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We retain our Neutral recommendation on ACE Limited (ACE - Analyst Report) following the second quarter earnings results. The property and casualty insurer carries a Zacks Rank #3 (Hold).

Why the Reiteration?

ACE Limited has been experiencing rising expenses over the last few years. Expenses increased 2.8% in 2010, accelerated by 19.6% in 2011, and by 1.1% in 2012. In the first half of 2013, expenses increased 5.8% year over year. The increases can be primarily attributed to the rise in losses and loss-related expenses, policy acquisition costs, and administrative expenses. If expenses continue to increase, it might take a toll on the company’s operating margin expansion.

Additionally, low interest rate environment continues to weigh on net investment income.

To add to its woes, ACE Limited also faces substantial exposure to losses resulting from natural disasters, man-made catastrophes, and other catastrophic events. Management expects catastrophe loss of $260 million for the remainder of the year.

Counting on the positives, the second quarter delivered a positive earnings surprise of 19.3%. This marked the fourth straight earnings beat with an impressive average of 12.4%. The long-term expected earnings growth rate for this stock is 7.3%.

ACE Limited’s inorganic growth story also looks impressive with the ongoing acquisitions.

ACE Limited also remains focused toward enhancing its shareholder value. In the first half of 2013, the company repurchased 2.5 million shares for $212 million and is left with $249 million under its buyback program. It has also approved a 4% hike in its quarterly dividend, currently yielding 2.3%. Given its strong capital, which exceeds $33.3 billion, and a solid liquidity position, we expect to see more such initiatives going forward.

ACE Limited’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.

Other stocks to Consider

Property and casualty insurers Alleghany Corporation (Y - Snapshot Report), Everest Re Group Ltd. (RE - Analyst Report) and Global Indemnity plc (GBLI) with a favorable Zacks Rank #1 (Strong Buy) are worth considering.

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