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ACE Limited Beats on Q3 Earnings, Ups View

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ACE Limited reported third-quarter 2013 operating net income of $2.49 per share, beating the Zacks Consensus Estimate of $2.21 by 12.7%. Results also improved 23.9% from $2.01 earned per share in the year-ago quarter. Operating income was $857 million, up 24.6% year over year.

Solid underwriting performances aided the better-than-expected results. Absence of any significant cat activities aided the upside. Both the North American and international business operations experienced growth and better margins. While North America benefited from better pricing and mix of business, international business improved on the back of better product and geographic mix. ACE Limited also gained on account of improved commercial property & casualty (P&C) pricing environment.

Including net realized gains, net of tax, of $59 million or 17 cents per share, ACE Limited reported net income of $916 million or $2.66 per share, which compared favorably with $640 million or $1.86 cents per share in the prior-year quarter. ACE Limited had registered net realized loss, net of tax, of $48 million or 15 cents per share in the third quarter of 2012.

Operational Performance

Gross premiums written by ACE Limited in the second quarter were $6.37 billion, up 6.1% year over year.

Net premiums earned declined 1.2% year over year to $4.62 billion in the quarter.

Net investment income in the quarter totaled $522 million, down 2.1% year over year, largely due to lower reinvestment rates, lower private equity distributions, and the adverse impact of foreign exchange.

Underwriting income at ACE Limited was $576 million, surging 60% year over year.

P&C combined ratio improved 550 basis points (bps) year over year to 86.5%. Total after-tax catastrophe losses including reinstatement premiums were $70 million, compared with $10 million in the year-ago quarter.

Segment Update

Insurance-North American P&C: The segment recorded 10.6% year-over-year growth in net earned premium in the quarter.

Operating income increased 8.6% from the year-ago quarter to $342 million.

Combined ratio deteriorated 300 basis points to 88.3% in the quarter under review.

Insurance-North American Agriculture: Net earned premium declined 27.2% year over year.

Operating income was $50 million, rebounding from a loss of $92 million incurred in the year-ago period.

Combined ratio improved 1950 bps to 89.9% in the quarter.

Insurance-Overseas General: Net premiums earned in the quarter improved 12.5% year over year.

Operating income was $320 million, up nearly 6% from the year-ago quarter.

Combined ratio was 88.2%, improving 50 bps year over year.

Global Reinsurance: Net premiums earned increased 14.9% year over year to $239 million.

Operating income was $131 million, up 5.8% year over year.

Combined ratio improved 690 bps to 65.8% in the quarter.

Life: Net premiums earned increased 2.7% from the year-ago quarter to $467 million.

Operating income decreased 13.8% year over year to $76 million.

Balance Sheet

ACE Limited exited the quarter with cash of $768 million, up 24.9% from the 2012-end level.

Book value per share, as of Sep 30, 2013, was $82.98, up 2.6% from $80.90 as of Dec 31, 2012.

Operating cash flow was $928 million in the third quarter of 2013.

Return on equity was 13% in the reported quarter.

2013 Guidance Raised

ACE Limited guided operating earnings at a band of $8.65–$8.90 per share, up from $7.65–$8.05 guided earlier. The revision came on the heels of a positive prior-period reserve development, lower-than-expected catastrophe losses, and better current accident year results excluding cat losses in the third quarter. The guidance includes estimated catastrophe loss of $95 million for the fourth quarter.

Performance of other Property and Casualty Insurers

RLI Corporation (RLI - Free Report) reported third-quarter 2013 operating earnings of $1.40 per share. The result surpassed both the Zacks Consensus Estimate of 95 cents by 47% as well as the year-ago figure of $1.02 by 37.2%. The year-over-year improvement came on the back of better underwriting results in the Property and Casualty segments.

W.R. Berkley Corp. (WRB - Free Report) reported third-quarter core operating earnings of 77 cents per share, 5 cents ahead of the Zacks Consensus Estimate. Earnings were also up 26.2% year over year. W.R. Berkley's earnings beat came on the back of higher premium written, pricing gains and a lower share count.

The Travelers Companies Inc. (TRV - Free Report) reported operating net earnings of $2.35 per share in the third quarter of 2013, surpassing the Zacks Consensus Estimate of $1.99 per share. Moreover, results improved 5.9% from $2.22 per share in the year-ago quarter. The outperformance was driven by improvement in underlying underwriting gains and lower share count.

Our Take

ACE Limited has successfully maintained the trend of delivering positive earnings surprises. The reported quarter marked the fifth consecutive one rendering a positive surprise.

ACE Limited continues to benefit from better commercial P&C pricing environment in the U.S., enjoying another quarter of rate increase. Its inorganic story seems impressive with suitable acquisitions in its pipeline. ACE Limited expects the acquisitions to meet or exceed its long-term return on equity (ROE) goal of 15% within 2–3 years.  

It also remains committed to return value to its shareholders.

ACE Limited also remains focused on launching products to strengthen its portfolio. We are optimistic that all these efforts will strengthen ACE Limited’s position going forward.

ACE Limited currently carries a Zacks Rank #1 (Strong Buy).

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