ACE Limited (ACE) reported fourth-quarter 2010 operating income of $2.05 per share, beating the Zacks Consensus Estimate by 20 cents. Results improved 2% from earnings of $2.01 in the year-ago period. Operating income in the quarter was $702 million, up 3% from $683 million in the fourth quarter of 2009.
Including net realized gains, net of tax, of $299 million or 87 cents per share, ACE Limited reported a net income of $1 billion or $2.92 per share compared with $0.95 billion or $2.81 in the prior-year quarter. The company, in fourth-quarter 2009, incurred net realized gains, net of tax, of $270 million or 80 cents per share.
Full year 2010 operating income was $7.79 per share and surpassed the Zacks Consensus Estimate of $7.56, but lagged year ago earnings of $8.17 by 5%. Operating income in the quarter was $2.66 billion, down 4% from $2.76 billion in 2009.
Including net realized gains, net of tax, of $451 million or $1.32 per share, ACE Limited reported a net income of $3.1 billion or $9.11 per share compared with $2.5 billion or $7.55 in 2009. The company, in 2009, incurred net realized losses, net of tax, of $210 million or 62 cents per share.
Operational Performance
Gross premiums written by ACE Limited in the quarter under review were $4.56 billion, up 1.3% year over year. Full year gross premiums written increased 1.8% from 2009.
Net premiums earned improved 5% year over year to $3.57 billion in the fourth-quarter 2010. It increased 2% year over year in 2010.
Underwriting income at ACE Limited declined 1% year over year to $369 million in fourth-quarter 2010. For 2010, it declined 11% year over year.
Property & Casualty combined ratio deteriorated 70 basis points year over year to 90.3% in the quarter, while it deteriorated 190 basis points year over year in 2010.
ACE Limited recorded higher catastrophe losses of $50 million in the quarter compared with $23 million a year ago. 2010, total catastrophe losses of $401 million compared with $136 million in 2009.
Favorable prior-period development was lower at $57 million, compared with $147 million in the prior-year quarter.
Investment income improved 4% year over year to $532 million in the quarter. For 2010, it improved 2% from 2009 level.
Net realized and unrealized gains, after tax, from investment portfolio were $310 million in the fourth quarter of 2010.
Segment Update
Insurance-North American: The segment recorded 11% year over year spike in net premium earned in the quarter. The combined ratio deteriorated by 600 basis points to 90.1% in the quarter. Operating income increased 3.8% year over year to $330 million in the quarter under review.
2010 net premium earned declined 0.6% from 2009. Operating income increased 1.5% from 2009.
Insurance-Overseas General: Net premiums earned in the quarter increased a trifle from the year-ago quarter. The combined ratio was 90.3%, flat with year ago quarter. Operating income was $229 million, up 11% from prior-year quarter.
Full year net premium earned increased 0.6% year over year. Operating income was down 1.5% from 2009.
Global Reinsurance: Net premiums earned saw an increase of 6% year over year. The combined ratio deteriorated to 71.7% from 67.1% in the prior-year quarter. Operating income was $141 million, down 3% from year ago quarter.
2010 net premium earned increased 9% from 2009. Operating income decreased 14% from 2009.
Life: The segment's net premiums earned increased 5% year over year. Operating income declined 13% year over year to $78 million in fourth-quarter 2010.
Net premium earned in 2010 increased 8% year over year. Operating income increased 6% from 2009 level.
Balance Sheet
The cash balance of ACE Limited at 2010 end totaled $772 million, up 15% from $669 million at the end of 2009.
Book value per share as of December 31, 2010, was $68.59, up 17% from $58.44 as of December 31, 2009.
Guidance
ACE Limited guided operating income to a range of $6.10 and $6.50 per share. Catastrophe losses of $300 million are included in the estimate.
Peer Comparison
The Travelers Companies (TRV), which competes with ACE Limited, reported operating earnings of $1.89 per share for the fourth quarter of 2010, surpassing the Zacks Consensus estimate by 22 cents.
Results, however, fell short of operating earnings of $2.12 in the prior-year quarter. Lower underwriting gains as well as net investment income primarily induced lower operating profits.
For full year 2010, the company reported operating income of $3.4 billion or $6.26 per share, lower than $3.6 billion or $6.29 per share in full year 2009. Results comfortably surpassed the Zacks Consensus Estimate of $6.06.
Our Take
The results of ACE Limited were not affected by 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. ACE Limited wrapped up the acquisition of New York Life's Korea and Rain and Hail Insurance Service, Inc. ACE Limited remains focused on expanding 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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