ACE Went Through a Series of Acquisitions

ACE Limited (ACE, Financial) is an insurance and reinsurance organization. The company provides commercial insurance products and service offerings such as risk management programs, loss control and engineering and complex claims management. The company’s segments are: Insurance - North American, Insurance - Overseas General, Global Reinsurance, and Life.

An Efficient Strategy

ACE Limited made significant acquisitions to expand its business. The company's more significant deal was the 80% acquisition of Rain and Hail Insurance Service, Inc. that it did not already own, for approximately $1.1 billion in cash. Rain and Hail is the second largest crop insurer in the U.S. More recently, in Sep 2012, it acquired 80% of PT Asuransi Jaya Proteksi in Indonesia expanding accident, health, commercial property and casualty businesses in Indonesia. In Jan 2013, the company´s local partner acquired the remaining 20%. To expand its Surety business, ACE acquired Fianzas Monterrey, a Mexican surety lines insurer, for $293 million in cash in early 2013. In May 2013, it acquired Mexico´s sixth-largest P&C insurer ABA Seguros from Ally Financial Inc. for $865 million. In early 2014, it agreed to acquire 60.9% of The Siam Commercial Samaggi Issurance PCL for some $185 million.

Dividend Hike

Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividend and share repurchases. Dividend-payment history affirms its commitment to maximize shareholder wealth. The company raised its quarterly dividend to $0.65 per share from $0.63, payable on Apr 17 to shareholders of record as on Mar 28, 2014. Furthermore, the board of ACE Limited has approved a buyback program, authorizing the company to repurchase $2 billion worth of shares through Dec. 31, 2014.

Analyst Recommendation

The firm is currently Zacks Rank # 2 - Buy, and it also has a longer-term recommendation of “OutPerform”. For investors looking for a Zacks Rank # 1 – Strong Buy, Alleghany Corp. (Y, Financial), Berkshire Hathaway Inc (BRK.B) and Fidelity (FNF, Financial) could be the options.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 9.1x, trading at a discount compared to an average of 11.6x for the industry. To use another metric, its price-to-book ratio of 1.2x indicates also a discount versus the industry average of 1.21x and the price-to-sales ratio of 1.8x is above the industry average of 1.13x.

Earnings per share (EPS) increased in a substantial way in the most recent quarter compared to the same quarter a year ago (from $2.22 to $2.90). In the next graph we can see that it has demonstrated an erratic but positive trend and we include the stock price because EPS often lead the stock price movement.

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has improved from the same quarter one year prior. This is a clear sign of strength within the company. Let´s compare the current ratio with competitors in the next table:

As we can see, the firm ratio is higher than the ones shown by Alleghany, Fidelity, Federated National Holding Co. (FNHC, Financial) and Global Indemnity Plc (GBLI, Financial).

Final Comment

As outlined in this article, ACE went through a series of acquisitions in an effort to expand its presence. The firm´s EPS as well as the revenues’ growth are demonstrating the improvement of the company´s strength. Therefore, I feel bullish about this company’s future profitability.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. David Dreman (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) have also invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.