Ace Sells Equities, Purchases Corporate Debt, U.S. Treasuries

July 28 (Bloomberg) -- Ace Ltd., the Zurich-based insurer and reinsurer with operations in more than 50 countries, said it sold equities in the second quarter as markets rebounded, then purchased corporate debt and U.S. Treasuries.

“With a strong recovery in global equity markets, we also liquidated the majority of our publicly traded equity holdings and invested the proceeds in higher-yielding corporate bonds,” Chief Operating Officer Philip Bancroft said yesterday in a conference call. “The shifts in asset allocation will, with all else being equal, increase book yield and investment income.”

Ace announced yesterday that second-quarter net income declined 28 percent from a year earlier as the value of its investments fell. Insurers have posted more than $200 billion in writedowns and unrealized losses tied to the collapse of the U.S. housing market since the beginning of 2007.

Cash investments were cut by about $1.8 billion in the period, Ace said on the call. The company spent proceeds from equities sales and bought mostly corporate debt, U.S. Treasuries and high-grade mortgages.

Ace, which moved its headquarters to Zurich from Bermuda, has fallen less than 1 percent in New York Stock Exchange composite trading in the past year compared with the 22 percent drop of the 77-company Bloomberg World Insurance Index. The Standard & Poor’s 500 Index has gained 8.7 percent this year while the Dow Jones Industrial Average rose 3.8 percent.

Second-quarter net income dropped to $535 million, or $1.58 a share, from $746 million, or $2.18, Ace said. Profit excluding some investment results was $2.09 a share, beating the $1.96 average estimate of 15 analysts surveyed by Bloomberg.

Plane Crashes

The June 1 Air France crash, which killed 228 people flying to Paris from Rio de Janeiro, contributed to a 37 percent decline in accident and health earnings, Chief Executive Officer Evan Greenberg said in the conference call. Accident and health fell to $87 million from $138 million a year earlier, Ace said.

“We had some one-time good guys last year in the second quarter, and we had some one-time bad guys in the quarter this year that were related to losses,” Greenberg said. “One example is the Air France crash.”

Ace was the lead insurer for the Yemenia Airways Inc. plane that crashed on June 30 with 153 people aboard, according to Insurance Insider. The Yemenia and Air France losses will contribute to what may be the most expensive month for the airline-insurance industry except for September 2001, Aon Corp., the biggest insurance broker, wrote in a July 6 report. Ace spokesman Stephen Wasdick declined to comment on Yemenia.

Corporate Debt

Ace’s net income includes a $171 million loss on the value of holdings including stocks and high-yield corporate debt. That compares with an $8 million investment gain a year earlier. Ace’s book value, a measure of assets minus liabilities, climbed 12 percent from the first quarter to $49.27 as other holdings posted gains that didn’t count toward earnings.

Junk-rated debt returned 23.2 percent in the second quarter, its best ever performance, according to Merrill Lynch & Co.’s High Yield Master II index.

“Our investment portfolio continues to be predominately invested in publicly traded, investment-grade fixed-income securities,” Bancroft said. The average credit rating is AA with more than one half invested in AAA securities, he said.

About 90 percent of the insurer’s $43 billion investment portfolio is in fixed-income holdings including securities backed by residential and commercial mortgages and debt issued by General Electric Co., JPMorgan Chase & Co. and Bank of America Corp.