ACE Limited (ACE) reported first-quarter 2013 operating income of $2.17 per share, up 24 cents from the Zacks Consensus Estimate. Results improved 5.8% from $2.05 earned in the year-ago quarter. Operating income was $746 million, up 7% from $701 million in the prior-year quarter.
Solid underwriting performances aided the better-than-expected results. Both the U.S. and international business operations experienced growth and better margins. ACE Limited also benefited from improved commercial property & casualty (P&C) pricing environment.
Including net realized gains, net of tax, of $207 million or 60 cents per share, ACE Limited reported net income of $953 million or $2.77 per share in the reported quarter, which compared unfavorably with $973 million or $2.84 per share in the prior-year quarter. ACE Limited registered net realized gains, net of tax, of $272 million or 79 cents per share in the first quarter of 2012.
Operational Performance
Gross premiums written by ACE Limited in the first quarter were $4.96 billion, up 3.7% year over year.
Net premiums earned improved 5.7% year over year to $3.57 billion in the quarter.
Net investment income in the quarter totaled $531 million, down 2.4% year over year largely due to lower reinvestment rates.
Underwriting income at ACE Limited was $388 million in first quarter 2013, up 14.8% year over year.
P&C combined ratio improved 100 basis points (bps) year over year to 88.2% in the quarter. Total after-tax catastrophe losses including reinstatement premiums were $28 million, compared with $14 million in the year-ago quarter.
Business Restructuring
Effective from the first quarter of 2013, the North American segment of ACE Limited was split into two separate reporting segments: Insurance – North American P&C and Insurance – North American Agriculture.
Segment Update
Insurance-North American P&C: The segment recorded an 8.9% year-over-year improvement in net earned premium in the quarter.
Operating income increased 16.8% year over year to $361 million in the quarter under review.
Combined ratio improved by 370 basis points to 85.7% in the quarter.
Insurance-North American Agriculture: Net earned premium in the quarter declined 5% year over year.
Operating income was $7 million, plunged 72% from $25 million in the year-ago period.
Combined ratio deteriorated 3650 basis points to 79.3% in the quarter.
Insurance-Overseas General: Net premiums earned in the quarter improved 6% year over year.
Operating income was $239 million in the quarter, up 11.7% from the year-ago quarter.
Combined ratio was 90.6%, up 60 bps from the prior-year quarter.
Global Reinsurance: Net premiums earned increased 7.4% year over year in the quarter under review.
Operating income was $144 million, up 5.1% from $137 million in the year-ago period.
Combined ratio improved 100 basis points to 67.3% in the quarter.
Life: Net premiums earned during the reported quarter inched up 0.8% year over year.
Operating income decreased 16.7% year over year to $70 million.
Balance Sheet
ACE Limited exited the quarter with cash of $855 million, up 39% from the 2012-end level.
Book value per share, as of Mar 31, 2013, was $82.17, up 1.6% from $80.90 as of Dec 31, 2012.
Operating cash flow was $913 million for the first quarter of 2013.
Return on equity was 11.9% in the reported quarter.
Share Repurchase Update
ACE Limited spent $154 million to buy back 1.8 million shares in the reported quarter.
2013 Guidance Updated
ACE Limited guided operating earnings to a band of $7.10–$7.50 per share, up from $6.60–$7.00 guided earlier. The revision came on the heels of a positive first-quarter prior period reserve development, lower-than-planned catastrophe losses realized in the first quarter and better-than-expected current accident year results excluding catastrophe losses. The guidance includes catastrophe loss of $330 million for the remainder of the year.
Other Property and Casualty Insurers
RLI Corporation (RLI) reported first-quarter 2013 operating earnings of $1.04 per share. The result lagged the Zacks Consensus Estimate of $1.06 by 1.89% but surpassed the year-ago level of 96 cents by 8.3%.
The year-over-year improvement came on the back of better underwriting results at Casualty and Surety.
Revenues in the quarter under review totaled $160.7 million, declining 2% from $164.0 million in the prior-year quarter, attributable to lower Investment income and decline in net realized investment gains. Revenues fell short of the Zacks Consensus Estimate by 4.7%.
Our Take
ACE Limited has successfully maintained the trend of delivering positive earnings surprise. The reported quarter marked the third consecutive quarter of positive surprises.
The company continues to benefit from better commercial P&C pricing environment in the U.S. It is also leveraging its solid footprint in Asia and Latin America to capitalize on the opportunities there.
ACE Limited continues to expand its international footprint with acquisitions in Mexico. It expects to close the ABA Seguros from Ally Financial Inc. shortly. ABA Seguros, the sixth-largest P&C insurer in Mexico, will likely strengthen its personal lines and agency businesses. ACE closed the acquisition of Fianzas Monterrey, thereby expanding its surety business in Mexico. ACE Limited expects the acquisitions to meet or exceed its long-term return on equity (ROE) goal of 15% within 2–3 years.
It also launched a $95 million special purpose vehicle— Altair Re, to strengthen its global reinsurance business. Further, ACE USA introduced a Foreign Casualty Pollution Liability coverage endorsement. ACE came up with this coverage option to provide insurance and risk management solutions to the globally operating mid-sized and large-scale multinational companies located in the U.S.A.
All these efforts strengthen ACE Limited’s position going forward.
ACE Limited remains focused on enhancing its earnings, ROE and book value per share. The board of directors will propose a 4% increase in the quarterly dividend at the extraordinary general meeting scheduled on May 16, 2013.
ACE Limited currently carries a Zacks Rank #2 (Buy). Among other property & casualty insurers Montpelier Re Holdings Ltd. (MRH) carrying a favorable Zacks Rank #1 (Strong Buy) and W.R. Berkley Corporation (WRB) carrying a Zacks Rank #2 will report their results shortly.
ACE LIMITED (ACE): Free Stock Analysis Report
MONTPELIER RE (MRH): Free Stock Analysis Report
RLI CORP (RLI): Free Stock Analysis Report
BERKLEY (WR) CP (WRB): Free Stock Analysis Report
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