ACE Ltd. Beats Estimates

ACE Limited: Profit plunges but exceeds expectations

ACE Limited’s (ACE - Analyst Report) second quarter operating earnings of $2.09 per share were down year-over-year, but ahead of our expectations as well as the Street's. In the prior year, the company reported operating earnings of $2.08 per share. Results reflected low catastrophe losses and favorable reserve development from prior year periods.

However, for the second quarter the company reported net income of $1.58 per share, compared with $2.18 per share in the prior-year period. The company has experienced a decrease in premium writings and reduced income from investments.

Nevertheless, as a result of significant benefit realized from the tightening of credit spreads, the company posted an increase in its book value. In the second quarter, book value per share grew 12% sequentially and 14% year-to-date. This was driven by increase in Treasury yields and reduced yields on corporate securities.

ACE continued to experience the negative impact of a recessionary economy on its premium writings. In addition, the strengthening of the U.S. dollar and a competitive pricing environment also contributed to the decline in premiums. Retentions and exposures were also impacted by the recession. Net P&C premiums written decreased 5%. Excluding the impact of foreign exchange, they were up only 1%. P&C combined ratio for the quarter was 87.7% compared with 87.8%.

The reinsurance market remained favorable in the second quarter. Prices continue to firm, particularly short-tail. Also, the company experienced better signings on treaties given the company’s rating and additional reinsurance purchases by companies for capital relief. As a result, Global Re posted a 22% growth in net premiums written.

While the insurance market continues to firm, that was not across the board. Rates are trending upwards in certain classes, flat in others, and are continuing to move down in still others, though at a continued slower pace. Insurance-North American reported a 4% decrease in net premiums written. Net premiums written in Insurance-Overseas General decreased 12%. However, adjusting for the foreign exchange impact, premium writing increased 2%.

Net investment income decreased 5% year-over-year to $506 million. Net realized and unrealized gains from its investment portfolio totaled around $1 billion after-tax. This included $1.2 billion of unrealized gains and $179 million of realized losses.

The company has also revised the upper end of its guidance. The company now expects operating earnings of $7.25 to $8.00 per share, down from the previous range of $7.25 to $8.25 per share.

Rates continued to improve in the quarter, and the relationship between rates and risk exposure has also exhibited positive trends. However, given the reduced exposure due to the current recession that is also impacting the clients’ insurance budgets, we do not expect any robust improvement in the top-line for the short-term.

Nevertheless, the company is well diversified in business segments and geography and is appropriately capitalized. As such we continue with our Hold recommendation on the shares of ACE.