Ace Limited (ACE) Quarterly Valuation

200px-Ace_Limited_logo.svgIn the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period.  Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation.  We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before.  By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value to get a sense of whether the company is a good investment.  In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Ace Limited fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): ACE Ltd (ACE) is a holding company of the ACE Group of Companies. ACE is a global insurance and reinsurance organization, serving the needs of customers in more than 170 countries. It offers commercial insurance products and service. It also provides specialized insurance products ranging from Directors & Officers and professional liability to various specialty-casualty and umbrella and excess casualty lines to niche areas, such as aviation and energy. In addition, it supplies personal accident, supplemental health, and life insurance to individuals in select countries. ACE operates in four business segments: Insurance-North American, Insurance-Overseas General, Global Reinsurance, and Life. In September 2012, it acquired 80% of PT Asuransi Jaya Proteksi in Indonesia. In February 2014, ACE Ltd created a Construction Industry Practice Group to serve the expanding risk management needs of contractors and principals in the Asia pacific region.

ACE Chart

ACE data by YCharts

Defensive Investor – must pass all 6 of the following tests: Score = 6/6

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  3. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  4. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  5. Moderate PEmg ratio – PEmg is less than 20 – PASS
  6. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 3/3

  1. Earnings Stability – positive earnings per share for at least 5 years – PASS
  2. Dividend Record – currently pays a dividend – PASS
  3. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $95.71
MG Value $133.95
MG Opinion Undervalued
Value Based on 3% Growth $114.13
Value Based on 0% Growth $66.91
Market Implied Growth Rate 1.83%
PEmg 12.16
PB Ratio 1.15

Balance Sheet – 9/30/2013

Total Debt $3,807,000,000
Total Assets $94,584,000,000
Intangible Assets $5,465,000,000
Total Liabilities $66,366,000,000
Outstanding Shares 340,070,000

Earnings Per Share

2013 $9.35
2012 $7.90
2011 $4.65
2010 $9.11
2009 $7.55
2008 $3.53
2007 $7.66
2006 $6.90
2005 $3.31
2004 $3.83
2003 $5.01

Earnings Per Share – ModernGraham 

2013 $7.87
2012 $6.94
2011 $6.47
2010 $7.24
2009 $6.13
2008 $5.30

Dividend History

ACE Dividend Chart

ACE Dividend data by YCharts

Conclusion:

Ace Limited is an extremely attractive company, despite its continued rise in price over the last number of years.  The company passes every requirement of both the Defensive Investor and the Enterprising Investor, demonstrating that it is financially sound.  Value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research to determine if the company is right for their individual portfolios.  Such research could include a review of ModernGraham’s valuation of AFLAC (AFL), or a review of ModernGraham’s valuation of The Chubb Corporation (CB).  From a valuation perspective, the company looks great, having grown its EPSmg (normalized earnings) from $5.30 in 2008 to $7.87 for 2013.  This level of growth outpaces the market’s current implied estimate for earnings growth of only 1.83%, and the ModernGraham valuation model returns an intrinsic value that is well above the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Ace Limited (ACE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Ace Limited (ACE) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.


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Comments

4 responses to “Ace Limited (ACE) Quarterly Valuation”

  1. Jean-Louis Avatar
    Jean-Louis

    Dear Benjamin,

    First thank you so much for providing detailed analyses and guidance. Reading your analyses of Aflac, Chubb, and now Ace, I wonder why is there that these insurance companies get all the highest ratings (both Defensive and Enterprising sides). Is there currently an undervaluation of the stocks in the insurance industry? Are insurance companies among the most appropriate for Graham’s investing style?

    Thank you and best wishes from Switzerland

    1. Benjamin Clark Avatar

      Thanks for the comment, and great question!

      It does seem like they pass much more frequently than some other industries (such as REITs), but they don’t always pass. For example, the ModernGraham valuation of American International Group (AIG) and ModernGraham valuation of MetLife (MET) both resulted in the companies not passing the requirements.

  2. Ronald E. Baker Avatar
    Ronald E. Baker

    ACE is a fine company, for sure. However, during the 2007 to 2009 financial crisis, the shares declined from a high of $62.31 on 12/10/2007 to a low of $33.95 on 3/3/2009. (about -46%). At the present market levels, there is a higher than normal risk of a correction. ACE could suffer, just as other market defensive shares. A correction of 30% would not seem outside the realm of possibilities, today. Any comments?

    1. Benjamin Clark Avatar

      Ronald,

      It’s impossible to know where Mr. Market will take things in the short term. A correction is always a possibility. As investors, the only thing we can do to deal with that is to accept it and be emotionally prepared. And the best way to be emotionally prepared is to always buy companies which we know are trading below their intrinsic value. Over the long period of time, it should be expected that the intrinsic value and the market price will come together. With that in mind, a company’s price movements have no bearing on calculation of the intrinsic value.

      Anyone else want to weigh in on this?

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