ACE Limited (ACE) 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.
However, given the exposure shrinkage due to the stressed economy that is also impacting the clients’ insurance budgets; we do not expect a robust improvement in the top line any time soon. Competitive pressures are also restricting improvements in pricing. Additionally, we expect investment yields to remain under pressure. Therefore, we reiterate a Neutral recommendation on the company.
ACE Limited continues to make acquisitions. In June, ACE INA International Holdings, Ltd., a subsidiary of ACE Limited acquired the remaining 49% stake of ACE Synergy Insurance Berhad in Malaysia from Advance Synergy Capital Berhad for a cash consideration of $39 million.
The acquisition further strengthens the company’s presence in Malaysia. Its earlier acquisitions include majority stakes in ProClaim America, Rain and Hail Insurance Service Inc, New York Life’s Hong Kong and Korea life insurance operations and Jerneh Insurance Berhad in Malaysia.
ACE Ltd. continues to remain focused on enhancing shareholder value. Recently, the company’s board of directors authorized an aggregate buyback of $500 million of common stock. The board also approved the 6.1% increase in quarterly dividend that the company announced in February. ACE Limited increased the quarterly dividend rate thrice in the trailing ten quarters.
The company also scores strongly with the credit rating agencies. Recently, A.M. Best Co raised the issuer credit ratings (ICR) of ACE Limited and its subsidiaries. The upgradation came on the back of solid risk-adjusted capitalization, international exposure, continued profitability and cash flow and strong balance sheet.
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 loss was lower in the second quarter compared to the first quarter to $134 million with the combined ratio deteriorating 290 basis points.
However, Hurricane Irene, which hit the east coast of the U.S. has caused huge damage. Results of third quarter are again expected to be adversely affected due to the cat loss.
ACE Ltd.’s second quarter operating earnings were well ahead of the Zacks Consensus Estimate, stemming from higher premiums and higher investment income. The results of ACE Limited were not affected despite natural disasters that led to catastrophe losses.
Looking ahead, the company expects to post double-digit revenue growth in the second half of 2011 and operating earnings of $6.00–$6.20 per share in 2011.
The Zacks Consensus Estimate for third-quarter 2011 is $1.79 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $6.57 per share and $7.47 per share.
We retain our “Neutral” recommendation on ACE Limited. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock 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 The Travelers Companies Inc. (TRV) and American International Group Inc. (AIG).
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