ACE Limited (ACE) reported second quarter 2013 operating net income of $2.29 per share, up 19.3% from the Zacks Consensus Estimate of $1.92. Results improved 5.5% from $2.17 earned in the year-ago quarter. Operating income was $790 million, up 6.3% over 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 $101 million or 30 cents per share, ACE Limited reported net income of $891 million or $2.59 per share in the reported quarter, which compared favorably with $328 million or 96 cents per share in the prior-year quarter. ACE Limited registered net realized loss, net of tax, of $415 million or $1.21 per share in the second quarter of 2012.
Operational Performance
Gross premiums written by ACE Limited in the second quarter were $6.03 billion, up 6.7% year over year.
Net premiums earned improved 7.5% year over year to $4.07 billion in the quarter.
Net investment income in the quarter totaled $534 million, down 0.6% year over year largely due to lower reinvestment rates.
Underwriting income at ACE Limited was $434 million in second quarter 2013, up 16% year over year.
P&C combined ratio improved 80 basis points (bps) year over year to 87.9% in the quarter. Total after-tax catastrophe losses including reinstatement premiums were $66 million, compared with $14 million in the year-ago quarter.
Segment Update
Insurance-North American P&C: The segment recorded 12.6% year-over-year improvement in net earned premium in the quarter.
Operating income increased 11.8% year over year to $341 million in the quarter under review.
Combined ratio improved 170 basis points to 87.6% in the quarter.
Insurance-North American Agriculture: Net earned premium in the quarter declined 8.5% year over year.
Operating income was $7 million, down 13.3% from $25 million in the year-ago period.
Combined ratio deteriorated 120 basis points to 89.9% in the quarter.
Insurance-Overseas General: Net premiums earned in the quarter improved 10.1% year over year.
Operating income was $256 million in the quarter, up 10.3% from the year-ago quarter.
Combined ratio was 88.2%, down 110 bps from the prior-year quarter.
Global Reinsurance: Net premiums earned increased 3.4% year over year to $245 million in the quarter under review.
Operating income was $156 million, up 4.7% year over year.
Combined ratio improved 390 basis points to 62.2% in the quarter.
Life: Net premiums earned during the reported quarter increased 1.3% year over year to $480 million.
Operating income decreased 3.8% year over year to $76 million.
Balance Sheet
ACE Limited exited the quarter with cash of $679 million, up 10.4% from the 2012-end level.
Book value per share, as of Jun 30, 2013, was $80.26, down 0.8% from $80.90 as of Dec 31, 2012.
Operating cash flow was $895 million in the second quarter of 2013.
Return on equity was 12.3% in the reported quarter.
2013 Guidance Raised
ACE Limited guided operating earnings to a band of $7.65–$8.05 per share, up from $7.10–$7.50 guided earlier. The revision came on the heels of a positive first half prior-period reserve development, better first half current accident year results excluding catastrophe losses, and higher net investment income in the second quarter.
ACE Limited expects net investment income to better even into the second half of the year. The guidance includes catastrophe loss of $260 million for the remainder of the year.
Performance of Other Property and Casualty Insurers
RLI Corporation (RLI) reported second-quarter 2013 operating earnings of $1.27 per share. The result surpassed both the Zacks Consensus Estimate of $1.18 by 7.6% as well as the year-ago level of $1.17 by 8.5%. The year-over-year improvement came on the back of better underwriting results at Property and Casualty segments.
W.R. Berkley Corp. (WRB) reported second-quarter core operating earnings of 70 cents per share, 3 cents ahead of the Zacks Consensus Estimate. The earnings beat came on the back of higher premium written, pricing gains and a lower share count. Earnings inched up 7.7% year over year.
The Travelers Companies Inc. (TRV) reported earnings of $2.13 per share in the second quarter of 2013, surpassing the Zacks Consensus Estimate of $1.58 per share. Moreover, results surged 69% from $1.23 per share in the year-ago quarter. Operating income of $816 million improved 65% in the reported quarter.
The outperformance was driven by lower catastrophe losses along with sustained improvement in underlying underwriting margins across all segments. However, the upside was partially offset by lower net investment income and lower net favorable prior-year reserve development.
Our Take
ACE Limited has successfully maintained the trend of delivering positive earnings surprise. The reported quarter marked the fourth consecutive quarter of positive surprises.
ACE Limited 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 closed the acquisition of ABA Seguros from Ally Financial Inc. ABA Seguros, the sixth-largest P&C insurer in Mexico, will likely strengthen the company’s 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. We expect the inorganic route to ramp up its growth profile.
ACE Limited also remains focused on launching products to strengthen its portfolio. All these efforts strengthen ACE Limited’s position going forward.
The board of directors approved a 4% increase in the quarterly dividend to enhance its shareholder value.
ACE Limited currently carries a Zacks Rank #3 (Hold).
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