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Another Earnings Beat for ACE Limited

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ACE Limited has successfully managed to keep its earnings streak alive with its fourth-quarter and full year 2013 earnings results. The property and property-casualty (P&C) insurer reported operating net earnings of $2.39 per share in the fourth quarter of 2013, surpassing the Zacks Consensus Estimate by 19.5%. Moreover, earnings surged nearly 67% on a year-over-year basis.

Including net realized gains, net of tax, of 51 cents per share, ACE Limited reported net income of $2.90 per share, up 30.6% year over year.

For full year 2013, ACE Limited posted record earnings of $9.35 per share which climbed 22.2% year over year and exceeded the Zacks Consensus Estimate by 4.3%. Earnings comfortably surpassed the company guidance of $8.65–$8.90 per share.

Solid underwriting performances aided the better-than-expected results. Absence of any significant cat activities also boosted the upside. Premium revenue witnessed improvement globally. It also benefited from positive prior-year reserve development.

Shares of ACE Limited gained about 1.51% in the after-market session, indicating that the market has taken this release positively.

Operational Performance

Gross premiums written by ACE Limited in the fourth quarter were $5.46 billion, up 6.6% year over year.

Net premiums earned improved 19.1% year over year to $4.36 billion in the quarter.

Net investment income in the quarter totaled $557 million, down 1.8% year over year, largely due to lower reinvestment rates.

Underwriting income at ACE Limited was $438 million, rebounding from a loss of $166 million in the year-ago quarter.

P&C combined ratio improved 1620 basis points (bps) year over year to 89.3%.

Segment Update

Insurance-North American P&C: The segment recorded 12.3% year-over-year growth in net earned premium in the quarter.

Operating income more than doubled to $402 million.

Combined ratio improved 2810 bps to 86.2% in the quarter under review.

Insurance-North American Agriculture: Net earned premium surged 63% year over year.

Operating loss widened to $20 million, from a loss of $1 million incurred in the year-ago period.

Combined ratio deteriorated 570 bps to 105.2% in the quarter.

Insurance-Overseas General: Net premiums earned in the quarter improved 13.6% year over year.

Operating income was $279 million, up nearly 13.4% from the year-ago quarter.

Combined ratio was 88.1%, improving 730 bps year over year.

Global Reinsurance: Net premiums earned fell 3.5% year over year.

Operating income nearly doubled to $145 million.

Combined ratio improved 3330 bps to 68.4% in the quarter.

Life: Net premiums earned decreased 1.6% from the year-ago quarter.

Operating income increased 16.2% year over year to $86 million.

Balance Sheet

ACE Limited exited the quarter with cash of $579 million, down 5.9% from the 2012-end level.

Book value per share, as of Dec 31, 2013, was $84.83, up 4.8% from $80.90 as of Dec 31, 2012.

Operating cash flow was $1.3 million in the fourth quarter and $4 billion in 2013.

Return on equity was 12.2% in 2013.

Performance of Other Property and Casualty Insurers

RLI Corporation (RLI - Free Report) reported fourth-quarter 2013 operating earnings of 72 cents per share exceeding the Zacks Consensus Estimate by 28.6% and the year-ago quarter’s earnings by 64%.

W.R. Berkley Corp. (WRB - Free Report) reported fourth-quarter core operating earnings of 85 cents per share, 8 cents ahead of the Zacks Consensus Estimate. Earnings were also up 33% year over year.

The Travelers Companies Inc. (TRV - Free Report) reported operating net earnings of $2.68 per share in the fourth quarter, surpassing the Zacks Consensus Estimate by 23.5% and improving nearly fourfold on a year-over-year basis.

Our Take

ACE Limited has kept up its trend of delivering impressive quarterly earnings. The reported quarter marked the sixth 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 also seems impressive with continued acquisitions. The company and its local partners recently inked a deal to acquire a 60.9% stake in The Siam Commercial Samaggi Insurance PCL, a general insurance company in Thailand, from Siam Commercial Bank to consolidate its foothold in Thailand – the second-largest economy in Southeast Asia. The company is expecting to strengthen its grip on commercial, auto and personal accident insurance sectors, capitalizing on The Siam Commercial Samaggi Insurance’s strong presence across Thailand. ACE Limited expects the acquisitions to meet or exceed its long-term return on equity (ROE) goal of 15% within 2–3 years.  

In addition, the company remains committed toward returning value to its shareholders. The board approved a 24% increase in quarterly dividend. Moreover, the board of ACE Limited has approved a buyback program, authorizing the company to repurchase $2 billion worth of shares through Dec 31, 2014. ACE Limited eyes repurchase of $1.5 billion worth of shares by 2014-end.

ACE Limited is retaining its focus on launching products to strengthen its portfolio. We are optimistic that all these efforts taken together will strengthen ACE Limited’s position going forward.

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

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