ACE Limited (ACE) reported a third-quarter 2010 net income of $2.01 per share, beating the Zacks Consensus Estimate of $1.84 by 17 cents. Results lagged earnings of $2.07 per share reported in the year-ago period. Net income in the quarter was $688 million, down 1.9% from $701 million in the third quarter of 2009.
Including net realized losses, net of tax, of $13 million or 4 cents per share, ACE Limited reported a net income of $675 million or $1.97 per share compared with $494 million or $1.46 in the prior-year quarter. The company, in third-quarter 2009, incurred net realized losses, net of tax, of $207 million or 61 cents per share.
Gross premiums written by ACE Limited in the quarter under review were $5.0 billion, flat year over year.
Net premiums written improved slightly to $3.29 billion in the quarter from $3.16 billion in the year-ago quarter. Net premiums earned improved to $3.42 billion from $3.39 billion in the prior-year quarter. Excluding the foreign exchange impact, net premiums written increased 5% and net premiums earned increased 1% year over year.
Underwriting income at ACE Limited declined 2.2% year over year to $402 million in third-quarter 2010. The combined ratio deteriorated 30 basis points to 88.4% from 88.1% in the comparable quarter, a year ago.
ACE Limited recorded higher catastrophe losses of $97 million in the quarter compared with $45 million a year ago. Net after-tax catastrophe losses were $86 million compared with $38 million in third-quarter 2009. Favorable prior-period development was lower at $201 million, compared with $203 million in the prior-year quarter.
Investment income improved 1% year over year to $516 million in the quarter. Net realized and unrealized gains, after tax, from investment portfolio were $723 million.
Segment Update
Insurance-North American: The segment recorded a 1.1% year-over-year increase in gross premium written. Net premiums written also improved 5.2% over the last year while net premiums earned decreased 1.6% year over year. The combined ratio improved by 110 basis points to 90.2%. Operating income increased 4.3% year over year to $312 million in the quarter under review.
Insurance-Overseas General: Gross premium written decreased 5.5% while net premiums written increased 0.2% (1% in constant currency), both year-over-year. Net premiums earned increased 0.3% year over year. The combined ratio improved 140 basis points to 86.0%. Operating income was $242 million, up 3.9% from prior-year quarter.
Global Reinsurance: The segment recorded improvements in gross and net premium written of 30.7% and 32%, respectively, year over year. Net premiums earned saw a spike of 9.7% year over year. The combined ratio deteriorated to 74.3% from 58.5% in the prior-year quarter. Operating income was $129 million, down substantially from $158 million in the year-ago quarter.
Life: The segment’s gross premium written declined 1.3% while net premiums written declined 0.3%, both on a year-over-year basis. However, net premiums earned increased 6.6% year over year. Operating income declined 2.7% year over year to $72 million in third-quarter 2010
Balance Sheet
The cash balance of ACE Limited at second-quarter-end totaled $487 million, down 27.0% from $669 million at the end of the fourth quarter of 2009.
Book value per share as of September 30, 2010, was $67.34, up 7% from $63.20 as of June 30, 2010 and 15.2% year over year from $58.44 as of December 30, 2009.
Guidance
Management raised its operating income guidance to a range of $7.20–$7.40 per share from the previously guided range of $6.25–$6.75 for full year 2010.
The results of ACE Limited were not affected despite frequent natural disasters that led to large 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.
The company is also on an aggressive acquisition spree. In September, and subsequent to the reported quarter, ACE Limited made as many as three acquisitions to expand its footprint in faster growing economies. We expect the acquisitions to turn around premium writings and help the company grow.
On the flip side, a competitive environment coupled with a sluggish economic recovery keeps us on the sidelines. 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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