Back to top

Analyst Blog

One of the largest property and casualty insurers of U.S. ACE Limited (ACE - Analyst Report) has announced that it will buy ItauSegurosSolucoesCorporativas SA. This is the property and casualty (P&C) insurance unit of ItaúUnibanco S.A., one of the largest private banks of Brazil.

ItauSeguros specializes in providing high-risk corporate and reinsurance. The segment provides insurance to projects related to oil and gas and infrastructure and is dependent on economic growth. The business hit an unfavorable patch since the economic growth rate for the past four years trailed the government average target growth rate of 4.5%.

ItauUnibanco Holding S.A. is exiting this unit to focus on growing its core business of selling insurance to retail-banking customers that offers higher return on equity. Moreover, the capital generated from the divestiture will fortify the bank’s capital enabling it to comply with the Basel III capital requirement.

Why Brazil?

For Swiss-based ACE Limited, the Brazilian insurance market is a lucrative opportunity. The company foresees huge demand high-risk corporate and reinsurance demand driven by rapid economic expansion which Brazil is expected to witness. The country has been often criticized for its weak infrastructure.

The president of Brazil, Dilma Rousseff, last year announced plans to make huge investments in infrastructure projects, such as sewage systems and road paving. Other projects to refurbish the country’s transport network, increase electricity supplies, and develop vast offshore petroleum reserves are also being worked out. 

ACE Ltd sees a huge growth opportunity and is therefore willing to even pay a price of $685 million which amounts to four times the book value of the company, which has a short operating history dating back to 2006.  

Post buyout, ACE Ltd which already provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance in Brazil, will rise in rank by becoming the country’s largest commercial P&C insurer. The company has a strong international business profile with operations in 54 countries.  
The acquisition which will likely close by early next year will be accretive to ACE Ltd’s 2015 earnings and equip it with 320 employees and more than 600 brokers.

A Compelling Inorganic Story

ACE Limited has always considered acquisitions as a prudent strategy to boost growth and expand its global footprint. Over the years, ACE Limited has made significant acquisitions to diversify its product offerings. Last month, the company acquired a 32.17% stake in The Siam Commercial Samaggi Insurance PCL (Samaggi).

Prior to this in Apr 2013 ACE Limited acquired Fianzas Monterrey, a leading surety lines company in Mexico for $293 million in cash. Indonesia's PT Asuransi Jaya Proteksi was also taken over for $100 million in cash in Jan 2013. Acquisitions boost ACE’s premiums and take it closer, a step at a time, to its long-term ROE goal of 15%.

Supported by Flush Cash Position

ACE Ltd has been strengthening its balance sheet to travel the inorganic path and perk up operational performance.  At the end of first quarter 2014, the company’s  cash balance improved 46% over the 2013 level and retained earnings grew 5.3%. ACE Ltd has also been effectively lowering its leverage ratios.

Other Stocks to Consider

ACE Ltd carries a Zacks Rank # 3(Hold). Better-ranked property and casualty stocks include W.R. Berkley Corp. (WRB - Analyst Report), Endurance Specialty Holdings Ltd. (ENH - Snapshot Report) and Hallmark Financial Services Inc. (HALL - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

Please login to Zacks.com or register to post a comment.