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We have retained our Neutral recommendation on ACE Limited (ACE - Analyst Report).The exposure to catastrophe loss, low interest rate environment and a soft crop business has overshadowed the positives of the company.

ACE has a substantial exposure to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. Based on the occurrence of Superstorm Sandy, the company expects to incur a loss of about $380 million. Concurrently, it lowered the full-year earnings expectation to $7.43 – $7.53 per share from $7.73–$8.03 per share, to accommodate the loss.  

Further, the weakness in the crop business partially overshadowed the solid performance of the company. The U.S. has experienced severe drought conditions in 2012, the worst since 1988. The third quarter had a negative impact of 28 cents per share on operating income and ACE Limited expects the operating income for this line of business to decrease by $195 million for full year 2012.

The continued low interest rate environment induced a 5.6% year-over-year decline in net investment income.

However, counting on the positives, the company has always considered acquisition as an efficient strategy to boost inorganic growth and expand its global footprint. In order to expand ACE’s presence in the fast-growing South-Asian market, it acquired PT Asuransi Jaya Proteksi in Indonesia. Further, the company agreed to buy Fianzas Monterrey to expand its Surety business. It also agreed to buy Mexico’s sixth-largest P&C insurer, ABA Seguros from Ally Financial Inc. for $865 million, thereby strengthening its personal lines and agency businesses in particular. ACE Limited expects these transactions to meet or exceed its long term ROE goal of 15% within 2–3 years.

ACE Limited strongly scores with the credit rating agencies. Rating affirmations or upgrades from credit rating agencies also played an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that the company’s strong score with the credit rating agencies will help it write more business going forward.

Additionally, the company remains focused on returning value to shareholders.  It has a consistent track record of paying regular quarterly dividends. Its dividend yield is 2.46%, higher than the industry yield of 1.63%, as well as its nearest peers Allstate Corp.’s (ALL - Analyst Report) 2.18% and Progressive Corp’s (PGR - Analyst Report) 1.92%. Also, it has shares worth $461 million remaining under its buyback authorization.

Based on the company’s solid performance in the first three quarters, the full year Zacks Consensus Estimate is currently pegged at $7.54 per share, representing a year-over-year increase of 8.2%. It carries a Zacks #3 rank, translating into a short term ‘Hold’ rating.
 

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