Financials_ACE_Buy_10_31_2014

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Financials!Sector!Team!October!22/2014!!

Rating: BUY ACE Limited. (NYSE:ACE) Price Target: $135.93 Industry: Insurance

Close: 10/31/2014 Price: $108.85 52 Wk. High: $92-$108.62 Shares Out (mm): 335.7 Mkt. Cap (mm): $35,819.1

Source: Capital IQ, Value Line, Bloomberg

Source: Capital IQ, Bloomberg, Morgan Stanley Research, BCF Analysis (all values are USD) Investment Action & Thesis The Financials team is initiating our coverage of ACE Limited with a BUY rating and a target price of $135.93 representing a potential upside of 25%. ACE’s strengths lie in its: 1) Strong underwriting disciplines as shown by their historically low combined ratio, 2) Global footprint offers opportunity for faster growth across P&C cycle with a large exposure to the major P&C segments 3) A strong Balance sheet that offers the ability to deploy capital and capture additional returns 4) Recent M&A that continues to contribute to top line growth and 5) Lower than average tax rate.

Key Investment Highlights: We have an overall positive stance towards the P&C insurance space in the medium term. Even tough the industry has low barriers of entry and the competitive landscape is highly concentrated (top 10 insurance firms account for 51% of total premiums written), companies such as ACE with global footprint, a diversified portfolio of products and a strong underwriting discipline focused on efficiency will stand apart from competition and will outperform the market. Because of their increased efficiency (combined ratio) they have the ability to compete better and grow, even in environments such ass todays where we see some downward pressure in insurance prices. Additional tailwinds could come when interest rates rise, and demand for insurance increases as the business landscape improves. Looking at the drivers behind our thesis we find that: Excellent Underwriting Discipline and Combine Ratio. This is a key metric of the industry; it equals the sum of the loss ratio, the expense ratio, and the dividend ratio. A combined ratio below 100% indicates an underwriting profit; one above 100% means an insurer has incurred an underwriting loss. ACE’s current combined ratio has been amongst the lowest of the industry historically, and stands today as one of the lowest amongst comparable company’s in the space.

Global footprint offers opportunity for faster growth across P&C cycle. ACE has a large exposure to the major P&C segments (US, international, specialty lines, reinsurance), a sizeable footprint in fast growing non-P&C insurance markets such as A&H and crop and an emerging growth presence in Personal lines, Commercial lines, and Asian life.

Basic Information Beta: 0.85 Cash& Srt. T. Invst. (bn): $3.5 Total Debt (bn): $7.66 Dividend Yield: 2.4% P/E (2015): 13.71 P/B (2015): 1.38 P/TBV: 1.47 P/B (Ex AOCI): 1.31 Comb. Ratio: 86.3% Cash F/Share: 12.68

Source: Capital IQ, Value Line, Bloomberg

Company Overview

ACE Limited, through its subsidiaries, provides a range of insurance and reinsurance products to clients worldwide. The company operates through five segments: Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance, and Life. The company offers the following products: Property Insurance, A&H, Agriculture, Personal Lines, , Life Insurance and Casualty.

Source: Capital IQ, Investor Relations

Analysts BCF Industrials Team: Alfredo Leon Ryan Diplock Paul Ramey

2012 2013 2014 2015 2016Total Revenue 17,936 19,261 19,502 21,223 21,630EBITDA 3,208 4,043 3,376 3,687 3,751Net Income 2,706 3,217 3,243 3,192 3,244EPS 7.90 9.35 9.57 9.71 10.15EPS Consensus 7.90 9.35 9.28 9.42 9.85Combine Ratio 87.10% 87.70% 89.80% 90.30%Premium Growth -4.80% 6.60% 7.70% 4.60%

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A Strong balance sheet offers the ability to deploy capital an increase earnings. With an estimated $8b in excess capital or 27% of equity, ACE is well positioned to offer more return to shareholders from a variety of sources: organic growth, M&A and buybacks/dividends. To put this under perspective if we assume ACE is able to earn a 10-15% return on this excess capital there is upside of ~$2/share to EPS (~200bps to ROE). Furthermore the company repurchased $4.3m shares for $450m in 3Q, the largest quarterly share buyback in the company's history, and could repurchase up to another $450m in 4Q.

Recent M&A Activity will contribute to earnings, and could generate further growth. Although management has expressed that they prefer to grow organically they are not shy to pull the trigger if a good opportunity presents. The company will finalized the acquisition of Banco Itaú of Brazil for $685 million at approximately 4 times the unit’s book value. The deal will close October 31st and the premiums added are immediately accretive to earnings. Earlier this year ACE also acquired a 93.03% stake in Thailand’s Siam Commercial Insurer Samagi.

A lower tax rate is a plus. ACE’s tax rate has a declining pattern; the company has been able to shrink the amount of net income retained in taxes in a somewhat consistent matter over the years. Final tax rate for year-end 2013 was only 11.33%, versus the 24.58% tax rate of 2011.

The past is not always the best predictor of the future, but the track record is impressive. Consider Modern Graham theory as a component of valuation. Under the defensive investors principals ACE clears all the hurdles: Adequate Size of Enterprise: Market capitalization of at least $2 billion – PASS, Earnings Stability: Positive earnings per share for at least 10 straight years – PASS, Dividend Record: Has paid a dividend for at least 10 straight years – PASS, Earnings Growth: Earnings per share have increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS, Moderate PEmg ratio: PEmg is less than 20 – PASS, Moderate Price to Assets: PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS.

Investment Risks:

Risk of Natural Catastrophes: ACE’s business model relies on their ability to make underwriting profits; this ability is threatened if large Natural Catastrophes were to occur more frequently or on a larger scale than anticipated.

Liquidity Risk: Liquidity is an important factor for any a P/C insurer, because of the insurer’s need to pay claims promptly. Because of the somewhat unpredictable nature of the P/C insurance business, cash flow from underwriting activities is probably the most volatile element of an insurer’s total cash flow and it is essential to maintain this variable in equilibrium to be able to keep running the business efficiently.

Pricing and Competitive Landscape: Theoretically, insurance prices should move in the opposite direction of interest rates, given the fact that higher interest rates translates in to higher investment yields on Bond Portfolios (which are a large portion of the earning assets of insurance companies).

However, during a period of historically low interest rates, insurance pricing remained competitive. This is largely attributable to an oversupply of underwriting capacity (or capital) in the insurance marketplace.

Possible Downside: International expansion. We expect the company’s international expansion to prove additive to growth in the longer run. However, not obtaining meaningful growth and synergies from its investments overseas, could result in downward pressure for the stock. This is especially true for recent acquisitions: a 93.03% stake in Thailand’s Siam Commercial Insurer Samagi and Brazil’s Itau Unibanco.

General Market Risks: ACE as any other insurance company is subject to risks relating to geopolitical instability, data security breaches, consumer and business expending habits, competition, among others.

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Business Overview: ACE Limited, through its subsidiaries, operates as an insurance and reinsurance company worldwide. The company offers commercial insurance products and service offerings, such as risk management programs, loss control and engineering and complex claims management. It provides specialized insurance products ranging from Directors & Officers (D&O) and professional liability to various specialty-casualty and umbrella and excess casualty lines to niche areas, such as aviation and energy. It also offers personal lines insurance coverage, including homeowners, automobile, valuables, umbrella liability, and recreational marine products. In addition, the company supplies personal accident, supplemental health, and life insurance to individuals in select countries. During 2013, the company acquired Finanzas Monterrey, a surety lines company in Mexico offering administrative performance bonds primarily to clients in the construction and industrial sectors; and ABA Seguros, a property and casualty insurer in Mexico that provides automobile, homeowners, and small business coverages. These businesses operate under its Insurance – Overseas General segment. More recently the company acquired a 93.03% stake in Thailand’s Siam Commercial Insurer Samagi and Brazil’s Itau Unibanco in accordance to their strategy of acquisition to expand internationally. Segments include: Insurance – Overseas General Comprises ACE International, the company’s retail broker-distributed business outside of North America, and ACE Global Markets, a London-based wholesale market business that includes a syndicate on the Lloyd’s trading floor. These businesses write a variety of coverages, including property, casualty, professional lines, marine, energy, aviation, political risk, construction risk, A&H and specialty consumer-oriented products. The segment also includes the international operations of Combined Insurance, which provides specialty accident and supplemental health insurance products to middle-income consumers in Europe, Latin America and Asia Pacific. Insurance — North American P&C: North American P&C segment serve clients ranging from the largest multinationals to mid-size and small businesses to high net worth individuals. ACE USA, which distributes coverage through retail brokers, provides a broad array of specialty property, casualty, and A&H insurance products and risk management services to corporate clients across the U.S. and Canada. ACE Westchester specializes in excess and surplus lines specialty products, including property, inland marine, casualty, professional lines, and environmental liability products distributed through wholesale brokers. ACE Bermuda writes high-level excess liability, property, political risk and directors and officers insurance worldwide. ACE Private Risk Services provides high net worth individuals and families with homeowners, automobile, valuables, umbrella and recreational marine insurance. ACE Commercial Risk Services offers specialty insurance products and solutions for small businesses through several distribution channels. Insurance — North American Agriculture: Insurance – North American Agriculture comprises Rain and Hail, which provides comprehensive multiple peril crop and crop-hail insurance distributed through a nationwide network of specialized agents; and ACE Agribusiness, which offers farm and ranch property as well as specialty P&C coverages distributed through brokers and agents for companies that manufacture, process and distribute agriculture products. Global Reinsurance Marketing its coverage worldwide under the ACE Tempest Re brand, the businesses of the Global Reinsurance segment provide a broad range of property and casualty reinsurance products to a diverse array of primary insurers. Business units include ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Canada, and ACE Tempest Re International, which encompasses P&C reinsurance operations based in London, São Paulo and Zurich. ACE Tempest Re also has operations in China and Brazil through Lloyd’s.

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Life ACE Life provides traditional life insurance protection and savings products to meet the needs of individuals and groups in Asia, Latin America and the Middle East. The North American operations of Combined Insurance, which distributes specialty individual accident and supplemental health insurance products through captive agents to middle-income consumers in the U.S. and Canada, is also included in this segment’s results. ACE Tempest Life Re provides specialty life reinsurance products to life insurers.

Source: Company Annual Report 2013, Capital IQ

Product Segments and Premium Growth:

Here we can see a breakdown of ACE’S insurance products by segment and by geography:

Source: Company’s year end Presentation 2013

Moreover obtaining net written premiums growth while minimizing risk exposure is the insurance company’s long-term objective. We can se how the company has evolved in this front from the graph bellow:

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Recent results have been positive in spite a more competitive landscape: Global P&C premiums grew +4% YoY including +2.7% growth in North America, +9.4% in Overseas, offset by -21.2% decline in Global Re largely due the non-renewal of a large workers comp treaty.

Management cited stronger competition and ACE's underwriting discipline in recent quarter. ACE saw 3Q P&C pricing similar to recent quarters: US casualty lines flat to up +4% while property lines down -4- 5%; International casualties down -2-3% while property was down -6%. Although management expects to see stronger premium growth in 4Q, they did not establish any specific range in the recent conference call. We expect ACE’s global footprint to drive further growth especially internationally where the insurance market is less penetrated.

A discipline for Underwriting and a Focus towards Efficiency:

Good insurance companies have strong underwriting discipline to maximize written premiums while minimizing their exposure to risk. History is usual a good indicator of how the company manages this risk between expanding (writing more premiums at the right price) and enduring losses. The bellow graph shows ACE’s combined ratio and reserve deployment over a 5-year time spam:

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We can appreciate how the company has historically been able to earn enough premiums to repay expenses of their ongoing operations, and how the combine ratio is also trending down. Moreover it is worth noting the somewhat cyclical pattern in the release of reserves that tends to peak each 3Q. This speaks to the level of discipline the company has in not being overly optimistic and releasing reserves early to boost earnings.

Investment Income:

Investment income comprises 65% of pre-tax income for ACE and is an under-appreciated recurring income stream by investors, in our view. The current low interest rate environment has been a huge headwind for the profitability of the float. Given persistently low reinvestment rates and portfolio duration of 4.1 years we see limited improvement in this key profit driver for the rest of 2014. However as stated before any increase in rates will have a substantial positive impact on earnings.

Source: Company Data, Morgan Stanley Research

To put things a bit under perspective, ACE net investment income for 3Q 2014 of $566m represents an increased of 8.5% YoY. Management guided to a $550m quarterly investment income run rate but have exceeded expectations in recent quarters.

Excess Capital Ready to Deploy:

ACE’s management has long favored growing the business (organic or acquisitions) over shareholder returns. Since 2007-2013, ACE has repurchased 10.5m shares (~3.2% outstanding, not enough to offset share issuance) while P&C peers have been more aggressive buying back shares. ACE has about $8b of excess capital that management can redeploy to spur both growth and shareholder returns. In November 2013, ACE board authorized a $1.5b repurchase program to be completed through 2014.

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As we can see in the bellow graph (an estimate of around $8b of excess capital) offers meaningful returns to shareholders via dividends and buybacks while retaining enough to fuel further organic or M&A derived growth. ACE has recently repurchased $4.3m shares for $450m in 3Q, the largest quarterly share buyback in the company's history, and could repurchase up to another $450m in 4Q.


Based on this, looking forward we forecast $2.2b in annual shareholder returns (about $900m dividends and $1.3b buybacks) close to a 70% total payout in 2014-16e.

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How the industry Operates:

When looking at the insurance industry cash flow and liquidity are very determinant factors. Insurers need to make sure they are liquid enough to face the potential loss of the premiums collected. The following table walks us trough the cash flow cycle of most insurance company’s:

!!!!!!!!!!!!!!!!!!!!!!!!! Source: Insurance Information Institute

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Industry Profile:! Industry market share remains concentrated among a handful of firms: The US property-casualty (P/C) industry comprises thousands of companies, each vying for a share of the multibillion-dollar market for personal and commercial lines insurance coverage. However, a small group o companies dominates the market. We can see this concentration trend in the summary table below:!

Current Trends:

Industry Premium Rates have Firmed: The property-casualty insurance industry has emerged from the credit crisis and the “Great Recession” relatively unscathed—both financially and from a regulatory standpoint—especially when compared with other financial institutions.

Moreover, following several years of heavy storm and catastrophe losses in 2011–2012, industry premium rates have firmed, although they may have weakened a bit as of the first quarter of 2014. The degree to which the industry will be able to grow its premium base will largely depend on the demand for insurance. An economic recovery in the US (even a modest one) should help the demand curve for insurance.

Volume and Direction of Written Premiums show Positive Outlook for Earnings: The net written premiums further propelled in the first quarter of 2014, as growth was sustained during this period and rose 3.6%, year to year, to $121.4 billion from $117.2 billion.

Personal lines: The industry’s largest sector, personal lines, accounts for 43.1% of the total industry written premiums for the first quarter of 2014. During this period, the personal lines sector advanced 5.2%, compared with a 5.0% growth rate in the same quarter of 2013.

Commercial lines: The commercial lines sector accounts for 33.9% of total industry written premiums, and increased to 3.3% in the first quarter of 2014 versus a 5.3% growth in the prior-year period.

Balanced lines: Balanced lines underwriters, who write a combination of personal and commercial lines coverage, accounted for the 23% of total industry written premiums in the first quarter of 2014. This group posted a 3.7% year-over-year increase during the first-quarter 2014.

Investment Results have been mixed, but Outlook remains favorable:!Investment income is an important revenue source for insurers, often accounting for 15%–20% or more of an insurer’s total revenues historically. During the past several years, investment results have been mixed, as persistent low investment yields pressured investment income.

Realized investment gains saw a 100% increase during the first quarter of 2014, rising to $2.9 billion from $1.4 billion in the same period in 2013 for the industry as a whole. However, unrealized investment gains and net investment income declined 90.1% and 1.8%, respectively for the same period.

Going forward a continuous recovery of the economy, a favorable outlook for businesses and an eventual increase in rates should favor returns derived form investments that trickle down to the bottom line.

Loss Trends are Improving: The largest expense item facing an insurer is often loss costs and related expenses, which are commonly referred to as loss adjustment expenses. A change in the direction of these expenses can dramatically affect bottom-line results. The summary table bellow depicts the improving conditions of the industry:

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- In 2013, underwriting rebounded to a $15.5 billion gain after a $13.3 billion loss in 2012. This momentum continued in the first quarter of 2014 when underwriting registered a net gain.

Combined Ratio as Measure to Gauge Performance: It is the sum of the loss ratio, the expense ratio, and (where applicable) the dividend ratio. A combined ratio under 100% indicates an underwriting profit, while one in excess of 100% means there is an underwriting loss. For 2013, insurers in the ISO study reported a combined ratio of 96.1%, a decline from 102.9% in 2012. In the first quarter of 2014, the combined ratio improved to 97.3% from 94.9% in the same period in 2013.

Surplus Remains Abundant: Also referred to ass net worth is the: the amount by which an insurer’s assets exceed its liabilities. The combined surplus continued to increase in the first quarter of 2014. As of March 31, 2014, insurers had a combined surplus

of $662.0 billion, up 1.3% from $609.8 billion in the same period in 2013. The ratio of net written premiums to surplus stood at 0.18-to-1 on March 31, 2014. In other words, in the first quarter of 2014, insurers wrote $0.18 worth of premiums for every $1 of surplus. If we assume a “typical” rate of leverage of 2-to-1 (which is what regulators usually allow), the industry had approximately $601.3 billion of “excess” surpluses on March 31, 2014.

Us Catastrophe Losses Slightly Increase In Q12014: For the second half of 2014, the catastrophe loss outlook is likely to be mixed. The first quarter of 2014 revealed underwriting results for many insurers that were negatively affected by claims from a series of winter storms from January 1 to February 21. However, outlook could turn positive given the forecast of a below- average hurricane season toward the second half of 2014. Storm forecasters attribute this to the formation of El Nino, a weather pattern that tends to suppress the development of hurricanes.

Congress Reforms Crop Insurance: The market leader in this space is indeed ACE, with an estimated market share of 18.7%. After several years of enduring losses the insurance companies see the signature of a new law (The Agriculture Act of 2014) by president Obama in February as a favorable driver. The most significant factor being that the new act repeals he old system of direct payments to farmers regardless of how much they actually plant or the price for which they sell their crops. Instead, farmers would buy into an insurance policy that covers lost revenue due to drops in prices or increases in feed costs.

Final Thoughts and Outlook:

Most insurance company’s in the industry are generating premium rates for many lines of business that are adequate to offset claim costs and still provide an underwriting profit. We believe in a positive fundamental outlook on the property-casualty insurance industry, largely because we think the fundamentals remain fairly healthy.

Moreover, most segments have emerged from the credit crisis relatively unscathed, from both a financial and a regulatory standpoint. Although they now have a degree of federal regulatory oversight, most insurers have seen little to no change in their business models.

Finally, while this period of prolonged low interest rates has crimped investment income growth for all insurers, we note that the property-casualty industry has a better “match” between their assets and liabilities since they are able to re-price their policies every six to 12 months.

We expect underwriting results for most insurers in in the space to be relatively healthy for the remainder of 2014. We think the focus will be on insurers’ top-line results, specifically the degree to which both premium and investment revenues rise. In these order of ideas companies with good combined ratios, a diversified product mix that reduces exposure and a strong underwriting discipline to capitalize the abundant surplus will outperform.

Source: S&P Net Advantage

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Management:

ACE’s management team is well known for their conservative steady growth approach and diligent focus towards strong underwriting premium discipline. This is reflected in the company’s consistent track record in terms of premiums written, earnings per share, earnings growth and dividend record that goes back more than 10 years. And for this, we expect management to continue to outperform in the future. Key leaders in ACE’s team include:

Evan G. Greenberg, Chairman and Chief Executive Officer of ACE Limited and ACE Group. Mr. Greenberg joined ACE Group in November 2001 as Vice Chairman. He was elected President and Chief Executive Officer in May 2004 and Chairman of the Board of Directors in May 2007. Over the course of more than 40 years in the insurance industry, Mr. Greenberg has held various underwriting and management positions and gained significant insight in the global property, casualty and life insurance sectors. Prior to joining ACE, Mr. Greenberg spent 25 years at American International Group, where he served as President and Chief Operating Officer from 1997 to 2000.

John Lupica, Vice Chairman of ACE Limited and Chairman, Insurance – North America, a position he has held since July 2011. He is responsible for the company’s property and casualty (P&C) and accident and health (A&H) insurance businesses in the United States, Bermuda and Canada. Mr. Lupica was appointed Vice Chairman of ACE Limited in November 2013 and Vice Chairman, ACE Group, in March 2014.

John Keogh,Vice Chairman and Chief Operating Officer of ACE Limited. He is responsible for the company’s property and casualty (P&C) and accident and health (A&H) insurance operations globally. Mr. Keogh also serves as Chairman, Insurance – Overseas General, a position he has held since joining the company in 2006. He was named Vice Chairman of ACE Limited in August 2010 and Chief Operating Officer in July 2011. Mr. Keogh was appointed Vice Chairman, ACE Group, in March 2014.

Philip Bancroft is Chief Financial Officer of ACE Limited, a position he has held since joining the company in 2002. He is responsible for all aspects of ACE’s financial organization, including transactional finance and decision-support activities such as performance management, budgeting, reporting, profit and cost management, and shareholder value. Mr. Bancroft was appointed Executive Vice President, ACE Group, in March 2014.

Source: Company Website

Shareholder Structure:

ACE’S main shareholders are comprised of Institutions. Main institutional investors include:

Source: Capital IQ

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Stock Performance:

ACE’s stock price in the last 5 years shows some degree of correlation to SSFINL (S&P Financial Index). However in this period the stock has outperform both the S&P Financial Index and the broader S&P 500 index, with a 5Y return of 111.72%% vs 75.03% and 84.79% respectively. The performance of the stocks summarized in the chart bellow:

Source: Bloomberg

Consensus Recommendations:

Analyst consensus recommendations imply 5.8% return potential to ACE’s stock, with a price target of $114.51. Recent recommendations range from overweigh/buy to hold.

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In addition to using Bloomberg for analyst consensus, we contacted Gloria Vogel Equity Research Analyst for Drexel Hamilton. Amongst the mots relevant insights discussed we have the following:

• Summary of Drivers: According to the analyst, growth of both the top and bottom line drive the price of the stock. Organic growth in not so penetrated and oversupplied markets, and M & A activity (such ass the recent acquisition in Brazil, Thailand and Mexico) will support the price of the stock going forward.

• Investment Income: The analyst noted ACES’s investment income as a big source of pretax income. She likes the company’s conservative approach of investing the float and also noted the above average return earned on much smaller portion of the portfolio (around 5%) focused on alternative investments (private equity, hedge funds, CMBS related instruments).

• Competition heating up: Given the level of supplied insurance products, competition as noted by the company in the recent conference call is increasing. The analyst noted however that ACE would outperform peers in these kinds of conditions given their product mix, market exposure and low combined ratios.

• Challenges/Risks Going Forward: Going forward important potential headwinds that could counter our thesis are: potential catastrophes, a more competitive landscape, and the possibility that the company cold not be generating meaningful growth and synergies from recent acquisitions.

Furthermore we contacted Helen Willson, Senior Vice President of Investor Relations to form some guidance in terms of the future of the company. Several key points were discussed including:

• Growth Rate of Premiums Going Forward; In terms of premium growth Mrs. Wilson did not offer any specific guidance as to what to expect going forward, as she pointed out she did not wanted to establish any range and that create any false expectations. She did highlight however and I think this is worth noting that the company is very disciplined when underwriting premiums, and will not be looking for growth if it means increasing risk beyond the appropriate levels of risk.

• In terms of Insurance Rates; she noted that ACE has enjoyed around 2-3 years of improvement in terms of pricing and it would be foolish to expect that this trend will last forever, she anticipates that rates will become a bit lower towards more normal levels.

• In terms of competition she stated that when rates start to push down it’s expected that the combined ratio will also go down with them. But, she noted that the company’s focus on efficiency makes them a better candidate to compete in a space with these characteristics.

• Investment Income: She noted that the float generated by the premiums written will be invested based on ACE’s same conservative philosophy and that a yield close to 3.5% should be expected going forward. She also noted that an eventual rise in interest rates could have a substantial impact in profits, being that investment income accounts for a big portion of pretax income.

• We also discussed how the management team plans to deploy the excess capital; she noted that the board would meet in November to determine planes regarding further repurchasing programs. On the M&A front, she does not see any potential transactions in the shorter term but explained that management is not shy of using this vehicle to peruse growth if the right price is paid. Moreover, she clarified that their priority is to return the excess capital to shareholders whether it be be buy buying back shares or perusing opportunity’s that offer good ROE and grow the business.

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Benchmarking and Valuation

To get and idea of how ACE’s measures against its peers in the space we can observe the company’s performance in the following graphs:

Relative Valuation:

Source: Data from Bloomberg, Graphs (Tableu Software)

Performance:

Source: Data from Bloomberg, Graphs (Tableu Software)

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Yield Benchmark

Summery of Findings:

• Undervalued when considering P/b vs ROE • Very efficient when considering combined ratio • Competitive Yield in line with peers

We projected ACE’s fair share price to be $135.93 per share, implying a potential upside 24.9%. We approached the valuation by using three methodologies.

First, a blended comparable company analysis using P/B and P/E. Second, we applied an additional technique we felt was relevant to incorporate given the consistent track record the stock has.

This method, that first appeared in Bejamin’s Graham book the Intelligent Investor uses the following formula to derive the price target, (also known as intrinsic value). Where: Value = Current (Normal) Earnings X (8.5 plus twice the expected annual growth rate). In order to modernize to some extent the method uses a weighted average of the diluted earnings per share more weighted towards recent earnings.

The 8.5 factor comes form Grahams understanding that a required rate of return in perpetuity for an investment of $8.5 is $1. This also yields a discount factor of 11%, which is a fairly appropriate discount rate. The bellow table summarizes our three different valuation methods:

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Price to Tangible Book Per Share:

Source: Bloomberg

Compco Median P/B 2014 1.29$ ACE Book Value per Share 2014E 91.88$ Implied Price Per Share 118.94$ Weight of the P/B Multiple 25%

Compco Median P/E 2014 11.56$ ACE Earnings per Share 2014E 9.57$ Implied Price Per Share 110.62$ Weight of the P/E Multiple 25%

Modern Graham Valuation EPS2014 9.57$ 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$

EPSmg 8.49$ Growth Rate (7-10 yrs): 5.00%

Intrinsic Value of te Stock 157.08Weight of Intrinsic Value Calculation 50.00%

Final Implied Price Per Share 135.93Current Price as of 10/30/2014 108.85

Potential Upside 25%

Blended COMPCO

Valuation Summary

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Moreover, as we see in the above chart (as of 10/27/2014) ACE’s stock is now trading at a P/TB multiple of 1.48, bellow the stocks average P/TB multiple of of 1.75 representing and additional discount of 17.44%. This serves as a cushion in terms of valuation of ACE and supports our thesis for investing in this stock.

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Appendix 1: ACE’s Financial Statements

Source: Bloomberg

ACE Ltd (ACE US) - StandardizedACE Ltd (ACE US) - StandardizedIn Millions of USD except Per Share12 Months Ending + Net Premium Earned (Non-Life & Life) Growth (YoY) + Capital Gains (Losses) Growth (YoY) + Total Investment Income Growth (YoY) + Other Operating Income Growth (YoY)Revenue Growth (YoY) - Insurance Claims & Charges Growth (YoY) - Underwriting Costs Growth (YoY) - Other Operating Expenses Growth (YoY)Operating Income Growth (YoY) - Interest Expense Growth (YoY) - Net Non-Operating Losses (Gains)Pretax Income Growth (YoY) - Income Tax Expense Growth (YoY)Income Before XO Items Growth (YoY) - Extraordinary Loss Net of Tax - Minority InterestNet Income Growth (YoY) - Total Cash Preferred Dividends Growth (YoY) - Other AdjustmentsNet Income Available to Shareholders Growth (YoY) Abnormal loss (gain) Growth (YoY) Tax Effect on Abnormal Items Growth (YoY)Normalized Income Growth (YoY) Basic EPS Before Abnormal Items Growth (YoY) Basic EPS Before XO Items Growth (YoY) Basic EPS Growth (YoY)Basic Weighted Avg Shares Growth (YoY) Diluted EPS Before Abnormal Items Growth (YoY) Diluted EPS Before XO Items Growth (YoY) Diluted EPS

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Last 12M2007-12-31 2008-12-31 2009-12-31 2010-12-31 2011-12-31 2012-12-31 2013-12-31 2014-09-30

12,297.0 13,203.0 13,240.0 13,504.0 15,387.0 15,677.0 16,613.0 17,419.04.0 7.4 0.3 2.0 13.9 1.9 6.0 8.2

-61.0 -1,633.0 -196.0 432.0 -795.0 78.0 504.0 -143.037.8 -2,577.0 88.0 -- -- -- 546.2

1,918.0 2,062.0 2,031.0 2,070.0 2,242.0 2,181.0 2,144.0 2,232.019.8 7.5 -1.5 1.9 8.3 -2.7 -1.7 3.6

0.0 66.0 -- -- -- -- ---- -- -- -- -- -- --

14,154.0 13,698.0 15,075.0 16,006.0 16,834.0 17,936.0 19,261.0 19,569.05.7 -3.2 10.1 6.2 5.2 6.5 7.4 3.7

7,519.0 8,002.0 7,747.0 7,936.0 9,921.0 10,174.0 9,863.0 10,319.04.5 6.4 -3.2 2.4 25.0 2.6 -3.1 2.9

3,226.0 3,872.0 3,941.0 4,195.0 4,540.0 4,542.0 4,870.0 5,188.01.7 20.0 1.8 6.4 8.2 0.0 7.2 8.4

81.0 27.0 85.0 0.0 0.0 0.0 0.0 0.0224.0 -66.7 214.8 -- -- -- --

3,328.0 1,797.0 3,302.0 3,875.0 2,373.0 3,220.0 4,528.0 4,062.011.0 -46.0 83.8 17.4 -38.8 35.7 40.6 0.0

175.0 230.0 225.0 224.0 250.0 250.0 275.0 283.0-0.6 31.4 -2.2 -0.4 11.6 0.0 10.0 5.60.0 0.0 0.0 -16.0 81.0 -6.0 15.0

3,153.0 1,567.0 3,077.0 3,667.0 2,042.0 2,976.0 4,238.0 3,786.011.7 -50.3 96.4 19.2 -44.3 45.7 42.4 0.1

575.0 370.0 528.0 559.0 502.0 270.0 480.0 490.010.2 -35.7 42.7 5.9 -10.2 -46.2 77.8 90.7

2,578.0 1,197.0 2,549.0 3,108.0 1,540.0 2,706.0 3,758.0 3,296.012.0 -53.6 112.9 21.9 -50.5 75.7 38.9 -6.5

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

2,578.0 1,197.0 2,549.0 3,108.0 1,540.0 2,706.0 3,758.0 3,296.011.8 -53.6 112.9 21.9 -50.5 75.7 38.9 -6.545.0 24.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0 -46.7 -- -- -- -- ---- -- 0.0 0.0 0.0 0.0 0.0 0.0

2,533.0 1,173.0 2,549.0 3,108.0 1,540.0 2,706.0 3,758.0 3,296.012.1 -53.7 117.3 21.9 -50.5 75.7 38.9 -6.5

0.0 0.0 196.0 -430.0 800.0 -67.0 -500.0 150.0-- -- -- -- -- -- 646.3

0.0 0.0 14.0 -19.7 -5.8 -7.9 -38.4 -124.5-- -- -- -- -70.8 36.5 389.2 553.3

2,533.0 1,173.0 2,759.0 2,658.3 2,334.3 2,631.2 3,219.6 3,321.69.1 -53.7 135.2 -3.6 -12.2 12.7 22.4 15.1

8.21 7.81 8.19 7.82 6.89 7.72 9.43 9.8011.4 -4.9 4.9 -4.5 -11.9 12.0 22.2 16.07.79 3.57 7.57 9.15 4.55 7.96 11.02 9.7411.1 -54.2 112.0 20.9 -50.3 74.9 38.4 -5.77.79 3.57 7.57 9.15 4.55 7.96 11.02 9.7411.0 -54.2 112.0 20.9 -50.3 74.9 38.4 -5.7

324.9 328.6 336.7 339.7 338.2 339.8 340.9 334.51.0 1.1 2.5 0.9 -0.4 0.5 0.3

8.07 7.72 8.17 7.79 6.85 7.65 9.36 9.7311.3 -4.3 5.8 -4.7 -12.1 11.7 22.3 16.17.66 3.53 7.55 9.11 4.52 7.89 10.92 9.6411.0 -53.9 113.9 20.7 -50.4 74.6 38.4 -5.97.66 3.53 7.55 9.11 4.52 7.89 10.92 9.64

BABSON College Fund

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Source: Bloomberg

ACE Ltd (ACE US) - StandardizedACE Ltd (ACE US) - StandardizedIn Millions of USD except Per Share12 Months EndingAssets + Total Investments Growth (YoY) + Fixed Income-Trading/AFS & ST Inv Growth (YoY) + Loans & Mortgages + Fixed Income Securities-HTM Growth (YoY) + Equity Securities Growth (YoY) + Real Estate Investments + Other Investments Growth (YoY) + Cash & Near Cash Items Growth (YoY) + Accounts & Notes Receivable Growth (YoY) + Deferred Policy Acquisition Costs Growth (YoY) + Other Assets Growth (YoY)Total Assets Growth (YoY)

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 20132007-12-31 2008-12-31 2009-12-31 2010-12-31 2011-12-31 2012-12-31 2013-12-31

41,779.0 39,715.0 46,515.0 51,407.0 55,676.0 60,264.0 60,928.014.1 -4.9 17.1 10.5 8.3 8.2 1.1

35,815.0 34,505.0 41,192.0 39,522.0 44,268.0 49,534.0 51,017.015.5 -3.7 19.4 -4.1 12.0 11.9 3.0

0.0 0.0 0.0 0.0 0.0 0.0 0.02,987.0 2,860.0 3,481.0 9,501.0 8,447.0 7,270.0 6,098.0

-2.0 -4.3 21.7 172.9 -11.1 -13.9 -16.11,837.0 988.0 467.0 692.0 647.0 744.0 837.0

7.2 -46.2 -52.7 48.2 -6.5 15.0 12.50.0 0.0 0.0 0.0 0.0 0.0 0.0

1,140.0 1,362.0 1,375.0 1,692.0 2,314.0 2,716.0 2,976.034.9 19.5 1.0 23.1 36.8 17.4 9.6

510.0 867.0 669.0 772.0 614.0 615.0 579.0-9.7 70.0 -22.8 15.4 -20.5 0.2 -5.9

18,318.0 18,072.0 18,066.0 17,906.0 17,572.0 17,018.0 17,027.0-1.0 -1.3 0.0 -0.9 -1.9 -3.2 0.1

1,121.0 1,214.0 1,445.0 1,641.0 1,548.0 1,873.0 2,313.04.1 8.3 19.0 13.6 -5.7 21.0 23.5

10,362.0 12,189.0 11,285.0 11,629.0 11,911.0 12,775.0 13,663.0-0.2 17.6 -7.4 3.0 2.4 7.3 7.0

72,090.0 72,057.0 77,980.0 83,355.0 87,321.0 92,545.0 94,510.07.4 0.0 8.2 6.9 4.8 6.0 2.1

Liabilities & Shareholders' Equity + Reserve for Outstanding Claim & Loss Growth (YoY) + Premium Reserve (Unearned) Growth (YoY) + Life Policy Benefits Growth (YoY) + Other Insurance Reserves + Total Insurance Reserves Growth (YoY) + Short-Term Borrowings Growth (YoY) + Other Short-Term Liabilities Growth (YoY) + Long-Term Borrowings Growth (YoY) + Other Long-Term Liabilities Growth (YoY)Total Liabilities Growth (YoY) + Total Preferred Equity Growth (YoY) + Minority Interest + Policyholders' Equity + Share Capital & APIC Growth (YoY) + Retained Earnings & Other Equity Growth (YoY)Total Equity Growth (YoY)Total Liabilities & Equity Growth (YoY)

37,112.0 37,176.0 37,783.0 37,391.0 37,477.0 37,946.0 37,443.04.5 0.2 1.6 -1.0 0.2 1.3 -1.3

6,227.0 5,950.0 6,067.0 6,330.0 6,334.0 6,864.0 7,539.0-3.3 -4.4 2.0 4.3 0.1 8.4 9.8

545.0 2,904.0 3,008.0 3,106.0 4,274.0 4,470.0 4,615.05.2 432.8 3.6 3.3 37.6 4.6 3.20.0 0.0 0.0 0.0 0.0 0.0 0.0

43,884.0 46,030.0 46,858.0 46,827.0 48,085.0 49,280.0 49,597.03.3 4.9 1.8 -0.1 2.7 2.5 0.6

372.0 471.0 161.0 1,300.0 1,251.0 1,401.0 1,901.0-35.6 26.6 -65.8 707.5 -3.8 12.0 35.7

9,037.0 7,995.0 7,827.0 8,587.0 9,984.0 10,664.0 10,071.013.8 -11.5 -2.1 9.7 16.3 6.8 -5.6

2,120.0 3,115.0 3,467.0 3,667.0 3,669.0 3,669.0 4,116.013.4 46.9 11.3 5.8 0.1 0.0 12.2

0.0 0.0 0.0 0.0 0.0 0.0 0.0-- -- -- -- -- -- --

55,413.0 57,611.0 58,313.0 60,381.0 62,989.0 65,014.0 65,685.04.8 4.0 1.2 3.5 4.3 3.2 1.0

575.0 0.0 0.0 0.0 0.0 0.0 0.00.0 -- -- -- -- -- --0.0 0.0 0.0 0.0 0.0 0.0 0.00.0 0.0 0.0 0.0 0.0 0.0 0.0

6,253.0 16,291.0 16,029.0 15,784.0 15,421.0 14,770.0 14,137.02.8 160.5 -1.6 -1.5 -2.3 -4.2 -4.3

9,849.0 -1,845.0 3,638.0 7,190.0 8,911.0 12,761.0 14,688.029.2 -- -- 97.6 23.9 43.2 15.1

16,677.0 14,446.0 19,667.0 22,974.0 24,332.0 27,531.0 28,825.016.8 -13.4 36.1 16.8 5.9 13.1 4.7

72,090.0 72,057.0 77,980.0 83,355.0 87,321.0 92,545.0 94,510.07.4 0.0 8.2 6.9 4.8 6.0 2.1

BABSON College Fund

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! ! ! ! 20!!!


Appendix 2: SIVB’s Value Line Report

Source: Value Line!

1601201008060504030

2015

Percentsharestraded

18126

Target Price Range2017 2018 2019

ACE LTD. NYSE-ACE 106.63 11.0 11.18.5 0.60 2.4%

TIMELINESS 3 Raised11/1/13SAFETY 2 Raised12/19/08TECHNICAL 3 Lowered6/6/14BETA .85 (1.00=Market)

2017-19 PROJECTIONSAnn’l Total

Price Gain ReturnHigh 130 (+20%) 7%Low 95 (-10%) NilInsider Decisions

O N D J F M A M Jto Buy 0 0 0 0 0 0 0 0 0Options 0 0 2 1 0 0 0 1 1to Sell 0 0 1 1 0 0 0 2 1Institutional Decisions

4Q2013 1Q2014 2Q2014to Buy 266 262 267to Sell 253 261 258Hld’s(000) 314185 308876 308732

High: 42.8 46.0 56.8 61.9 64.3 68.0 55.6 62.6 73.8 82.1 104.1 108.6Low: 23.6 31.8 38.4 47.8 52.8 34.9 30.9 47.1 56.9 68.5 79.8 92.0

%TOT.RETURN8/14THIS VLARITH.*STOCK INDEX

1 yr. 24.2 21.53 yr. 76.3 72.75 yr. 128.4 129.0

CAPITAL STRUCTURE as of 6/30/14Total Debt $5908 mill. Due in 5 Yrs $4033 mill.LT Debt $4057 mill. LT Interest $272 mill.(Includes $309 mill. of Trust Preferred Securities)

(12% of Cap’l)

Leases, Uncapitalized Annual rentals $106 mill.

Common Stock 335,698,995 shs.

MARKET CAP: $35.8 billion (Large Cap)FINANCIAL POSITION 2012 2013 6/30/14

($MILL.)Bonds 47306 49254 51601Stocks 744 837 907Other 44495 44419 44939Total Assets 92545 94510 97447Unearned Premium 6864 7539 8296Reserves 37946 37443 37177Other 20204 20703 21649Total Liab’ties 65014 65685 67122ANNUAL RATES Past Past Est’d ’11-’13of change (per sh) 10 Yrs. 5 Yrs. to ’17-’19Premium Inc 7.0% 4.0% 6.0%Invest Income 7.5% 6.0% 2.5%Earnings 20.5% 4.5% 9.5%Dividends 10.5% 10.0% 7.5%Book Value 12.5% 15.5% 6.0%

Cal- Fullendar Year

NET PREMIUMS EARNEDMar.31 Jun.30 Sep.30 Dec.31

2011 3309 3757 4490 3831 153872012 3381 3783 4665 3848 156772013 3573 4067 4610 4363 166132014 3970 4332 4995 5053 183502015 4720 4665 4965 5150 19500Cal- Fullendar Year

EARNINGS PER SHARE AMar.31 Jun.30 Sep.30 Dec.31

2011 .79 2.01 2.22 1.94 6.962012 2.05 2.17 2.01 1.43 7.662013 2.17 2.29 2.49 2.39 9.342014 2.27 2.42 2.47 2.34 9.502015 2.45 2.55 2.75 2.25 10.00Cal- Fullendar Year

QUARTERLY DIVIDENDS PAID BEMar.31 Jun.30 Sep.30 Dec.31

2010 .31 .31 .33 .33 1.282011 .33 .33 .35 .35 1.362012 .47 .47 .49 .98 2.412013 - - .49 .51 .51 1.512014 .63 .63 .65

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20114.62 11.43 19.52 22.77 25.40 34.31 39.15 36.34 36.22 37.30 39.57 39.34 40.25 46.481.68 2.27 3.32 3.02 3.05 3.08 3.52 3.91 4.90 5.82 6.18 6.04 6.17 6.77.55 .06 .88 d.96 d1.13 2.81 1.42 .32 4.48 4.71 3.98 4.61 5.16 4.132.96 1.85 2.31 d.63 1.78 4.28 3.28 3.05 7.05 8.07 7.72 8.17 7.79 6.96.36 .42 .50 .58 .66 .74 .82 .90 .98 1.06 1.09 1.19 1.30 1.50

19.19 21.39 23.33 23.50 23.14 23.35 26.49 29.42 36.69 43.61 43.30 58.44 68.47 74.06193.59 217.46 232.35 259.86 262.68 279.90 284.48 323.32 326.46 329.70 333.65 336.52 335.54 331.02179% 117% 124% 153% 150% 142% 156% 157% 148% 136% 126% 80% 79% 88%11.6 13.5 12.5 - - 19.5 7.7 12.6 15.2 7.7 7.4 7.1 5.7 6.9 9.3.60 .77 .81 - - 1.07 .44 .67 .81 .42 .39 .43 .38 .44 .58

1.0% 1.7% 1.7% 1.6% 1.9% 2.2% 2.0% 1.9% 1.8% 1.8% 2.0% 2.6% 2.4% 2.3%11136 11748 11825 12297 13203 13240 13504 1538769.3% 74.2% 60.8% 61.1% 60.6% 58.5% 56.1% 61.9%26.2% 24.9% 26.4% 26.9% 29.6% 29.6% 30.6% 29.3%4.6% 1.0% 12.8% 11.9% 9.8% 11.9% 13.3% 8.9%19.4% 22.3% 18.3% 17.9% 19.8% 15.7% 17.9% 17.8%983.2 952.0 2351.0 2639.0 2567.0 2759.0 2657.0 2372.04.2% 4.0% 4.4% 4.9% 5.6% 4.7% 4.9% 4.7%56342 62440 67135 72090 72057 77980 83355 875059835.8 11812 14278 16677 14446 19667 22974 2451610.0% 8.1% 16.5% 15.8% 17.8% 14.0% 11.6% 9.7%9.5% 6.9% 16.6% 15.7% 15.1% 12.1% 9.7% 7.8%28% 31% 15% 15% 15% 14% 16% 19%

2012 2013 2014 2015 © VALUE LINE PUB. LLC 17-1946.41 49.33 54.45 57.85 P/C Prem Earned per sh 68.106.13 6.05 6.25 6.50 Investment Inc per sh 7.504.41 5.18 5.15 5.50 Underwriting Inc per sh 6.457.66 9.34 9.50 10.00 Earnings per sh A 14.001.94 2.14 2.58 2.64 Div’ds Decl’d per sh BE 2.9181.50 85.60 91.55 96.45 Book Value per sh C 114.55337.81 336.76 337.00 337.00 Common Shs Outst’g D 323.0092% 107% Bold figures are

Value Lineestimates

Price to Book Value 98%9.7 9.8 Avg Ann’l P/E Ratio 8.0.62 .55 Relative P/E Ratio .50

2.6% 2.3% Avg Ann’l Div’d Yield 2.6%15677 16613 18350 19500 P/C Premiums Earned 2200060.5% 60.5% 60.5% 60.5% Loss to Prem Earned 60.5%30.0% 29.0% 30.0% 30.0% Expense to Prem Writ 30.0%9.5% 10.5% 9.5% 9.5% Underwriting Margin 9.5%18.0% 18.0% 18.0% 18.0% Income Tax Rate 18.0%2706.0 3758.0 3250 3400 Net Profit ($mill) 45505.0% 5.0% 4.7% 4.8% Inv Inc/Total Inv 5.0%92545 94510 97500 100000 Total Assets ($mill) 10600027531 28825 30900 32500 Shr. Equity ($mill) 370009.8% 13.0% 10.5% 10.5% Return on Shr. Equity 12.5%7.5% 10.5% 7.5% 7.5% Retained to Com Eq 10.0%24% 19% 27% 26% All Div’ds to Net Prof 21%

Company’s Financial Strength A+Stock’s Price Stability 95Price Growth Persistence 90Earnings Predictability 85

(A) Dil. egs. Op. egs. starting in 2002 (Excl.cap. gains/losses): ’98, $2.06; ’99, $0.22; ’00,($0.18); ’01, ($0.11); ’02, ($1.59); ’03, $0.75;’04, $0.25; ’05, $0.26; ’06, ($0.14); ’07,

($0.18); ’08, ($4.19); ’09, ($0.61); ’10, $1.32;’11, ($2.31). 2010 eps do not sum due tochange in shares. Next egs. rpt. late October.(B) Div’ds paid in late Apr., July, Oct., and Jan.

Paid in Swiss Francs as of 7/08 and convertedto U.S. Dollars at pymt. date. (C) Incl. intang. In2013: $5404 mill., $16.05/share. (D) In mill. (E)Advanced dividend of $0.49 paid on 12/28/12.

BUSINESS: ACE Limited provides insurance and reinsurance for adiverse group of international clients. Has clients in about 140 coun-tries. Net premiums earned breakdown in 2013: North America(45%), Overseas General (38%), Global Reinsurance (6%), Life In-surance and Reinsurance (11%). Acquired CAT Limited andWestchester Specialty Group in 1998; CIGNA’s property/casualty

book in 1999. Acquired Capital Re in 1999. Spun off 65% of AGCHoldings LTD, 4/04. Officers & directors own less than 1.0% ofcommon shares; Capital World Investors, 7.5%; BlackRock, Inc.8.0% (4/14 Proxy). Chairman, President, & CEO: Evan G. Green-berg. Address: Barengasse 32, CH-8001 Zurich, Switzerland. Tele-phone: +41 (0)43 456 76 00. Internet: www.acelimited.com.

ACE Limited seems to be rolling alongat a good clip . Net premiums earnedgrowth has ga ined steam overseas, whileovera ll profitability has taken advantageof st ronger underwr it ing resu lt s and high-er investment income. Fur ther, the compa-ny’s adherence to st r ingent underwr it ingcr iter ia and new cost cont rols have bol-stered the combined ra t io. Also, posit ivereserve development has been a boon toearn ings. Going forward, we believe a com-bina t ion of meaningfu l ra te increases,lower tota l r isk exposure, and eleva tedequity markets augur well for premiumsand profit s.The insurer has raised its quarterlycash div idend. Indeed, it h iked the pay-out by $0.02, or approximately 3%, to$0.65 a share. Stockholders ought to ap-plaud th is act ion , in our view, as it reflect sa good balance sheet , solid business pros-pects, and management ’s willingness to re-turn addit iona l capita l to shareholders. In-vestors should note ACE’s dividend yieldhovers above the Value Line median .The company has announced it is se tto acqu ire Itau Unibanco. Althoughlit t le deta il sur rounding the acquisit ion is

known, the t ransact ion is expected to costACE about $685 million . The addit ion ofItau ought to considerably st rengthen theinsurer ’s proper ty & casua lty opera t ionsthroughout Brazil. The Brazilian out fitspecia lizes in mid-sized and la rge corpo-ra te P&C offer ings, as well as deliver ingaccident & hea lth products. This marr iagewill crea te the la rgest commercia l P&Cbusiness in Brazil, replete with 19 officeloca t ions and more than 600 brokers.These share s are ranked 3 (Average )for Time line ss . The stock present lyt rades well-with in our Target Pr ice Rangeto 2017-2019, limit ing it s capita l appreci-a t ion poten t ia l dur ing tha t span . Fur ther-more, th is good-qua lity issue appears fa ir-ly va lued on a P/E basis. ACE Limited’spursu it of Itau Unibanco and Samaggi In-surance in Thailand ought to lift globa lprospects. The company’s flexible ba lancesheet , stu rdy underwr it ing guidelines, andample reserves have it poised fornotewor thy top- and bot tom-line advancesthree to five years hence. Thus, a smoothin tegra t ion of ACE’s recent acquisit ionsmay prompt us to revisit our project ions.Kenneth DeFranco, J r. S eptem ber 12, 2014

LEGENDS8.0 x Earnings p sh. . . . Relative Price Strength

Options: YesShaded area indicates recession

© 2014 Value Line Publishing LLC. All rights reserved. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind.THEPUBLISHER ISNOTRESPONSIBLEFORANYERRORSOROMISSIONSHEREIN. This publication is strictly for subscriber’s own, non-commercial, internal use. No partof it may be reproduced, resold, stored or transmitted in any printed, electronic or other form, or used for generating or marketing any printed or electronic publication, service or product.

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P/ERATIO

RELATIVEP/E RATIO

DIV’DYLD( )Trailing:

Median:VALUELINE

BABSON College Fund

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! ! ! ! 21!!!


Important Disclosures

Babson College Fund

The Babson College Fund (BCF) is an academic program in which selected students manage a portion of the Babson College endowment. The program seeks to provide a rich educational experience through the development of investment research skills and the acquisition of equity analysis and portfolio management experience. Please visit http://cutler.babson.edu for more information.

Analyst Contact Information

Alfredo Leon | 7347304664 | [email protected]

Paul Ramey | 6032754515 | [email protected]

Ryan Diplock| 4136956343| [email protected]

Definition of Ratings

BUY: Expected to outperform the S&P500 producing above average returns.

HOLD: Expected to perform in line with the S&P500 producing average returns.

SELL: Expected to underperform the S&P500 producing below average returns.

References

Capital IQ

Thomson ONE

S&P Net Advantage

Bloomberg

Value Line

ACE Group Company Website

Analyst: Gloria Vogel Equity Research Analyst for Drexel Hamilton

Investor Relations: Helen Wilson Helen Wilson

BABSON College Fund

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Documents

Financials_ACE_Buy_10_31_2014