ACE Limited (ACE) reported a fourth-quarter 2011 operating income of $1.94 per share, which came in ahead of the Zacks Consensus Estimate by 13 cents. Earnings declined 5% from $2.05 per share earned in the year-ago quarter. Operating income in the quarter was $663 million, down 6% from $702 million in the fourth quarter of 2010.
The quarter suffered huge catastrophe losses of $155 million, which increased more than threefold. However, premiums increased aided by acquisitions, global accident and health insurance business and property and casualty business in Asia and Latin America. Net investment income also experienced an uptick.
Including net realized gains, net of tax, of $87 million or 26 cents per share, ACE Limited reported a net income of $750 million or $2.20 per share compared with $1.001 billion or $2.92 per share in the prior-year quarter. The company, in fourth-quarter 2010, registered net realized gains, net of tax, of $299 million or 87 cents per share.
Full year operating earrings came in at $6.97 per share, striding ahead of the Zacks Consensus Estimate of $6.83. Results compare unfavorably with $7.79 earned in 2010. Operating income was $2.38 billion, down 11% from $2.66 billion in 2010.
Including net realized loss, net of tax, of $791 million or $2.32 per share, ACE Limited reported a net income of $1.56 billion or $4.65 per share compared with $3.11 billion or $9.11 per share in 2010.
Operational Performance
Gross premiums written by ACE Limited in the quarter under review were $4.9 billion, up 6.5% year over year. Full year gross premiums written increased 6.8% over 2010 to $20.8 billion.
Net premiums earned improved 7.3% year over year to $3.8 billion in the fourth-quarter 2011 while full year net premiums earned improved 13.9% to $15.4 billion.
Net investment income in the quarter totaled $565 million, an improvement of 6.2% year over year. The upside stemmed primarily from higher invested assets and higher distributions from private equity funds, somewhat offset by lower new money rates. Full year net investment income climbed 8.3% over 2010 to $2.2 billion.
Underwriting profit at ACE Limited was $278 million in fourth-quarter 2011, down 24.7% year over year. Full year Underwriting profit came in at $$967 million, down 29.6% over 2010.
Property & Casualty combined ratio deteriorated by 260 basis points year over year to 92.9% in the fourth quarter. Fiscal 2011 combined ratio deteriorated 440 basis points over 2010.
Segment Update
Insurance-North American: The segment recorded a 10% year-over-year increase in net earned written in the quarter. Full year net earned written improved 22% year over year.
Operating income increased 3.6% year over year to $342 million in the quarter under review while full year income decreased 6.9% over 2010.
The combined ratio deteriorated by 90 basis points to 91% in the fourth quarter.
Insurance-Overseas General: Net premiums earned in the quarter increased 5.5% year over year. Full year net earned written improved 9.5% year over year.
Operating income improved 24.5% year over year to $173 million in the fourth quarter while full year income declined 13.5% over 2010.
The combined ratio was 94.4%, deteriorating 410 basis points over the prior-year quarter.
Global Reinsurance: Net premiums earned saw a decline of 7.1% year over year. Full year net earned written decreased 6.3% year over year.
Operating income declined 11% year over year to $125 million in the quarter while full year income declined 26% over 2010.
The combined ratio deteriorated 540 basis points year over year to 77.1% in the quarter.
Life: The segment’s net premiums earned increased 12.6% year over year while full year net premiums earned improved 12.6% over 2010.
Operating income increased 15.3% year over year while full year net premiums earned improved 16% over 2010.
Balance Sheet
The cash balance of ACE Limited at 2011 end totaled $614 million, down 20.5% from $772 million at the end of 2010.
Book value per share as of December 31, 2011, was $72.76, up 6.1% from $68.59 as of December 31, 2010.
Looking into 2012
ACE Limited expects operating earnings for 2012 in a band of $6.65 – $7.05 per share. The guidance includes catastrophe loss of $385 million after tax. 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 $1.48 per share in the fourth quarter, lagging the Zacks Consensus Estimate of $1.52 per share. Results were far behind earnings of $1.89 in the prior-year quarter.
The decline was primarily due to lower net investment income and lower underwriting gains stemming form lower net favorable prior-year reserve development.
Full year 2011 operating earnings were $3.28 per share, 2 cents behind the Zacks Consensus Estimate.
Our Take
The company remains well poised on the strength of its international presence, diversified product offering, risk management, conservative underwriting practice and strong reserves.
ACE Limited remains focused on enhancing its earnings, return on equity and book value per share. Acquisitions continue to contribute to growth.
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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