SUMMARY. Risk Level *

Transcription

1 December 10, 2014 ACE Limited (ACE-NYSE) Current Recommendation Prior Recommendation Neutral Date of Last Change 10/17/2013 Current Price (12/09/14) $ Target Price $ OUTPERFORM SUMMARY ACE Limited s third-quarter earnings per share surpassed the Zacks Consensus Estimate as well as year-ago number. Solid underwriting performances coupled with improved investment results aided the outperformance. Premium revenue grew globally. 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 seems impressive as well with suitable acquisitions in the pipeline. ACE Limited expects the acquisitions to meet or exceed its long-term return on equity goal of 15% within the next few years. Its capital position is also strong and allows it to remain committed to shareholders value enhancement. The company was recently authorized a $1.5 billion repurchase program and is on track to repurchase $1.5 billion worth of shares by 2014 end. The company also scores strongly with credit rating agencies. Nonetheless, rising expenses continue to hurt margins. SUMMARY DATA 52-Week High $ Week Low $92.19 One-Year Return (%) Beta 0.86 Average Daily Volume (sh) 1,254,100 Shares Outstanding (mil) 332 Market Capitalization ($mil) $38,532 Short Interest Ratio (days) 3.62 Institutional Ownership (%) 91 Insider Ownership (%) 1 Risk Level * Low, Type of Stock Large-Value Industry Ins-Prop&Caslty Zacks Industry Rank * 46 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $2.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 6.9 Earnings Per Share (%) 4.9 Dividend (%) 20.9 using TTM EPS 11.9 using 2014 Estimate 12.2 using 2015 Estimate 12.4 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page ,928 A 4,286 A 5,215 A 4,435 A 17,864 A ,114 A 4,564 A 5,137 A 4,927 A 18,742 A ,540 A 4,913 A 5,345 A 3,318 E 18,116 E ,406 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $2.05 A $2.17 A $2.01 A $1.43 A $7.65 A 2013 $2.17 A $2.29 A $2.49 A $2.39 A $9.35 A 2014 $2.27 A $2.42 A $2.64 A $2.19 E $9.52 E 2015 $9.34 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 OVERVIEW ACE Limited (ACE), the holding company of the ACE Group of Companies, is one of the world s largest providers of property and casualty (P&C) insurance and reinsurance. ACE opened its business office in Bermuda in 1985 and continues to maintain significant operations in Bermuda. ACE Limited is now domiciled in Zurich, Switzerland. The company along with its direct and indirect subsidiaries comprises global insurance and reinsurance organization, with operating subsidiaries in more than 53 countries serving the needs of the commercial and individual customers in more than 140 countries. The company was initially formed to write high layer excess liability insurance. Since then, it has diversified through acquisitions into many specialty lines, including marine, medical risk, excess property, environmental and terrorism insurance. ACE Limited provides specialized insurance products such as personal accident, supplemental health and life insurance to individuals in select countries. Its reinsurance operations include both P&C and life companies. Effective from the first quarter of 2013, the Insurance-North American segment has been split into two reporting segments namely North American P&C and Insurance, and North American Agriculture. Currently, ACE Limited divides its operations into five business lines: The Insurance-Overseas General segment (37% of net premiums earned in 2013) provides property, primary and excess casualty, energy, professional risk, marine, political risk, trade risk, accident and health, aviation, and consumer-driven products. The Insurance-North American P&C segment (35%) offers a broad range of retail, and wholesale and specialty products. The retail products include risk management, loss control and engineering programs, and specialty commercial P&C and A&H coverage options to personal lines homeowners, automobile, liability, valuables, and marine coverage. The wholesale and specialty products comprises excess and surplus property, D&O, professional liability, inland marine, specialty casualty, environmental and political risk. Life segment (12%), offers traditional life reinsurance and life insurance products, including whole life, endowment plans, universal life, individual and group term life, personal accident, and variable annuity contracts in a number of countries including Thailand, Vietnam, the United Arab Emirates, Taiwan, China and Egypt. The Insurance-North American Agriculture segment (10%) offers coverage for agriculture business. These include Multiple Peril Crop Insurance (MPCI), crop-hail and farm P&C insurance protection to U.S. and Canadian customers by means of Rain and Hail Insurance Service Inc. (Rain and Hail). Additionally, it provides P&C insurance coverage to companies that manufacture, process and distribute agriculture products. The Global Reinsurance segment (6%) offers a broad range of reinsurance products to several P&C insurance companies. Equity Research ACE Page 2

3 12% 6% 10% Net Premiums Earned (By Segment) 35% Insurance- North American P&C Insurance- Overseas General Life Global reinsurance 37% Insurance- North American Agriculture Source : Company REASONS TO BUY ACE Limited has always considered acquisition as an efficient strategy for inorganic growth and global expansion. In Sep 2012, ACE acquired 80% of PT Asuransi Jaya Proteksi in Indonesia to leverage its presence in the fast-growing South-Asian market and broaden the accident and health, and commercial property and casualty businesses. In Jan 2013, the company s local partner acquired the remaining 20%. To expand its Surety business, it acquired Fianzas Monterrey from New York Life Insurance Company in Mar In May 2013, it acquired Mexico s sixth-largest P&C insurer ABA Seguros from Ally Financial Inc., thereby strengthening its personal lines and agency businesses in particular. Moreover, ACE Limited and its local partners now has a 93% stake in The Siam Commercial Samaggi Insurance PCL a general insurance company in Thailand that will likely strengthen its grip on commercial, auto and personal accident insurance. It is also expanding in Brazil with the buyout of Itau Seguros SA, the P&C insurance unit of Itaú Unibanco S.A., one of the largest private banks in that country. The increasing exposure in Brazil is expected give a boost to the combined large commercial P&C business and help small commercial A&H personal lines and life business. ACE Limited expects these transactions to meet or exceed its long-term ROE goal of 15% within 2 3 years. Further, the approval by the Tunisian Ministry of Finance to carry out operations in Tunisia expanded its Middle East and North African presence. Acquisitions have improved premium writings and helped the company deliver better numbers, and we expect this to continue going forward. We expect ACE, with its considerable balance sheet strength, to grow both organically and inorganically. Per the company s expectation, premium growth gained momentum and continued to deliver solid results (up 5.2% year over year in the first nine months of 2014). Higher premium also drove top-line growth at the company (up 1.7% in the first nine months of 2014). The number is expected to improve further based on the company s strong organic as well as inorganic growth profiles. ACE limited is one of the largest reinsurance buyers in the world and its risk appetite remains steady. It is benefitting from softening reinsurance market in terms of pricing and better terms, which is expected to further consolidate its future financial results. ACE Limited boasts a strong capital position. As of 2013 end, the company had book value of nearly $29 billion, which was doubled in last five years and tripled in the last 10 years. Its debt-to-capital Equity Research ACE Page 3

4 has also exhibited an improving trend over the last several years. The debt-to-capital ratio showed improvement over the last few years, improving 70 bps in 2011 and 120 bps in Although the debt-to-capital ratio deteriorated 560 bps in 2013, it improved 40 bps at third-quarter end. We expect further improvement going forward, given the company s strong cash balance, which is expected to help mitigating the debt level. The debt level remained high due to debt issued by ACE during the first quarter that was aimed at redeeming the debt maturities in 2014 and A low reliance on debt provides adequate financial flexibility to the company to manage its business and invest in its globally diversified platforms. The strong capital and liquidity position enables ACE Limited to enhance its shareholders value. In May this year, the board of directors proposed a 3% increase in quarterly dividend to $0.65 per share. The company has increased its quarterly dividend by 80% since ACE also has a consistent track record of paying regular quarterly dividends. Its dividend yield of 2.21% is ahead of the sector yield of 1.95%. ACE Limited aims to achieve a dividend payout ratio of 30% of its operating earnings. With respect to share buyback, the board of ACE Limited also approved a buyback program, authorizing the repurchase of $1.5 billion worth of shares through Dec 31, 2015 that replaces the current authorization under which the company already bought back $1.1 billion shares through Oct 20, with $0.9 billion remaining. In the third quarter, the company returned $670 million in capital to its shareholders ($450 million in share repurchase $220 million in dividend). The company is also on track to complete its $1.5 billion share buyback for Given its strong capital and a solid liquidity position, we expect to see further buyback from the company that will, in turn, boost its bottom line. RISKS ACE Limited has a substantial exposure to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. Due to the absence of any significant cat activities, underwriting income improved significantly in 2013 with combined ratio improving 590 basis points (bps) year over year. Underwriting income and combined ratio through the first three quarters also showed improvement benefitting from better current accident year underwriting results. Nonetheless, exposure to cat occurrences will always remain a concern as natural disasters can affect the results. Significant catastrophic events in future might widen the losses further and keep combined ratio under pressure. ACE s expenses have been on a rising trend over the last few years. It increased 1.1% in 2012, 0.4% in and 6.3% in the first nine months of The last quarter witnessed higher loss and loss expenses and policy acquisition costs that increased the total expense. Escalating expenses had also been taking a toll on the operating margin expansion. Operating margin in 2010 was 22.7%, which dropped to 12.1% in Although it improved to 16.6% in 2012 and to 16.7% in 2013, it again lost 600 bps year over year to register a margin of about 19% in the first quarter, a further 250 bps for a margin of 18.9% in the second quarter and another 220 basis point for a margin of 18.5% in the third quarter. If expenses continue to accelerate at a higher pace than revenue increase, operating margin expansion will be largely affected going forward. Low interest rate environment has been a drag on the investment result, with net investment income declining over several quarters. However, the first nine months of 2014 witnessed an improvement in net investment income on a higher invested asset base, an increase in private equity distributions, and an increase in call activity in corporate bond portfolio. But as the interest rate environment is expected to remain soft, we wait to see if the momentum continues. Nonetheless, the company expects quarterly investment income run rate of $550 million. Equity Research ACE Page 4

5 RECENT NEWS ACE Limited Approves $1.5 Billion Share Buyback Program Nov 24, 2014 The board of directors of ACE Limited approved a $1.5 billion share repurchase program for The new authorization will replace the current one when it expires on Dec 31, 2014 and has $0.9 million remaining. ACE Q3 Earnings Beat on Solid Underwriting & Investment Oct 21, 2014 ACE Limited 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 $0.32 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-thanexpected 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%. Equity Research ACE Page 5

6 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, 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, Equity Research ACE Page 6

7 VALUATION Shares of ACE Limited currently trade at 12.2x our 2014 earnings estimate, a 24.7% discount to the industry average of 16.2x. On a price-to-book basis, the shares trade at 1.3x, in line with the industry average. The valuation on a price-to-book basis looks attractive; given a trailing 12-month ROE of 11.2% is 20.4% higher than the industry average of 9.3%. Our six-month target price of $ equates to 14.6x our earnings estimate for Combined with $2.60 per share annual dividend this price target implies an expected total return of 15.6% over that period. This is consistent with our Outperform recommendation on the shares. The quantitative Zacks Rank for ACE Limited is currently 2, indicating upward directional pressure on the shares over the near term. Short interest is currently 3.6 days. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low ACE Limited (ACE) Industry Average S&P The Travelers Companies, Inc. (TRV) The Allstate Corporation (ALL) Progressive Corp. (PGR) The Chubb Corporation (CB) NA TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA ACE Limited (ACE) Industry Average S&P Equity Research ACE Page 7

8 Earnings Surprise and Estimate Revision History Equity Research ACE Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ACE. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1138 companies covered: Outperform %, Neutral %, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research ACE Page 9