our other source of income comes 23%, while net income was up 39% to $3.8 billion. With from investing our loss reserves and shareholder capital. investment income essentially flat given the prolonged, Net investment income of $2.1 billion was down less than historically low interest rates, our earnings growth last year 2% for the year given our strong cash flow of $4 billion. was driven by outstanding underwriting income results. This is a good result considering the continued pressure As I have often said, ACE is an underwriting company from record low interest rates. Our investment portfolio and underwriting is embedded in our ethos. Underwriting yield was 3.8% at both the beginning and end of 2013, defines us because it’s what we do – we analyze and while the current new money rate at the time of this take risk. In a year when the industry performed relatively writing is 3% if we were to invest in a similar distribution well, benefiting from light catastrophe losses (CATS), our to our existing portfolio. Like our underwriting, we take a underwriting results stood out. We produced over $2.1 conservative approach to our investing activities and don’t billion of underwriting income, up 73% from prior year reach for yield in our predominantly investment-grade and also a record, and our P&C combined ratio, or our fixed income portfolio. We never forget we are fiduciaries margin from underwriting, was 88.0% versus 93.9% of these invested assets since they comprise shareholder in 2012. By the way, the record combined ratio for our capital – your money – and the loss reserves we hold to company, at least in the last 15 years, was 87.9% in 2007. pay our policyholder claims. That said, it is frustrating that Our strong underwriting income growth was driven by a long-term savers globally, including insurers, have been combination of premium growth and margin expansion. penalized for so long by central bank policies intended With the former, we took advantage of our product to stimulate economic activity through low interest rates. breadth, distribution and deep physical presence all over Although rates likely will remain low for some time, the U.S. the world as our diversification strategies, initiated years central bank is unwinding its stimulus efforts as economic ago, continue to drive profitable growth. As for the latter, conditions improve. Frankly, sustained central bank we secured underwriting margin expansion as a result of stimulus programs such as quantitative easing are in part a improved pricing in the U.S., our product mix globally and product of ineffective political leadership and government our underwriting portfolio management efforts, including inaction to implement policies to address the important expanded use of sophisticated data analytics that are cyclical and structural growth-related issues developed sharpening our individual risk selection insights. countries face. I mentioned catastrophe losses were lower in 2013 – Dividend increase and share repurchase plan $227 million pre-tax versus $638 million in 2012, which was larger than our expected average. Light catastrophe Turning to capital and our balance sheet, ACE has never losses are the favorable side of volatility and we certainly been stronger financially. Total capital grew 7% last don’t rely on that to make money. As sure as CATS are year to $34.8 billion at December 31. In November, our light one year, they’re potentially heavy the next – it’s just board announced its intention to increase our quarterly not predictable. Strip out the catastrophe losses and the dividend 24% – a recommendation that was approved benefit we received from prior years’ loss reserve releases, by you, our shareholders, in January. We have a long- which were up 11% compared to prior year, and you get to term commitment to a stable dividend with a target the current accident year, or the result on the underwriting payout ratio of approximately 30% of operating earnings. exposures we earned last year. The current accident year The announcement also included a plan to target the combined ratio was 90%, which is an excellent result repurchase of up to $1.5 billion of our shares in 2014, that speaks to the fundamental health of our current- which I believe clearly demonstrates what we have been year business. We are conservative underwriters so it is saying for years – that we are not religious about our views gratifying that our underwriting performance shows up not on capital management. The buybacks are not a change only in our current-year results but also when our reserves in our strategy or view of opportunity. We have simply for the business we wrote in prior years develop favorably. reached a point, all things being equal, where we have built up sufficient capital flexibility for both opportunity and risk that we can return additional capital surplus we generate in 2014 via share repurchases without impacting our growth capability. By the way, we consider the share 5 repurchases a good buy because we are undervalued. We Diversification by product, geography and distribution will continue to capture organic growth where the returns ACE is predominantly a global multiline P&C insurance are attractive while pursuing acquisitions opportunistically company. Ten years ago, three-fourths of our company’s to complement our growth strategies. To be clear, our business as measured by gross premiums was concentrated preference is to put shareholder capital to work to grow in industrial commercial and specialty commercial P&C the company. If we find a great growth opportunity that insurance. Consistent with our long-term strategy, we requires capital and will generate a favorable risk-adjusted have made great strides over the last five and 10 years return, that’s our preferred way to use it. to diversify our business so that today 50% of our business comes from this area with one-third coming from ACE is a growth company as measured by growth in consumer insurance lines – accident and health (A&H), book value and we see great opportunity to increase personal lines and life insurance – and the remaining 12% shareholder value over time by growing the company, and 5% from our agriculture insurance and our reinsurance although growth in a risk business with market cycles is divisions, respectively. Our diversification efforts have generally not smooth and requires a long-term view and also focused on achieving significantly greater balance strategic patience. At the same time, we are consistently by geography. Today, approximately half of our business producing an operating ROE that is attractive – an average is in the U.S. with the balance conducted locally in 53 12.5% over five years and 13.7% over 10 – with last year’s other countries, making ACE one of the world’s very few coming in at 12.2%. That’s well in excess of our cost of truly global multiline P&C insurance companies. Lastly, capital and a good return given risk-free rates of around our distribution capabilities have evolved dramatically 2.5% for the year. For perspective, the overall industry from a company that was once dependent primarily generates a mid-single digit average ROE. In 2013, our on retail and wholesale commercial P&C brokerage. book value per share grew 5%, or over 11% if you exclude Today, we reach individual consumers and commercial unrealized losses from our investment portfolio from customers of all sizes through a myriad of distribution rising interest rates. I prefer to look at our book value channels – brokerage, agency (both independent and growth this way because we are fundamentally a long- exclusive), bancassurance and direct marketing. For many term, buy-and-hold fixed income investor, so it’s really a of our businesses, marketing and distribution often make timing question. Book value, or shareholder net worth, the difference between success and failure, so we make has doubled in the last five years and tripled in the last our distribution choices based on the country, economic 10 and now stands at $29 billion. As I have observed in conditions and culture to best reach our target customer. previous letters, sustained book value growth and quality ROEs ultimately find their way into the stock price, which While our diversification efforts are clearly not finished – crossed the symbolic $100 threshold in 2013. This is a in fact, in many ways we are just getting started – our sign of confidence in our company and the way we run our current balance is terrific. When one area of the world is business. Last year, investors in ACE stock were rewarded down, another is up – that’s the beauty of being global. with a 31.9% total return compared to 32.4% for the S&P For example, ACE’s significant and expanding capabilities 500, which had one of its greatest years ever. Over a 10- in Asia and Latin America are designed to capitalize on year period, ACE shares have been superior with twice the many faster-growing economies with strong new business total return of the S&P 500. Over a five-year period, ACE’s creation and an emerging middle class. Similarly, while we total return was 120% while the S&P 500’s was 128% – have consistently grown our commercial P&C business relatively close. globally – and there is plenty of room for future growth – we have developed at a faster rate our personal accident, Looking ahead, we are quite optimistic about our growth personal lines, small commercial and life insurance prospects because we have so much scope for growth by businesses, many of which are distributed in unique and virtue of our product positioning, our geographic presence, novel ways. These lines of business present an enormous our distribution breadth, our operating culture and, frankly, growth opportunity while providing us with a hedge against our small share of the global insurance business in both our exposure to the commercial P&C industry pricing cycle. its totality and within any one of our businesses. As I said, we are patient about growth, and due to the market- Our broad geographic presence and expanded product driven pricing cycles of property casualty, we are willing capabilities contributed greatly to our premium revenue to trade market share without hesitation to preserve results last year. Total company net premiums written, an underwriting profit. It is our responsibility to never including P&C, A&H, life and reinsurance, grew 7% on knowingly let underwriting destroy book value, which is our a constant dollar basis to $17 billion with growth well measure of shareholder wealth creation. Many companies balanced by territory and product area. If we exclude espouse commitment to underwriting discipline but few agriculture, which is a $1.6 billion business and where see this through. I will return to this last point later when I we are a leading provider of crop insurance in the United touch on the external environment. States, net premium revenue grew 9.5% on the remaining $15.4 billion. This is the measure I look at most to see So, with that as prologue, let me tell you a bit more about how the company is doing from a growth perspective. who we are and give you an update on our businesses. Crop insurance is a unique public-private partnership in the U.S. and premium growth is affected substantially by commodity prices and how we share premium and loss with the government. Premium levels, therefore, can be volatile from period to period and have nothing to do with the underlying health of the business or the competitive environment. 6 If we find a great In our global A&H business, which now represents about 1 8% of the company, we’ve also been making investments growth opportunity in data analytics, in this case to constantly refine the performance of our direct marketing efforts to reach the that requires capital customers, members and employees of organizations that sponsor our products. Net premiums written in 2013 grew and will generate a about 5% on a constant dollar basis, with international up double-digit, led by growth in Asia and Latin America of favorable risk-adjusted 13%, and respectable single-digit growth in the U.S. and Europe. Premiums for our Combined Insurance business, return, that’s our which generates sales through a captive agency force, were down modestly, but agent recruitment is way up for preferred way to use it. our core business and so is the growth in new sales those agents are producing. Those factors will ultimately translate into premium growth. When we bought this business, it had suffered from years of neglect and underinvestment, For the year, our commercial and specialty P&C but we saw tremendous potential and I am a believer in its businesses, which represent about 50% of the company distribution model and the customer market it is meant and $12 billion in gross premiums, generated growth of to serve. While a business like this takes years to restore 10% globally in constant dollars – about three times the to true vitality, I see the company making great progress industry average growth rate – with contributions from and am convinced Combined Insurance will soon return to every region. In North America, where we benefited from growth. a favorable rate environment, our commercial P&C net premiums grew 11%. We have two retail broker-distributed I’m pleased with the growth of our personal lines business, businesses in North America: ACE USA, which serves which has become a $2 billion business for ACE – or large account and upper-middle market clients, and ACE about 8% of the company – from practically nothing Commercial Risk Services, which is focused on small 10 years ago and $700 million five years ago. We have commercial customers for specialty coverages. Premiums done what we said we were going to do – this is now a in these two businesses grew 11%. Our two predominantly more meaningful business that we have been patiently wholesale broker-distributed businesses in North America building, organically and through select acquisitions, are ACE Westchester, which is focused on middle market as part of our long-term diversification strategy. Net specialty, and ACE Bermuda, which serves large corporate premiums written were up 40% in constant dollars in accounts. Both performed well in 2013 with premiums 2013, or 11.5% excluding the contributions from our up over 11%. While we have good market share in the acquisitions, particularly in Mexico. We have done a good U.S. large corporate segment, we see plenty of room for job to date of integrating the personal lines-oriented growth. We are also investing to expand our product and companies we bought and they have been accretive to geographic presence to better penetrate the broker and our earnings in the first year. We are making them more independent agent universe for the insurance needs of valuable by combining their impressive talent and local middle market commercial customers. product and market expertise with our global underwriting, distribution management capabilities and product Internationally, we are expanding in particular where portfolio. Meanwhile, for ACE Private Risk Services, which economic growth is occurring. For commercial P&C, Latin focuses on high net worth consumers in the U.S., net America led the way with growth of over 20%, followed premiums were up over 9%. We are making an impact by solid single-digit growth in Asia and Europe. ACE by striving to deliver outstanding service quality and a International, our retail broker-distributed business in 51 broad portfolio of coverage to meet the complex needs countries, had commercial net premium growth of 10% in of these discriminating customers. If you fit the profile of constant dollars while ACE Global Markets, our London- the customer we best serve, try us out. With the benefit based wholesale market business, grew at a modest 2% of substantial investments in our capabilities, our global owing to more competition during the year. personal lines business is poised to continue its strong growth. Our commercial P&C businesses globally benefited last year from our continued emphasis on improving our Premium production for our international life insurance underwriting portfolio management capabilities, where I business, which is focused primarily in Asia and secondarily believe we are still in the early stages. These efforts are on Latin America, grew 18.5% in constant dollars. We being implemented across our P&C portfolio globally. We continue to make investments to build our own captive are focused intently on strengthening our data analytics agency capabilities – from recruitment and training to improve our insights into risks as we segment our to management and systems – and now have 35,000 businesses into ever-smaller, more discrete risk cohorts. proprietary life insurance agents in Asia including Huatai This is and will be a fundamental ACE capability and will Life, our 36%-owned venture in China with Huatai separate winners from also-rans in what has become the Insurance. We had standout performances last year in long-term arms race of our industry. a number of countries, with Indonesia, Korea and Hong Kong, for example, registering premium production growth of 35%, 18% and 16%, respectively. 7 We are continuing to build a strong distribution capability has varied depending on overall experience in a given class. that deepens our geographic presence in individual Large, high-quality carriers have shown leadership and countries. Enhanced distribution will be critical for our have sought to focus on earning a reasonable margin for commercial P&C, personal lines, A&H and life businesses the risk assumed. Many companies have benefited from as we continue to introduce new products, enter new target an improved price environment, modest catastrophe losses markets and expand our presence in existing ones such and low inflation. as Thailand, where we announced in January 2014 our intention to acquire a majority stake in Siam Commercial In the U.S., for commercial P&C insurance, we are likely Samaggi Insurance, a well-established and trusted general at the beginning of a transition market that will lead to insurer. Samaggi distributes its personal lines and small a more competitive market and already has for property commercial products through its own branches, 1,000 insurance. At the same time, the reinsurance market is independent agents and more than 1,100 branches of softening, both in terms of pricing and terms, and this, too, Siam Commercial Bank, one of the country’s largest and will impact the primary insurance market. At the moment, most venerable financial institutions. The acquisition should insurance company balance sheet reserves are adequate complement our existing commercial P&C, A&H and life in aggregate and most insurers are feeling greater earnings capabilities in Thailand and further strengthen our valuable growth pressures, exacerbated by low interest rates and Southeast Asia network. relatively slow revenue growth while underwriting margins in aggregate have improved. To achieve earnings growth The expansion of our physical branch office networks from here, most companies will be unable to meaningfully enables us to tap into the economic activity occurring improve margins except in a few distressed classes like locally in countries like Mexico, where we have 78 offices workers’ comp and will therefore likely go for growth in in 46 cities; Brazil, where we have branches in 19 cities; classes where they perceive better margins. That means Malaysia, where we have 2,100 agents and 23 offices the return of a more competitive cycle. nationwide; Indonesia, where we have over 40 branch offices for life and non-life business; and the U.S. with Overseas, the commercial P&C rate environment is more major sales and underwriting offices in 22 cities. In competitive but remains reasonably stable. Asia and addition, our direct marketing capabilities, including over Latin America are the growth regions of the world and 100 call centers in 34 countries that make about 90 many global insurers, particularly Europeans and a few million calls annually, are key to reaching the customers of Americans, as well as local company participants, are third-party affinity sponsors such as utilities, mobile phone focusing more attention there, and that means increased operators, department stores and financial institutions. competition. The Continent is reasonably stable while the U.K. is competitive, particularly the London wholesale Lastly, our global reinsurance business had an excellent market, which is heavily dependent on catastrophe year with a combined ratio of 66% and underwriting insurance as a source of revenue. CAT insurance is also income up over 45%. These great numbers reflect low a major source of earnings for Lloyd’s – they are caught catastrophe losses and good results from the core in the same predicament as traditional reinsurers – and P&C book. With flat-to-declining reinsurance rates and I will address that next. The London wholesale market is with competition increasing as the year progressed, net quite competitive and it will only become more so. There is premiums declined 3%. The reinsurance market is awash no doubt in my mind that there will be more competition in capital, so we aren’t looking for near-term growth in this globally in the future. I don’t say any of this to be negative. business. We accept that and are fully prepared to walk On the contrary, we are ready for a more challenging away from business and shed further volume if necessary insurance market and are clear-eyed and hard-nosed about to maintain an underwriting profit. This is a relatively small reality. I believe we will outperform in any market and business for ACE but important, and we take pride in the continue to generate superior returns. underwriting discipline of our reinsurance colleagues – we applaud them and reward them for it. The reinsurance landscape is changing in some fundamental ways. It’s not simply the beginning of a typical On the other side of the coin, ACE is a substantial buyer soft cycle. There are new sources of capital, and not just of reinsurance, one of the largest in the world, and our risk one flavor. Some of this new capital represents typical appetite has not changed – it remains steady. We pride soft market cyclical behavior – cheap capital chasing a ourselves on the long-term relationships we have with perceived source of earnings. In my judgment, this is naïve reinsurers and the money we have made for them over and these capital providers will simply be abused and the years. We are a sought-after cedant. The softening eventually disappear. It takes more than capital to make reinsurance market benefits ACE in terms of pricing and money in our business. The capital needs to be backed by improved terms that will positively impact our future smart underwriting. financial results. On the other hand, major sources of the alternative Insurance market conditions capital are thoughtful and rational entities with enormous resources – they represent a more structural and Turning to the subject of insurance market conditions, the permanent change to the reinsurance market landscape. insurance business globally is competitive and there are Capital markets players have noticed the margins plenty of companies and capital chasing market share in every line of business. That’s nothing new. In the U.S., market conditions are competitive but reasonable. Pricing 8