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Tickers in this Article: TRV, ACE
ACE Limited (ACE) reported second quarter 2012 operating income of $2.17 per share, breezing past the Zacks Consensus Estimate by 24 cents. Earnings improved 10% from $1.97 earned in the year-ago quarter. Operating income was $743 million, 10% higher than $673 million in the prior-year quarter.

The quarter largely benefited from solid current accident year underwriting results as well as lower catastrophe losses.

Including net realized loss, net of tax, of $415 million or $1.21 per share, ACE Limited reported net income of $328 million or 96 cents per share compared with $594 million or $1.74 per share in the prior-year quarter. The company, in second quarter 2011, registered net realized loss, net of tax, of $79 million or 23 cents per share.

Operational Performance

Gross premiums written by ACE Limited in the quarter under review were $5.6 billion, up 4.2% year over year.

Net premiums earned inched up 0.7% year over year to $3.8 billion in the quarter.

Net investment income in the quarter totaled $537 million, down 5.6% year over year. The decline was largely due to lower new money rates and the adverse impact of foreign exchange, partially offset by higher distributions from private equity funds.
Underwriting profit at ACE Limited was $429 million in second quarter 2012, up 46% year over year.

Property & Casualty combined ratio improved by 400 basis points year over year to 88.7% in the quarter. A lower level of catastrophe activities aided the improvement. Total after-tax catastrophe losses including reinstatement premiums were $41 million, compared with $101 million in the year-ago quarter.

Segment Update

Insurance-North American: The segment recorded a 3% year-over-year growth in net earned written in the quarter.

Operating income increased 18.8% year over year to $335 million in the quarter under review.

The combined ratio improved by 590 basis points to 89.2% in the quarter.

Insurance-Overseas General: Net premiums earned in the quarter inched up 0.4% year over year.

Operating income was $232 million in the quarter, an improvement of 5% from $221 million in the year-ago quarter.

The combined ratio was 91.2%, improving 230 basis points over the prior-year quarter.

Global Reinsurance: Net premiums earned saw a decline of 6.7% year over year to $237 million.

Operating income was $149 million, up 3.5% from $144 million in the year-ago period.

The combined ratio improved 180 basis points to 66.1% in the quarter.

Life: The segment's net premiums earned decreased 2.1% year over year.

Operating income decreased 10.2% year over year to $79 million.

Balance Sheet

ACE Limited exited the quarter with cash of $617 million, inching up 0.5% from the 2011 level end.

Book value per share as of June 30, 2012, was $75.98, up 1.3% from $75.09 as of March 31, 2012.

2012 Outlook Revised Upward

ACE Limited raised its full year expectation. It now guided operating earnings to a band of $7.20-$7.60 per share, up from $7.03-$7.43 per share guided earlier. The guidance includes catastrophe loss of $270 million for the remainder of the year.

The upward revision came on the back of positive prior-period reserve development and lower-than-planned catastrophe losses of 74 cents in the first half of 2012 and a reduction of 19 cents per share reflecting a projected third quarter increase in the year-to-date crop insurance loss ratio.

Peer Comparison

The Travelers Companies (TRV), which competes with ACE Limited, reported earnings of $1.26 per share in the second quarter of 2012, lagging the Zacks Consensus Estimate of $1.38 per share. Travelers missed the expectation due to catastrophe losses. Cat loss incurred by the company totaled $357 million or 90 cents per share arising from wind and hail storms in several regions of the United States.

However, it rebounded from the loss of 88 cents incurred in the year-ago quarter, fueled by underwriting margin improvement across all segments.  Lower share count due to share repurchases during the quarter aided the bottom line.

Total revenue in the quarter under review was $6.4 billion, flat with the year-ago quarter, driven by the increase in premiums earned, partially offset by decrease in net investment income. Revenue surpassed the Zacks Consensus Estimate of $6.3 billion.

Our Take

The company remains well poised owing to its international presence, diversified product offering, risk management, conservative underwriting practice, strong reserves and improving P&C pricing environment.
ACE Limited remains focused on enhancing its earnings, return on equity and book value per share.

Also, to enhance shareholders value, the Board of Directors approved a 4.25% increase in the quarterly dividend.

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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