We retain our Neutral recommendation on ACE Limited (ACE), following its second quarter performance.
Operating earnings in the second quarter outperformed the Zacks Consensus Estimate and the year-ago earnings, benefiting largely from solid current accident year underwriting results as well as lower catastrophe losses.
ACE Limited continues with it acquisitions that help it improve its top line inorganically. Acquisitions have created a turnaround in premium writings. With considerable balance sheet strength, we expect ACE to grow both organically and inorganically. The company expects premium growth to gain momentum in each quarter, averaging in the mid to upper single digits in 2012. It also estimates agriculture premium to be lower by $250 million from the year-ago level. Its latest move to acquire PT Asuransi Jaya Proteksi in Indonesia for $130 million will aid the company to diversify its business there.
ACE boasts of a strong capital position, which helps it enhance its shareholders value. It has a record of increasing its dividend every year; the last dividend hike was 4.25%. Its dividend yield is 2.69%, above Allstate Corp.’s (ALL) 2.06% and Progressive Corp.’s (PGR) 2.2% yield. It is also left with share repurchase worth $461 million under its authorization. Furthermore, the company does not have direct exposure to sovereign debt in Europe. Its exposure to Euro zone financial institutions totaled $1.1 billion or less than 2% of the portfolio and is concentrated in Northern Europe.
ACE’s earnings generating capability and stability supported by its conservative reserving philosophy and commitment to underwrite profitability provide a solid base for its enterprise risk management program. As such, the company strongly scores with the credit rating agencies.
Nevertheless, these positives are dwarfed by substantial exposure to catastrophe losses. Though the entire industry benefited from lower cat loss, exposure to cat activities will always remain a concern as natural disasters can affect the results adversely. The company also stated that the drought conditions in the U.S. will weigh on its profitability in the later half of 2012.
Low interest rate environment continues to weigh on net investment income and the recent quarter was no exception to it. Net investment income in the second quarter suffered a dip largely due to lower new money rates and the adverse impact of foreign exchange, partially offset by higher distributions from private equity funds.
The quantitative Zacks Rank for ACE Limited is currently “3", indicating no clear directional pressure on the shares over the near term.
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