PMIC Penn Millers Holding Corp. (MM)

ACE Limited (ACE) reported a third-quarter 2011 operating income of $2.22 per share, which came in ahead of the Zacks Consensus Estimate by a substantial 43 cents. Earnings improved 10% from $2.01 per share earned in the year-ago quarter. Operating income in the quarter was $759 million, up 10% from $688 million in the third quarter of 2010.

Better-than-expected results stemmed from higher premiums and investment income. The quarter experienced solid current accident year underwriting results benefiting from both underwriting discipline and risk management. Acquisitions also contributed to the better results.

Including net realized losses, net of tax, of $790 million or $2.31 per share, ACE Limited reported a net loss of $31 million or 9 cents per share compared with a profit of $675 million or $1.97 per share in the prior-year quarter. The company, in third-quarter 2010, registered net realized loss, net of tax, of $13 million or 4 cents per share.

Operational Performance

Gross premiums written by ACE Limited in the quarter under review were $5.9 billion, up 17.9% year over year.

Net premiums earned improved 31.2% year over year to $4.5 billion in the third-quarter 2011. 

Underwriting profit at ACE Limited was $479 million in third-quarter 2011, up 19.2% from $402 million in the year-ago period.

Property & Casualty combined ratio deteriorated by 190 basis points year over year to 90.3% in the quarter.

Net investment income in the quarter totaled $564 million, an improvement of 9.3% year over year. The improvement stemmed primarily from a slower turnover rate in the portfolio and a positive impact from foreign exchange.

Net realized and unrealized losses, after tax, from investment portfolio were $760 million, compared with a loss of $50 million in the year-ago period.

Segment Update

Insurance-North American: The segment recorded 53% year over year increase in net premium written in the quarter. The combined ratio deteriorated by 410 basis points to 94.3% in the quarter. Operating income decreased 7.7% year over year to $288 million in the quarter under review.

Insurance-Overseas General: Net premiums written in the quarter increased a 19% year over year. The combined ratio was 85.9%, improved 10 basis points over the prior-year quarter. Operating income improved 21.5% year over year to $294 million in the quarter.

Global Reinsurance: Net premiums written saw a decline of 8% year over year. The combined ratio improved 890 basis points year over year to 65.4% in the quarter. Operating income improved 12.4% year over year to $145 million in the quarter.

Life: The segment’s net premiums written increased 21.7% year over year. Operating income increased 22% year over year to $88 million in the quarter.

Balance Sheet

The cash balance of ACE Limited at quarter end totaled $766 million, down 0.8% from $772 million at the end of 2010.

Book value per share as of September 30, 2011, was $70.60, up 2.9% from $68.59 as of December 31, 2010.

Looking Ahead

ACE Limited raised its operating earnings expectation to $6.55 - $6.75 per share from $6.00 - $6.20 per share guided earlier. The guidance includes $630 million after tax in catastrophe losses for the first three quarters and $75 million after tax in catastrophe losses for the fourth quarter. Also, the guidance includes $335 million of after-tax positive prior period development reflected in the first three quarters.

Peer Comparison

The Travelers Companies (TRV), which competes with ACE Limited, reported operating earnings of 79 cents per share in the third quarter that lagged the Zacks Consensus Estimate by 20 cents. Results were also far behind earnings of $1.81 in the prior-year quarter. The decline was primarily due to underwriting losses that stemmed from higher catastrophe losses.

Our Take

The results of ACE Limited were not affected despite natural disasters that led to catastrophe losses. The company is well poised on the strength of its international presence, diversified product offering, risk management, conservative underwriting practice and strong reserves.

ACE Limited remains focused to enhance its earnings, return on equity and book value per share. The company’s recent acquisition of  Penn Millers Holding Corporation (PMIC) will enhance ACE Limited’s product offering in agricultural market and will also help the company to write higher premiums.

We maintain a Neutral recommendation on ACE Limited in the long term. The quantitative Zacks # 3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

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