Best Upgrades Ratings for Most ACE Limited Subsidiaries; Outlooks Stable

April 15, 2014

A.M. Best has upgraded the financial strength rating (FSR) to ‘A++’ (Superior) from ‘A+’ (Superior) and the issuer credit ratings (ICR) to “aa+” from “aa” of the North American property/casualty subsidiaries of ACE Limited, which is based in Zurich, Switzerland, as well as its ratings for ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., and the members of the ACE American Pool, ACE INA Insurance (Canada) and ACE Tempest Re’s parent, ACE Tempest Life Reinsurance Ltd (ATLRE), also based in Bermuda.

Best also upgraded the ICR and senior debt ratings to “a+” from “a” of ACE and its wholly owned downstream holding company, ACE INA Holdings Inc., whose debt is fully guaranteed by ACE. Best has consequently revised its outlook on all of these ratings to stable from positive.

In addition, Best has affirmed the FSR of ‘A+’ (Superior) and the ICRs of “aa-” of Combined Insurance Company of America, based in Glenview, Illinois, and Combined Life Insurance Company of New York, together known as the Combined Companies.

Best has also affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of ACE Life Insurance Company, based in Stamford, Connecticut, and the FSR of ‘A’ (Excellent) and ICR of “a” of Panama-based ACE Seguros S.A. The outlook for these ratings is stable.

“The ratings for the core property/casualty subsidiaries of ACE reflect their strong risk-adjusted capitalization, diversified global operation enhanced by prudent acquisitions over the past few years and the historically favorable record of generating strong earnings and cash flows,” Best explained.

“The balance sheet for these core subsidiaries is strengthened by controlled financial leverage, a relatively conservative investment portfolio that generates stable earnings and favorable loss reserve development in recent years.”

Best also indicated that the “positive rating factors are derived from management’s experience and consistent focus on underwriting profitability generated by effective risk selection and pricing standards, and maintenance of appropriate policy limits and exposure to catastrophes, including the use of reinsurance to manage net retentions.

“ACE’s strong enterprise risk management (ERM) program relies on close collaboration of executives and operating departments to identify, assess and control enterprise risk and accumulations. The effectiveness of the ERM program is demonstrated by risk-adjusted capital levels and overall earnings that have remained strong and consistent through soft market conditions, the global financial crisis and the increase in global catastrophe and weather-related events.”

Best also noted that “continued competitive pricing in the market, combined with a lower level of reserve redundancies and investment returns, requires ACE to remain focused and diligent in executing pricing discipline, product and risk selection capabilities and managing exposure levels to generate continued positive underwriting results.

“Other offsetting rating factors include the group’s exposure to emerging asbestos and environmental claims and natural and man-made catastrophes. The property/casualty subsidiaries’ capital also is exposed to varying dividend demands and higher than industry average ceded reinsurance leverage, driven by the nature of their business, agricultural and captive/cash flow programs and recoverables relating to their run-off book.”

Best also pointed out that as of “December 31, 2013, ACE’s adjusted debt-to-total-capital level was 17.5 percent (excluding accumulated other comprehensive income), which is within

Best’s expectations at current rating levels. Interest coverage also remained favorable. Since ACE maintains substantial capital levels in its Bermuda-based operations, little cash and liquid securities are held at the ultimate holding company level.

“Therefore, holding company cash flows necessary to meet shareholder dividends and debt service requirements are principally met through dividends from the operating companies. Given the significant holding company cash flow requirements, there is a dependence on the property/casualty subsidiaries in multiple jurisdictions to provide sufficient dividend cash flow.

“The ratings of ATLRE reflect its ownership of ACE Tempest Re, which accounts for the majority of the company’s financial profile and the benefit of being part of the ACE organization.

As a partial offsetting factor Best cited “the potential capital and operating volatility associated with ATLRE’s run-off variable annuity reinsurance business as well as its limited life reinsurance operations.

“Although it is a very limited contributor to the ACE group of companies, ACE Life Insurance Company’s (New York, NY) ratings recognize its stable capitalization, along with a very conservative investment portfolio that offers adequate liquidity to support the run-off of its remaining U.S. life reinsurance business. Offsetting rating factors include its nominal scope of operations and business profile, which is currently in run off, and earnings volatility.

“The ratings for the Combined companies reflect the benefits it receives as members of the ACE organization, its consolidated financial strength, operating profile, established niche in the middle-income market for supplemental individual accident and health products and the level of risk-based capital maintained at both entities.”

Best added that it “believes the core group members are well positioned at their current rating levels, given the rating upgrades positive rating movement is unlikely in the near term. Factors that could lead to negative rating actions include operating performance falling short of A.M. Best’s expectations and/or an erosion of surplus that causes a decline in risk-adjusted capital to a level no longer supporting the current ratings.

For a complete listing of ACE Limited and its subsidiaries’ FSRs, ICRs and debt ratings, go to: www.ambest.com/press/041106ace.pdf

Source: A.M. Best

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