ACE Limited (ACE) reported second-quarter 2011 operating income of $2.01 per share, ahead of the Zacks Consensus Estimate by 33 cents. Results were, however, in line with the year ago earnings. Operating income in the quarter was $686 million, a trifle lower than $688 million in the second quarter of 2010.
Better-than-expected results stemmed from higher premiums and investment income.
Including net realized losses, net of tax, of $79 million or 24 cents per share, ACE Limited reported a net income of $607 million or $1.77 per share compared with $677 million or $1.98 in the prior-year quarter. The company, in second-quarter 2010, registered a net realized loss, net of tax, of $11 million or 3 cents per share.
Operational Performance
Gross premiums written by ACE Limited in the quarter under review were $5.4 billion, up 5.2% year over year.
Net premiums earned improved 9.8% year over year to $3.8 billion in the second-quarter 2011.
Underwriting profit at ACE Limited was $304 million in second-quarter 2011 up 12.4% from $347 million in the year ago period.
Property & Casualty combined ratio deteriorated by 290 basis points year over year to 92.6% in the quarter.
Net investment income in the quarter totaled $569 million, an improvement of 10% year over year. The improvement stemmed primarily from a slower rate of turnover in the portfolio as book yield stabilized, a positive impact from foreign exchange and private equity distributions.
Net realized and unrealized gains, after tax, from the investment portfolio were $137 million, compared with $422 million in the year ago period.
Segment Update
Insurance-North American: The segment recorded a 21% year over year increase in net premium earned in the quarter. The combined ratio deteriorated by 470 basis points to 95% in the quarter. Operating income decreased 9.3% year over year to $284 million in the quarter under review.
Insurance-Overseas General: Net premiums earned in the quarter increased 15% year over year. The combined ratio was 91.4%, deteriorating 50 basis points over the prior-year quarter. Operating income improved 21% year over year to $225 million in the quarter.
Global Reinsurance: Net premiums earned saw a decline of 0.8% year over year. The combined ratio deteriorated 320 basis points year over year to 67.9% in the quarter. Operating income improved 7.1% year over year to $144 million in the quarter.
Life: The segment’s net premiums earned increased 16.5% year over year. Operating income increased 22% year over year in the quarter.
Balance Sheet
The cash balance of ACE Limited at quarter-end totaled $833 million, down 7.9% from $772 million at the end of 2010.
Book value per share as of June 30, 2011, was $71.36, up 4% from $68.59 as of December 31, 2010.
Looking Ahead
ACE Limited expects to post double digit revenue growth in the second half of 2011. For 2011, the company raised operating earnings expectation to $6.00 – $6.20 per share from $5.40 – $5.70 per share guided earlier.
Peer Comparison
The Travelers Companies (TRV), which competes with ACE Limited, reported an operating loss of 91 cents per share in the second quarter, wider than the Zacks Consensus Estimate of a loss of 62 cents. Results were far behind earnings of $1.39 in the prior year quarter. The company suffered hugely due to catastrophe losses. Catastrophe losses in the quarter totaled $1.09 billion or $2.56 per share.
The revised guidance includes $544 million after tax in catastrophe losses for the first half and $200 million after tax in catastrophe losses for the second half. The guidance also includes $187 million of after-tax positive prior period development reflected in the first half.
Our Take
The results of ACE Limited were not affected despite natural disasters that led to 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. The company also returns value to its shareholders through dividend increases and scores strongly with the rating agencies.
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 it grow.
We maintain a Neutral recommendation on ACE Limited in the long term. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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