A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa” of the North America property/casualty subsidiaries of ACE Limited, which is based in Zurich, as well as its ratings for ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., the members of the ACE American Pool and ACE INA Insurance (Canada). Best also affirmed the ICR and senior debt ratings of “a” of ACE and ACE INA Holdings Inc.
The outlook for all of these ratings is stable.
In addition Best has upgraded the FSR to ‘A+’ (Superior) from ‘A’ (Excellent) and ICR to “aa” from “a+” of Penn Millers Insurance Company following the initiation of its quota share reinsurance agreement with ACE American Insurance Company on January 1, 2012. The outlook for Penn Millers Insurance Company’s ratings has been revised to stable from positive.
Best has also withdrawn the ratings of ACE Bermuda International Reinsurance (Ireland) Limited, following its amalgamation into its affiliate, ACE Bermuda International Insurance (Ireland) Limited.
The affirmation of the ratings for ACE’s core property/casualty operations “reflects their strong risk-adjusted capitalization, diversified global operation and consistently favorable record of generating strong earnings and cash flows,” Best explained. “ACE’s balance sheet is further strengthened by controlled financial leverage, a relatively conservative investment portfolio that generates stable earnings and favorable loss reserve development in recent years.”
The report points out that the positive rating factors are “derived from management’s consistent focus on underwriting profitability generated by effective risk selection and pricing standards, and maintenance of appropriate policy limits and exposure to natural 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 through soft market conditions, the global financial crisis and the increase in global catastrophe and weather-related events, especially in 2011.
“Continued competitive pricing in the market, combined with a lower level of reserve redundancies and investment returns, require ACE to remain focused and diligent in executing pricing discipline, product and risk selection capability, and managing exposure levels to generate continued positive underwriting results.”
As further offsetting factors Best cited “the group’s exposure to emerging asbestos and environmental claims and natural and man-made catastrophes, and higher than industry average ceded reinsurance leverage driven by the nature of its business, mainly its agricultural and captive/cash flow programs, as well as recoverables relating to its run-off book.
“ACE’s debt-to-tangible capital ratio at March 31, 2012 remains manageable at 22.1 percent (including trust preferreds and excluding AOCI), well within Best’s expectations at current rating levels. Interest coverage also remained strong through the first quarter of 2012 at 12 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.”
Best added that while it “believes ACE and its operating companies are well positioned at their current rating levels, a factor that may lead to positive rating actions include continued strong underwriting and operating performance that outperforms peers over time.
“However, factors that could lead to negative rating actions include operating performance falling short of Best’s expectations or an erosion of surplus that causes a decline in risk-adjusted capital to a level that no longer supports current ratings.
A complete listing of ACE Limited and its subsidiaries’ FSRs, ICRs and debt ratings is available on Best’s website.
Source: A.M. Best
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