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ACE Maintained at Neutral

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We have retained our Neutral recommendation on ACE Limited . The low interest rate environment, rising operating expenses and weather related losses will likely offset the positive impact of the acquisitions and dividend hike made by ACE. The excess liability insurance provider currently carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Over the last 30 days, one out of 11 estimates moved upward while one was nudged down keeping the Zacks Consensus Estimate for 2013 at $8.10, translating into a year-over-year improvement of 5.82%.

Being one of the largest Property and Casualty (P&C) insurers, ACE is exposed to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. The first quarter of 2013 was no exception. The company incurred a catastrophe loss of $28 million in the first three months of 2013, swelling 100% year over year. The deterioration came on the back of heavy flooding in Australia and severe storms in the U.S.

Counting on the positives, ACE has been expanding its operations through acquisitions. The recent venture in this regard was the completion of its pending acquisition of ABA Seguros from Ally Financial. This acquisition is expected to strengthen its personal lines and agency business. Including this deal, ACE has completed two acquisitions over the past five months. Overall, incessant acquisitions on the part of the company are considered favorable as it will help the company reach its Return on Equity (ROE) goal of 15% and boost premium growth going forward.

ACE also has a record of increasing shareholders worth through share buybacks and dividend payouts. The Board in Aug 2011 authorized a $303 million worth of share buyback in addition to the $197 million remaining under its previous authorization. As of Mar 31, 2013, the company is left with $307 million under its authorization. ACE also increased its quarterly dividend by 4% to 51 cents per share in May 2013. The company boasts of a dividend yield of 2.23%, higher than the industry yield of 2.20%.

Operating expenses of ACE has also been rising for the past few years. In the first quarter as well ACE reported an increase in operating expenses by 4.3% mainly due to increase in losses and loss expenses, policy acquisition costs, and administrative expenses. Continuous escalation of operating expenses is expected to have an adverse impact on operating margin going forward. Also, lower interest rates and the adverse impact of foreign exchange has hurt net investment income for some time.

Other Stocks to Consider

Among others from the industry, Cincinnati Financial Corporation (CINF - Free Report) and Arch Capital Group Limited (ACGL - Free Report) carry Zacks Rank #2 (Buy) and AXIS Capital Holdings Limited (AXS - Free Report) carries a favorable Zacks Rank #1 (Strong Buy).

In-Depth Zacks Research for the Tickers Above

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Cincinnati Financial Corporation (CINF) - free report >>

Axis Capital Holdings Limited (AXS) - free report >>

Arch Capital Group Ltd. (ACGL) - free report >>

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