Best Affirms ACE and Subs Ratings; Outlook on Debt Changed to Positive

May 4, 2010

A.M. Best Co. has revised the outlook to positive from stable and affirmed the issuer credit ratings (ICR) of “a-” and senior debt ratings of ACE Limited, based in Zurich, Switzerland, and ACE INA Holdings Inc.

In addition Best affirmed the financial strength ratings (FSR) of ‘A+’ (Superior) and ICRs of “aa-” of ACE Bermuda Insurance Ltd. and ACE Tempest Reinsurance Ltd. , both domiciled in Bermuda, as well as ACE American Pool and its members, ACE INA Insurance (Canada) and ACE European Group Limited (UK), the “core property/casualty operating companies. The outlook for the ICRs has been revised to positive from stable, while the outlook for the FSRs is stable.

Best also affirmed the FSR of ‘B-‘ (Fair) and ICR of {{dq1}} of Century Indemnity Company, the run-off entity of ACE, with a stable outlook. In addition Best affirmed the FSR of ‘A+’ (Superior) and ICR of “aa-” of ACE Tempest Life Reinsurance Ltd. (ATLRe) (Bermuda), and the FSR of ‘A’ (Excellent) and ICRs of “a” of Combined Insurance Company of America (Glenview, IL) and Combined Life Insurance Company of New York (Latham, NY). The outlook for the ICRs has also been revised to positive from stable, while the outlook for the FSRs is stable.

However, Best said it has downgraded the FSR to ‘A-‘ (Excellent) from ‘A’ (Excellent) and ICR to “a-” from “a” of ACE Life Insurance Company (Stamford, CT). The outlook for these ratings is stable. All companies are domiciled in Philadelphia, PA, unless otherwise specified.

ACE’s ratings and those of its core P/C operating companies “reflect an organization that is well diversified by business segment and geography and is strongly capitalized,” Best explained. “The organization maintains the capacity to generate significant cash flow and earnings in its domestic and overseas markets given its underwriting acumen. In addition, ACE’s balance sheet remains stable through controlled financial leverage, a relatively conservative investment portfolio and favorable loss reserve developments in recent years.”

Best said the “positive rating factors are derived from management’s successful operating strategies, which include consistent focus on underwriting profitability through careful risk selection and pricing, appropriate policy limits within the business model framework and the use of reinsurance to manage net retained exposures at appropriate levels.

“Overall risk and catastrophe specific exposures are well managed through a comprehensive enterprise risk management (ERM) program. The ERM program relies on the close collaboration of ACE’s leaders and staff departments to appropriately identify and control enterprise risk and accumulations, manage and regularly review risks and verify through comprehensive internal and external audits.

“ACE’s first quarter 2010 underwriting and operating results remained strong despite an increase in global catastrophe losses, which further demonstrates the enterprise’s underwriting discipline and risk management philosophy. However, a fair degree of earnings variability is inherent, reflecting ACE’s above-average risk appetite and global reach.”

However, Best also cautioned that “despite its positive track record, ACE (along with the rest of the industry) must remain consistently diligent with regard to pricing and exposure levels in order to continue to generate positive underwriting margins. This is particularly applicable given ACE’s risk appetite and spread of operations. As such, execution risk across the ACE enterprise remains a key rating consideration.

“In addition, the company’s balance sheet is somewhat susceptible to volatility from the capital markets, as evidenced by the realized and unrealized investment losses recorded in 2008 and early 2009. Despite the decline, risk-adjusted capitalization remained well supportive of the ratings during this period. For full-year 2009, the realized and unrealized loss positions improved significantly from the prior year, resulting in risk-adjusted capital levels that were more in line with ACE’s historic levels.”

Best also singled out ACE and its core P/C operating companies’ “exposure to emerging asbestos and environmental claims and natural and man-made catastrophes as well as higher than industry average ceded reinsurance recoverable leverage. The recoverable leverage is partially due to several unique characteristics of ACE, including its significant run-off book and agricultural and captive/cash flow programs.”

Best explained that “while the run-off operations at Century Indemnity Company have stabilized, ACE remains exposed long term to the potential need to shore up capital, given potential adverse loss reserve development or capital reductions through operating losses. In 2009, Century Indemnity Company required net loss reserve increases of approximately $80 million, which was included in ACE’s overall favorable loss reserve development of $579 million.”

Best ratings on Century “acknowledge its $25 million of capital (a minimum level required by the 1995 Restructuring Agreement approved by the Pennsylvania Department of Insurance), a $2.5 billion reinsurance contract with National Indemnity Company and an $800 million excess of loss contract provided by the ACE American Pool. At December 31, 2009, approximately $1.1 billion of coverage remained on a paid basis under the contract with National Indemnity Company. At December 31, 2009, approximately $493 million of GAAP basis losses ($191.3 million on a statutory basis) had been ceded to the excess of loss agreement.

“The ratings of ATLRe reflect its favorable capitalization on both a nominal basis and risk-adjusted basis, primarily because of the substantial capital level at its property/casualty subsidiary, ACE Tempest Re. The ratings also consider the history of favorable operating performance, ATLRe’s strong risk management and modeling capabilities as well as its strategy to cease accepting new variable annuity business during unfavorable market conditions.”

Best explained that the downgrade of the ratings for ACE Life Insurance Company is “based upon the run-off nature of the operations. Effective January 1, 2010, ACE shifted its strategy away from the U.S. life reinsurance market to focus on businesses that generated higher returns for the use of capital.

“The rating affirmations and ICR outlook revision of the Combined group of companies recognizes the established position in its core individual supplemental accident and health market, as well as the favorable operating results reported and its continued initiatives to reduce its expense structure. The group has continued to report favorable operating results and sales activity despite current weakened economic conditions.

“Additionally, the Combined group of companies took steps under its new ownership to reduce its expense structure through numerous operational efficiency programs, which are being implemented both domestically and internationally.”

ACE maintains “substantial capital levels in its Bermuda operations (namely ACE Bermuda Insurance Ltd. and ACE Tempest Re),” Best continued, “while capital levels in other operating subsidiaries are sufficient to meet Best’s rating requirements. Operating subsidiary capital levels are protected by internal reinsurance arrangements with ACE affiliates, primarily in Bermuda. A.M. Best has incorporated the capital management strategy, and as a result, provides rating enhancement to a number of ACE operating subsidiaries.

“ACE’s debt-to-capital ratio at March 31, 2010 remains modest at 14.9 percent (including trust preferreds). However, the company continues to maintain a sizable 18.9 percent of equity in intangible assets. Adjusting for tangible capital, the debt-to-capital ratio is 17.8 percent (including trust preferreds), well within A.M. Best’s expectations at current rating levels. Interest coverage also remained strong through first quarter 2010 at 17.9 times.

“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 dividend 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 subsidiaries in multiple jurisdictions to provide sufficient dividend cash flow.”

For a complete listing of ACE Limited, ACE INA Holdings, Inc. and subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/050305acelimited.pdf.

Source: A.M. Best

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