Ace Limited's Outlook Limited
Ace Limited’s (ACE - Analyst Report) operating earnings of $2.18 per share, substantially ahead of expectations, reflects the Combined Insurance acquisition and a favorable prior period reserve development. Underwriting results benefited from relatively better current accident year results and a lower level of catastrophe losses.
The company experienced growth in international operations, which benefited from a weaker U.S. dollar as well as growth in A&H and specialty lines. However, the global reinsurance business again reported a significant decline in this quarter and remains our matter of concern. We expect potential pressure on ACE’s shares over the next couple of quarters, which should outweigh our growth expectations for this company at this time. Hence, we reiterate our Hold recommendation.
Based on 2Q08 results, we are increasing FY08 earnings expectation to $8.18 per share from $7.90 per share, but maintaining our FY09 earnings expectation at $7.90 per share. At the current price, the shares of ACE trade at 1.06x the 2Q08 book value of $48.99 per share, a 12.8% premium to the Bermuda reinsurance group but not out of line from the historic level of other primary carriers its size. The company has benefited from the sale of its three run-off units, which represented 17% of its legacy asbestos reserves.
This has somewhat reduced the uncertainty associated with legacy asbestos claims and improved visibility to ACE’s future earnings. Despite some of the general softening of casualty lines, we expect ACE to show trends in its premiums and earnings. Our six-month price target of $57.50 per share incorporates a 1.10x price-to-book multiple to our estimate for the company’s book value of $52.25 per share at December 31, 2008.