A.M. Best Co. has upgraded the financial strength ratings (FSR) to A+ (Superior) from A (Excellent) and assigned issuer credit ratings (ICR) of “aa-” to ACE Westchester Specialty Group (ACE Westchester) (lead company domiciled in New York) and ACE American Pool (ACE American) (Pennsylvania).
The upgrades represent rating enhancements to the level of ACE Group (ACE) (Cayman Islands) from the stand-alone ratings of ACE American and ACE Westchester. The FSRs of B- (Fair) and the ICRs of “bb-” of Brandywine Group (Brandywine) (Pennsylvania) remain under review with negative implications pending regulatory approval of the sale of three affiliated subsidiaries. Concurrently, A.M. Best has upgraded the debt ratings to “a-” from “bbb+” of ACE Limited’s senior debt, returning to standard notching.
A.M. Best has also affirmed the FSRs of A+ (Superior) and assigned ICRs of “aa-” to ACE Bermuda Insurance Ltd. (ACE Bermuda), ACE Tempest Life Reinsurance Limited and ACE Tempest Reinsurance Ltd. (ACE Tempest Re).
Additionally, A.M. Best has affirmed the FSRs of A (Excellent) and has assigned ICRs of “a” and “a+”, respectively, to ACE INA Insurance (Canada) and ACE European Group Limited (United Kingdom). All ratings (with the exception of Brandywine) have a stable outlook. (See link below for a complete list of the ratings.)
The rating affirmations of the Bermudian, Canadian and European subsidiaries and the rating lifts afforded to the U.S. subsidiaries to the level of ACE are based on ACE’s strong capitalization, excellent earnings generating capability, disciplined underwriting culture focused on profitability, global market profile and consistent management strategies.
Prior year increases to ACE’s overall core loss reserves have been fairly modest. The company maintains a sophisticated and integrated risk management capability. A.M. Best’s analysis also considers the significant inter-company reinsurance arrangements in its subsidiary ratings, which blur the distinctions between the business segments and legal entities.
A.M. Best views ACE Limited’s announcement of its decision to re-state its financials as providing considerable closure to the finite (re) insurance cloud that has hung over the company in recent months. A.M. Best views the $1 million net effect of the GAAP re-statements as less than material; however, the need to re-state reveals a failure in measuring up to standards expected of a highly-rated company.
The numerous controls instituted by management as a result of the rigorous internal investigations and changed corporate environment should indicate that management is heeding higher standards and lead to a higher level of quality in the numbers. A.M. Best expects minimal effects from a potential statutory re-statement. Additionally, the level of ACE’s capital and flexibility of that capital is sufficient to meet A.M. Best’s expectations of capital levels in the U.S. subsidiaries.
Cash proceeds from the spin off of Assured Guaranty in April 2004 produced over $1 billion of cash, which was re-invested in ACE’s property/casualty operations and contributed to the strong capital position that supports its ratings. ACE’s capital management strategy dictates that excess capital levels be maintained in Bermuda, while the U.S. subsidiaries are sufficiently capitalized for their ratings.
A.M. Best believes that the current good capital levels in the United States are necessary to support a more elevated risk profile of the company given the higher percentage of casualty business written, greater retentions and the objective of writing business lines where significant underwriting capability is needed. With the present pricing environment, A.M. Best expects premiums in certain segments and business lines to appropriately decline. However, quality core earnings generating capability is expected to continue through 2005.
The variability of the asbestos and environmental (A&E) reserves of Brandywine and–to a much lesser extent–ACE Westchester has resulted in variability of the earnings of the company and has also been factored into ACE’s ratings. The capital model of ACE includes allowance for potential additional A&E liability substantially beyond the $800 million of ACE American’s obligation.
The consolidated GAAP earnings and capital are exposed to increases in reserves in Brandywine; however, support of the lead Brandywine entity, Century Indemnity Company (Philadelphia, Pa.) is limited under the 1996 CIGNA P&C Restructuring to the $800 million of reinsurance afforded by ACE American. After the proposed sale of three Brandywine reinsurance run-off subsidiaries is completed, approximately $130 million of capacity will remain. Earnings will continue to be negatively affected by potential reserve increases or by a potential sale of the remaining A&E liabilities and disposition of these liabilities will include consideration of the $1 billion of recoverables due to ACE subsidiaries.
However, A.M. Best expects ACE to generate significantly robust earnings, which would absorb negative A&E reserve development without compromising core earnings capability to any material extent.
ACE Limited’s financial leverage has steadily declined over the past few years given the increases in equity from substantial earnings, allowing A.M. Best to employ standard notching on the debt ratings. On a tangible capital basis, leverage is somewhat elevated for the ratings.
However, ACE Limited’s cash flow has not declined in tandem with leverage and cash needs are still substantial, particularly in the United States, where the ability to upstream dividends is more regulated compared with the Bermudian subsidiaries. ACE Limited relies heavily on dividends from ACE Bermuda and ACE Tempest Re for liquidity, which slows capital accumulation in these subsidiaries. Tax settlements with the U.S. subsidiaries provide funds for debt service in the United States, but dividends from U.S. and foreign subsidiaries will need to be upstreamed beyond 2005.
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