Given ACE Limited’s (ACE) substantial exposure to catastrophe losses, pressure on top line growth and volatile financial market, we retain our Neutral recommendation on the company.
Counting on the positives, ACE Limited continues to make acquisitions. Acquisitions have created a turnaround in premium writings and in turn have helped the company to deliver better numbers and we expect the trend to continue going forward. Also, with considerable balance sheet strength, we expect ACE to be able to grow organically as well as inorganically.
ACE boasts a strong capital position and liquidly which helps it to pursue share buyback. Recently, the board announced its intentions to substantially boost its dividend by 33%. Also, in August, the company’s board authorized a $303 million worth of share buyback. Year-to-date, ACE bought back 1.6 million shares for $100 million.
As of September 30, the company is left with share repurchases worth $500 million under its authorization. Given its strong capital and liquidity position, we expect to see further buyback spending from the company, which will boost EPS.
The company scores strongly with rating agencies. Based on a solid risk-adjusted capitalization, international exposure, generating continued profitability and cash flow and strong balance sheet A.M. Best had raised the issuer credit ratings.
On the flip side, ACE has a substantial exposure to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. The magnitude of pretax catastrophe loss in the third quarter was lower than the first two quarters. Cat loss was $86 million with a combined ratio of 90.3%.
The cat loss largely stemmed from Hurricane Irene, which hit the east coast of the U.S. causing huge damage. The company’s operating earnings includes an estimated cat loss of $75 million for the fourth quarter of 2011.
The volatile financial market has affected the performance of the variable annuity reinsurance business in the third quarter. This business reported a loss of $660 million largely due to loss related to change in fair value liabilities. A sharp decline in interest rates besides, soft equity markets contributed to the loss. As a result, net income as well as book value was adversely affected.
The Zacks Consensus Estimate for fourth-quarter 2011 is $1.93 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $6.92 per share and $7.50 per share.
The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward pressure on the shares over the near term.
Headquartered in Zurich, Switzerland, ACE Limited, through its subsidiaries, provides a range of insurance and reinsurance products to commercial and individual customers worldwide. The company competes with American International Group Inc. (AIG) and The Travelers Companies Inc. (TRV).
ACE LIMITED (ACE): Free Stock Analysis Report
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