3 Favorite Post-Sandy Insurance Plays: Merrill Lynch

3. ACE Limited

Shares of ACE, Ltd. (ACE) of Zurich closed at $79.23 Monday, returning 16% year-to-date.

The shares trade for 1.2 times their reported Sept. 30 tangible book value of $64.67, and for 10 times the consensus 2013 earnings estimate of $7.92 a share. The consensus 2014 EPS estimate is $8.11.

Based on a quarterly payout of 49 cents, the shares have a dividend yield of 2.47%.

Cohen on Monday raised his price target for ACE's shares by a dollar to $95, and said that the company's "earnings through the first nine months of 2012 consistently beat our forecast and our forward estimates gradually rose during that time," and that the "solid performance occurred despite the drought conditions in the US, which were the worst in over 20 years."

ACE reported net income of $1.9 billion for the first three quarters of 2012, or $5.67 a share, increasing from $805 million, or $2.36 a share, during the first three quarters of 2011. Underwriting income grew to $1.1 billion during the first three quarters from $663 million a year earlier, while the combined ratio -- underwriting losses plus expenses, divided by earned premiums -- improved to 90.2% from 95.3%. A combined ratio of over 100% indicates an underwriting loss.

Cohen said that ACE's valuation was "attractive," trading "just below its book value" of $79.36, and that although "some investors point out that ACE's shares are trading at just over 1.2x tangible book value, making it look more expensive than it does on a straight price/book basis... we note that on a tangible basis, ACE's 2013 estimated ROE would be about 200 basis points higher than on a reported book basis or about 11.5%, suggesting that a premium to tangible book is warranted."

The analyst also said that "there is no doubt that Sandy will have an impact on fourth quarter result, but at this point, we have no reason to believe that ACE's loss from this event will be outsized in nature." Cohen estimates that ACE's adjusted book value will increase from $80.30 at the end of 2012 to $86.22 at the end of 2013, while the tangible book value will grow from $66.08 at the end of this year, to $72.00 at the end of 2013.

ACE data by YCharts

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