Fitch Affirms ACE Limited’s and Subs Ratings; Outlook Stable

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Fitch Ratings has affirmed the ratings of ACE Limited and its subsidiaries (collectively, ACE), and has assigned an ‘AA-‘ Insurer Financial Strength rating (IFS) to Agri General Insurance Company (AGIC). Fitch has also withdrawn its rating on ACE’s subsidiary, Westchester Fire Insurance Company (WFIC), subsequent to its merger with ACE Indemnity Insurance Company (which was immediately renamed WFIC). The outlook on all of the ratings is stable.

Fitch said its “affirmation reflects ACE’s recent strong operating performance, solid balance sheet and financial flexibility, and diverse sources of revenues and earnings. Partially offsetting these positives is the effect of modestly rising accident-year combined ratios and the effect of continued significant competition in the company’s chosen markets.”

The review defined ACE’s “strong” operating performance as “characterized by improved investment performance and low combined ratios, reflecting modest consistent favorable reserve development, and manageable catastrophe losses.

“ACE reported net income of $3.1 billion for the year ended Dec. 31, 2010 versus $2.5 billion for 2009 in the midst of a difficult economic environment and a competitive property/casualty market. The company reported continued strong underwriting profitability as evidenced by a combined ratio of 90.2 percent for the year ended Dec. 31, 2010, its eighth consecutive year with a combined ratio under 100 percent. Fitch noted that it expects first quarter catastrophe losses, including the New Zealand and Japan earthquakes, to impact ACE’s earnings, but not result in a material capital event.”

In addition Fitch pointed out that ACE has “steadily grown its ordinary shareholders’ equity with solid earnings. As a result, ordinary shareholders’ equity has increased by 93 percent since year-end 2005 to $23 billion at Dec. 31, 2010. Tangible equity has grown in conjunction with the growth in shareholders’ equity and has more than tripled since 2001.”

Fitch also noted that ACE, unlike many of its peers, has not repurchased shares during the current soft market other than in December 2010 when it repurchased $303 million of common shares “in order to partially offset potential dilution related to share-based compensation plans.

“The rating actions also consider the results of Fitch’s stress test results of ACE’s investment portfolio. Fitch believes that these results demonstrate ACE’s ability to withstand potential near-term investment losses and volatility without a material impact on its capitalization.”

Fitch said its rating on ACE’s indirect subsidiary, Century Indemnity Co., reflects its view that the “company’s importance to ACE is limited due to Century’s run-off status and thin capitalization. The company maintains inactive operations largely consisting of asbestos and environmental (A&E) reserves that are in run-off. Fitch views Century’s potential A&E exposure as an increasingly smaller component of ACE’s overall exposures.”

Fitch also said it has assigned its ‘AA-‘ IFS rating to AGIC, the insurance operating subsidiary of Rain and Hail Insurance Service, Inc. which ACE recently acquired in December 2010. The rating rationale is “based on Fitch’s group rating methodology and the inclusion of AGIC within the ACE American pool group. Fitch views AGIC as a core part of ACE’s global operations. At the same time, Fitch has withdrawn its rating on ACE’s subsidiary, WFIC, as a result of the company’s merger with an affiliated company, ACE Indemnity Insurance Company. The purpose of the merger was to relocate WFIC to Pennsylvania from New York to simplify ACE’s business processes. Immediately following the merger, the combined company was renamed WFIC.”

The bulletin also pointed out that certain “key rating drivers” might lead to an upgrade. These include – “continued strong operating performance with a combined ratio consistently under 95 percent, material stockholders’ equity growth, and maintaining a track record of successful acquisition execution while managing financial leverage to under 25 percent total debt to capital.”

On the other hand there are “key rating drivers that may lead to a downgrade.” These include – “a sustained material deterioration in operating performance such that the combined ratio is consistently over 100 percent (unprofitable), a significant reduction in stockholders’ equity that is not recovered in the near term, and financial leverage consistently over 30 percent.

“Potential for future acquisitions and the associated integration risks and company profile changes could lead to both positive and negative pressure on the ratings, depending on the acquisition details.”

Fitch summarized the companies covered by the ratings affirmation as follows:
ACE Limited –Issuer Default Rating (IDR) at ‘A+’.
ACE INA Holdings Inc. –IDR at ‘A+’;
–$500 million senior notes due 2014 at ‘A’;
–$450 million senior notes due 2015 at ‘A’;
–$700 million senior notes due 2015 at ‘A’;
–$500 million senior notes due 2017 at ‘A’;
–$300 million senior notes due 2018 at ‘A’;
–$500 million senior notes due 2019 at ‘A’;
–$100 million senior debentures due 2029 at ‘A’;
–$300 million senior notes due 2036 at ‘A’.
ACE Capital Trust II – $300 million capital securities due 2030 at ‘BBB+’.
ACE American Insurance Company
ACE Bermuda Insurance Limited
ACE Fire Underwriters Ins. Company
ACE Insurance Company of the Midwest
ACE Property and Casualty Insurance Company
ACE Tempest Reinsurance Limited
Atlantic Employers Insurance Company
Bankers Standard Fire & Marine Company
Bankers Standard Insurance Company
Combined Insurance Company of America
Combined Life Insurance Company of New York
Illinois Union Insurance Company
Indemnity Insurance Company of North America
Insurance Company of North America
Pacific Employers Insurance Company
Westchester Fire Insurance Company (F/K/A ACE Indemnity Insurance Company)
Westchester Surplus Lines Insurance Company
–IFS at ‘AA-‘.
Century Indemnity Company –IFS at ‘B-‘.