S&P Affirms ACE Ratings; Revises Outlook to Negative

November 1, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on Bermuda-based ACE Ltd. and some of its subsidiaries to negative from stable.

At the same time, S&P assigned preliminary debt ratings to ACE’s $1.5 billion shelf, but noted that “a draw-down from that shelf is not expected in the near term.” It also affirmed its ratings on ACE and some of its subsidiaries, including the “BBB+/A-2” counterparty credit ratings on ACE Ltd.

“The ratings on ACE reflect its competitive position as a global and diversified property/casualty company, its strong capitalization and financial flexibility, and its improved operating performance,” said S&P. “Offsetting these considerations to some extent are the amount of reinsurance recoverables and the amount of runoff reserves and intangibles.”

The rating agency also cited certain “recent developments” as the primary reason “leading to the negative outlook.” S&P said this includes “the company’s execution of an aggressive growth strategy that has led ACE to compete directly with some larger companies; this has been done through more competitive rates. However, without the capital base or market presence of these larger competitors, it will be difficult for ACE to maintain this competitive posture. Moreover, ACE’s good combined ratio must be considered in light of a relatively modest level of accident-year reserve bookings.”

It also identified the “ongoing investigation of the insurance and brokerage industry by the State of New York with regard to various pricing practices,” as an additional negative development. “Given the scope of the investigations, ACE has the potential to draw greater scrutiny than other companies in the industry,” said S&P.

“Among the existing concerns that led to the negative outlook is the overall quality of the ACE balance sheet, with reinsurance recoverables equal to 27 percent of total assets and 1.6x shareholders’ equity,” the bulletin continued. “Additionally, goodwill equals approximately 5 percent of total assets and 28 percent of shareholders’ equity.” Finally, S&P said it “believes that the overall net reserves of the group remain modestly deficient.”

Nevertheless, S&P said it “expects that ACE will maintain risk-based capital of 150 percent or better going forward and show a combined ratio for 2004 of approximately 93 percent, despite losses from the Florida hurricanes.”

S&P noted that, “the negative outlook reflects several recent and existing developments. Although these developments are not likely to adversely affect the performance of the company in the near term, when combined with some existing negative conditions, Standard & Poor’s believes that they make it possible that ACE’s ratings may eventually be lowered by a notch from their current levels.”

ACE’s current status, as well as AIG’s, will be discussed by S&P analysts in a telephone conference call scheduled for 1:00 p.m. EST today, Monday November 1, 2004 (see related article in National Section).

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