ACE Beats Bottom-Line Estimate

ACE Limited (ACE) reported a first-quarter 2011 operating income of 79 cents per share, beating the Zacks Consensus Estimate by 13 cents. Results plummeted 54% from $1.70 earned in the year-ago period. Operating income in the quarter was $268 million, down 54% from $579 million in the first quarter of 2010.

The better-than-expected performance stemmed from strong renewal persistency, positive client payroll and higher sales.

Including net realized losses, net of tax, of $9 million or 3 cents per share, ACE Limited reported a net income of $259 million or 76 cents per share compared with $755 million or $2.22 per share in the prior-year quarter. The company, in first-quarter 2010, registered net realized gains, net of tax, of $176 million or 52 cents per share.

Including catastrophe losses of $443 million or $1.30 per share and favorable prior period development of $74 million or 22 cents per share, net income was $637 million or $1.87 per share in the reported quarter, compared with $620 million or $1.82 per share in the year-ago quarter.

Operational Performance

Gross premiums written by ACE Limited in the quarter under review were $4.6 billion, down 3% year over year.

Net premiums earned improved 1% year over year to $3.3 billion in the first-quarter 2011.

Underwriting loss at ACE Limited was $94 million in first-quarter 2011 compared with underwriting profit of $255 million in the year-ago period.

Property & Casualty combined ratio deteriorated substantially to 105% in the quarter from 92.8% in the year-ago quarter.

Investment income improved 8% year over year to $544 million in the quarter.

Net realized and unrealized losses, after tax, from the investment portfolio were $45 million, compared with gains of $168 million in the year-ago period.

Segment Update

Insurance-North American: The segment recorded a 1.8% year-over-year increase in net premium earned in the quarter. The combined ratio deteriorated by 430 basis points to 95% in the quarter. Operating income decreased 14.9% year over year to $263 million in the quarter under review.

Insurance-Overseas General: Net premiums earned in the quarter increased 4.2% year over year. The combined ratio was 107.2%, deteriorating form 95% in the year-ago quarter. Operating income was $11 million, sliding from $156 million in the prior-year quarter.

Global Reinsurance: Net premiums earned saw a decline of 5.8% year over year. The combined ratio deteriorated to 129.7% from 78.8% in the prior-year quarter. Operating loss was $13 million, compared with a profit of $118 million in the year-ago quarter.

Life: The segment’s net premiums earned increased 5% year over year. Operating income increased 4% year over year in the quarter.

Balance Sheet

The cash balance of ACE Limited at quarter end totaled $1.1 billion, up 44% from $772 million at the end of 2010.

Book value per share as of March 31, 2011, was $69.33, up 1% from $68.59 as of December 31, 2010.

Guidance

ACE Limited guided its 2011 operating income to a range of $5.40 to $5.70 per share.

The guidance includes  $250 million in catastrophe losses for the remainder of the year. Also, the guidance includes $74 million of after-tax positive prior period development reflected in the first quarter as well as an adjustment for the estimated increase to the investment income run rate.

Peer Comparison

The Travelers Companies (TRV), which competes with ACE Limited, reported operating earnings of $1.89 per share in the first quarter, surpassing the Zacks Consensus Estimate of $1.55 by 34 cents. Results were also ahead of $1.22 earned in the prior-year quarter. Higher underwriting gains, favorable resolution of prior-year tax matters, lower catastrophe losses and lower outstanding shares helped the company to post improved results.

Our Take

The results of ACE Limited were not affected despite frequent natural disasters that led to large catastrophe losses. The company is well poised on the strength of its international presence, diversified product offering, risk management, conservative underwriting practice and strong reserves.

ACE Limited remains focused on expanding its footprint in faster growing economies. We expect the acquisitions made by the company to turn around premium writings and help the company grow.

We maintain a Neutral recommendation on ACE Limited in the long term. The quantitative Zacks # 4 Rank (short-term Sell rating) for the company however indicates downward pressure on the stock over the near term.

ACE LIMITED (ACE): Free Stock Analysis Report

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