ACE Limited Beats, Cat Loss Hurts 4Q - Analyst Blog


ACE Limited ( ACE ) reported fourth-quarter 2012 operating income of $1.43 per share, up 14 cents from the Zacks Consensus Estimate. However, it declined 25% from $1.90 earned in the year-ago quarter. Operating income was $492 million, down 24% from $648 million in the prior-year quarter.

The results were hugely affected by cat losses incurred due to Superstorm Sandy.

Including net realized loss, net of tax, of $273 million or 79 cents per share, ACE Limited reported net income of $765 million or $2.22 per share, which compared favorably with $735 million or $2.15 per share in the prior-year quarter. ACE Limited had registered net realized loss, net of tax, of $87 million or 25 cents per share in the fourth quarter of 2011.

Operational Performance

Gross premiums written by ACE Limited in the fourth quarter were $5.1 billion, up 5.8% year over year.

Net premiums earned improved 0.4% year over year to $3.8 billion in the quarter.

Net investment income in the quarter totaled $567 million, up 0.4% year over year.

Underwriting loss at ACE Limited was $166 million in fourth quarter 2012, compared with a profit of $263 million in the year-ago quarter.

Property & Casualty combined ratio deteriorated 1250 basis points (bps) year over year to 105.5% in the quarter. Total after-tax catastrophe losses including reinstatement premiums were $400 million, compared with $137 million in the year-ago quarter. Cat losses in the reported quarter included a loss of $393 million due to Superstorm Sandy.

Full Year Highlights

Full year 2012 operating income was $7.65 per share, which substantially surpassed the Zacks Consensus Estimate by 2% and improved 12% year over year.

Including net realized investment gains of 24 cents, the company reported net income of $7.89 per share, up from $4.52 a share earned in 2011.

Investment income declined 2.8% year over year to $2.2 billion.

Underwriting income improved 11% year over year to $1.2 billion. Combined ratio improved 80 basis points year over year to 93.9%.

Segment Update

Insurance-North American : The segment recorded a 3.2% year-over-year decline in net earned premium in the quarter.

Operating income plunged 50% year over year to $170 million in the quarter under review.

The combined ratio deteriorated by 2090 basis points to 111.9% in the quarter.

Insurance-Overseas General: Net premiums earned in the quarter improved 3.2% year over year.

Operating income was $246 million in the quarter, up 45% from the year-ago quarter.

The combined ratio was 95.4%, deteriorating 90 bps from the prior-year quarter.

Global Reinsurance : Net premiums earned increased 2.0% year over year in the quarter under review.

Operating income was $74 million, down 41% from $145 million in the year-ago period.

The combined ratio deteriorated 2460 basis points to 101.7% in the quarter.

Life : In this segment, net premiums earned during the reported quarter increased 4% year over year.  

Operating income decreased 6.3% year over year to $74 million.

Balance Sheet

ACE Limited exited the quarter with cash of $615 million, up 0.2% from the 2011-end level.

Book value per share, as of Dec 31, 2012, was $80.90, up 12% from $72.22 as of Dec 31, 2011.

Operating cash flow was $970 million for the fourth quarter and $4.0 billion for 2012.

2013 Outlook

ACE Limited guided operating earnings to a band of $6.60-$7.00 per share. The guidance includes catastrophe loss of $450 million.

Other Property and Casualty Insurers

The Travelers Companies ( TRV ) reported earnings of 72 cents per share in the fourth quarter of 2012, which surpassed the Zacks Consensus Estimate of 4 cents per share. However, results plunged 51% from $1.48 earned in the year-ago quarter.

The year-over-year downside was largely attributable to higher catastrophe losses mostly due to Hurricane Sandy. However, higher underlying underwriting margins and higher net favorable prior-year reserve development limited the downside to some extent.

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

RLI Corporation ( RLI ) reported fourth-quarter 2012 operating earnings of 89 cents per share. The result surpassed the Zacks Consensus Estimate of 44 cents by 107% but missed the year-ago level of $1.13 by 32.1%. Operating earnings in the quarter were $19.2 million, down 31.9% year over year.

Lower underwriting results led to the year-over-year downfall.

Revenue in the quarter under review totaled $171.4 million, improving 4.5% from $163.9 million in the prior-year quarter, attributable to higher premiums earned and augmentation in net realized investment gains. Revenue was in line with the Zacks Consensus Estimate.

Our Take

ACE Limited has successfully maintained the trend of delivering positive earnings surprise.

Though its exposure to cat loss weighs on the results, prudent underwriting practices, international presence, diversified product offering, and a sturdy balance sheet managed to limit the adverse effect.

The company continues to expand its international footprint with acquisitions in Indonesia and Mexico. In October, ACE Limited 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 the acquisitions to meet or exceed its long-term return on equity (ROE) goal of 15% within 2-3 years.

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

ACE Limited currently carries a Zacks Rank #3 (Hold). Among other property & casualty insurers carrying a favorable Zacks Rank #1 (Strong Buy), Fidelity National Financial, Inc . ( FNF ) is slated to report on Feb 19, after the closing bell.

ACE LIMITED (ACE): Free Stock Analysis Report

FIDELITY NAT FI (FNF): Free Stock Analysis Report

RLI CORP (RLI): Free Stock Analysis Report

TRAVELERS COS (TRV): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: ACE , FNF , RLI , TRV

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