ACE Q3 Earnings Beat on Solid Underwriting & Investment - Analyst Blog

ACE Limited ( ACE ) has kept its surprise streak alive with third-quarter operating earnings of $2.64 per share, outperforming the Zacks Consensus Estimate by about 10%. Earnings improved 6% year over year.

Including net realized losses, net of tax, of 32 cents per share, ACE Limited reported net income of $2.32 per share, down 13% year over year.

Solid underwriting performances coupled with improved investment results drove the better-than-expected results. Premium revenue witnessed global improvement.

Operational Performance

Gross premiums written by ACE Limited were $6.3 billion, down 1.7% year over year. Net premiums earned improved 3.1% year over year to $4.8 billion.

Net investment income totaled $556 million, up 8.5% year over year on sturdy growth in invested assets, increase in private equity distributions and an increase in call activity in the company's corporate bond portfolio.

Underwriting income at ACE Limited was $586 million, up 5% year over year on the back of solid earned premiums and underwriting margin. Combined ratio improved 20 basis points (bps) year over year to 86.3%.

Segment Update

Insurance-North American P&C : The segment recorded 5.1% year-over-year growth in net earned premium in the quarter. Operating income decreased 1.5% to $337 million.

Combined ratio improved 310 bps to 91.4%.

Insurance-North American Agriculture : Net earned premium declined 9.8% year-over-year to $766 million. Operating income increased 14% to $57 million.

Combined ratio improved 280 bps to 89.5%.

Insurance-Overseas General : Net premium earned in the quarter improved 7.2% year over year. Operating income was $348 million, up 8.8% year over year.

Combined ratio was 80.1%, reflecting an improvement of 210 bps year over year.

Global Reinsurance : Net premium increased nearly 6.7% year over year. Operating income of $145 million declined 10.7% on a year-over-year basis.

Combined ratio deteriorated 440 bps to 69.9%.

Life : Net premium earned increased 4.7% from the year-ago quarter. Operating income declined 4% year over year to $72 million.

Balance Sheet

ACE Limited exited the quarter with cash of $806 million, up 39% from the 2013-end level.

Book value per share, as of Sep 30, 2014, was $90.38, up 6.5% from $84.83 as of Dec 31, 2013.

Operating cash flow was $1.1 billion in the reported quarter. Operating return on equity was 12.6%.

Share Repurchase Update

ACE Limited spent $450 million to buy back 4.3 million shares in the quarter. The company has spent about $1.1 billion to repurchase 11.2 million shares since the inception of the share repurchase authorization in Nov 2013 through Oct 20, 2014.

Our Take

Solid underwriting continues to help ACE Limited maintain its surprise momentum.

Though the company noted a slowdown in premium growth, it expects to gain momentum in the ongoing quarter given its diversified exposure.

Its inorganic story also looks good with continued acquisitions. It expects the buyout of Itau Seguros SA, the P&C insurance unit of Itaú Unibanco S.A., ( ITUB ) to close by this month end. While the acquisition makes ACE Limited the largest commercial P&C insurer in Brazil, the transaction will also be immediately accretive to earnings.

In addition, the company remains committed to returning value to its shareholders. Regular buybacks consistently boost the bottom line

ACE Limited currently carries a Zacks Rank #3 (Hold).

Performance by Other P&Cs Insurers

Bottom lines at RLI Corporation ( RLI ) and The Travelers Companies Inc. ( TRV ) have outperformed their respective Zacks Consensus Estimate in the third quarter.

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

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

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