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ACE Limited (ACE - Analyst Report) reported third quarter 2012 operating income of $2.01 per share, breezing past the Zacks Consensus Estimate by 15 cents. Earnings however declined 9% from $2.20 earned in the year-ago quarter. Operating income was $688 million, 8% lower than $751 million in the prior-year quarter.

The results were hugely affected by drought conditions in the U.S. that hampered the company’s crop business. Nevertheless, ACE Limited delivered sturdy underwriting results.

Including net realized loss, net of tax, of $48 million or 15 cents per share, ACE Limited reported net income of $640 million or $1.86 per share, rebounding from a loss of $39 million or 11 cents per share in the prior-year quarter. ACE Limited had registered net realized loss, net of tax, of $790 million or $2.31 per share in the third quarter of 2011.

Operational Performance

Gross premiums written by ACE Limited in the third quarter were $6.0 billion, up 1.8% year over year.

Net premiums earned improved 3.9% year over year to $4.7 billion in the quarter.

Net investment income in the quarter totaled $533 million, down 5.6% year over year. The decline was largely due to lower reinvestment rates and the adverse impact of foreign exchange. However, higher distributions from private equity funds partially mitigated the downfall.

Underwriting profit at ACE Limited was $360 million in third quarter 2012, down 23.9% year over year.

Property & Casualty combined ratio deteriorated by 180 basis points year over year to 92% in the quarter. Total after-tax catastrophe losses including reinstatement premiums were $41 million, compared with $86 million in the year-ago quarter.

Segment Update

Insurance-North American: The segment recorded a 7.5% year-over-year growth in net earned written in the quarter.

Operating income decreased 23% year over year to $223 million in the quarter under review.

The combined ratio deteriorated by 360 basis points to 97.8% in the quarter.

Insurance-Overseas General: Net premiums earned in the quarter declined 2.6% year over year.

Operating income was $302 million in the quarter, an improvement of 3.4% from $292 million in the year-ago quarter.

The combined ratio was 82.7%, improving 290 basis points over the prior-year quarter.

Global Reinsurance: Net premiums earned saw an increase of 17.1% year over year to $281 million.

Operating income was $139 million, down 4.1% from $145 million in the year-ago period.

The combined ratio deteriorated 730 basis points to 72.7% in the quarter.

Life: The segment’s net premiums earned remained flat with the year-ago level at $480 million.  

Operating income increased 8.7% year over year to $87 million.

Balance Sheet

ACE Limited exited the quarter with cash of $690 million, up 12.4% from 2011-end level.

Book value per share as of September 30, 2012, was $79.36, up 4.7% from $75.98 as of June 30, 2012.

2012 Outlook Revised Upward

ACE Limited raised its full year expectation. It now guided operating earnings to a band of $7.73–$8.03 per share, up from $7.20–$7.60 per share guided earlier. The guidance includes catastrophe loss of $100 million in the fourth quarter.

The upward revision came on the back of positive prior-period reserve development and lower-than-planned catastrophe losses of $1.60 per share in the first three quarters of 2012 and a reduction of 57 cents per share related to the company’s crop insurance business.

Peer Comparison

The Travelers Companies (TRV - Analyst Report), which competes with ACE Limited, reported earnings of $2.22 per share in the third quarter of 2012, outshining the Zacks Consensus Estimate of $1.61 per share. Results surged 181% from 79 cents earned in the year-ago quarter.

Lower catastrophe losses and sturdy underwriting results fueled the outperformance.

Total revenue in the quarter under review was $6.5 billion, increasing 2% year over year, driven by the augmentation in premiums earned and net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.3 billion.

Our Take

The company remains well poised owing to its international presence, diversified product offering, risk management, conservative underwriting practice, strong reserves and improving P&C pricing environment. Favorable P&C pricing trend aided the company to post double-digit premium growth in North America.

The company continues to expand its international footprint. It purchased 80% of PT Asuransi Jaya Proteksi in Indonesia. Jakarta-based Asuransi Jaya Proteksi will leverage ACE’s presence in the fast-growing South Asian market. Furthermore, it will help broaden accident & health and commercial property & casualty businesses in Indonesia.

Also, it inked a definitive agreement for the acquisition of Mexico’s sixth-largest property and casualty (P&C) insurer ABA Seguros from Ally Financial Inc. The acquisition should strengthen ACE Limited’s P&C business, particularly its personal lines and agency businesses. The deal will also strengthen the company’s foothold in Mexico. Further, it agreed to buy Mexico’s second-largest surety writer – Fianzas Monterrey

ACE Limited remains focused on enhancing its earnings, return on equity and book value per share.

We maintain a Neutral recommendation on ACE Limited in the long term. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward boost on the stock over the near term.

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