ACE Ltd Expects Buyouts to Bode Well, Expenses Hurt Margins
On Dec 10, we issued updated research report on ACE Limited (ACE).
Bottom line of ACE Limited in the last reported quarter surpassed the Zacks Consensus Estimate as well as year-ago number on solid underwriting performances coupled with improved investment results.
With respect to the earnings trend, this Zacks Rank #2 (Buy) property and casualty (P&C) insurer has been delivering a positive surprise each quarter over two decades. Its trailing 4-quarter average beat is 10.9%.
ACE Limited has always considered acquisition as an efficient strategy for inorganic growth and global expansion. Acquisitions have improved premium writings. It latest buyout of ItauSeguros SA, the P&C insurance unit of Itaú Unibanco S.A. in Brazil is expected to close ahead of the scheduled time.
ACE Limited boasts a strong capital position with a good cash position and financial leverages showing improvement. With its considerable balance sheet strength, we expect the company to grow both organically and inorganically.
With respect to returning value to shareholders, the company engages in regular buybacks along with dividend increases. The board of directors also approved a repurchase of $1.5 million shares through next year. Under the current authorization the company has already bought back $1.1 billion shares through Oct 20. The company is also on track to complete its $1.5 billion share buyback for 2014.
Income seeking investors will find ACE Limited an attractive pick as it pays a stable and regular dividend. Its dividend yield of 2.21% betters the sector yield of 1.95%. In the third quarter, the company returned $670 million capital to its shareholders ($450 million in share repurchase and $220 million in dividend).
Nonetheless, increased expenses have been taking a toll on margin expansion. If expenses continue to increase at a higher pace than revenue growth, operating margin expansion will be affected further.
Being a property and casualty insurer, ACE Limited is exposed to cat occurrences. If the company incurs a huge cat loss, its underwriting results and combined ratio will be hugely affected.
A solid quarterly performance along with strong fundamentals has prompted the Zacks Consensus Estimate for 2014 and 2015 to rise over the last 60 days. It increased 3.3% to $9.52 (as 10 of 11 estimates moved north) for 2014 and by a penny to $9.34 (as 4 of 11 estimates moved north) for 2015. The expected long-term earnings growth rate for the stock is 10%.
Investors interested in property and casualty insurers may consider AmTrust Financial Services, Inc. (AFSI), Navigators Group Inc. (NAVG) and Selective Insurance Group Inc. (SIGI). All these sport a Zacks Rank #1 (Strong Buy).
Read the Full Research Report on ACE
Read the Full Research Report on AFSI
Read the Full Research Report on NAVG
Read the Full Research Report on SIGI
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