Best Upgrades ACE Limited and Subs Issuer Credit Ratings; Affirms FSR’s

A.M. Best Co. has upgraded the issuer credit ratings (ICR) and senior debt ratings to “a” from “a-” for Zurich-based ACE Limited and ACE INA Holdings Inc. Best has also upgraded the ICR to “aa” from “aa-” and affirmed the financial strength rating (FSR) of ‘A+’ (Superior) of ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., ACE American Pool and its members, ACE INA Insurance (Canada).

In addition, A.M. Best Europe – Rating Services Limited has upgraded the ICR to “aa” from “aa-” and affirmed the FSR of A+ (Superior) of the UK-based ACE European Group Limited. All the above companies are herein collectively referred to as the core property/casualty operating companies.

Best also upgraded the ICR to “aa” from “aa-” and affirmed the FSR of ‘A+’ (Superior) of ACE Tempest Life Reinsurance Ltd. (ATLRe), as well as the ICR to “a+” from “a” and affirmed the FSR of ‘A’ (Excellent) of Combined Insurance Company of America and Combined Life Insurance Company of New York, collectively, the Combined group of companies. Best also affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Stamford Conn.-based ACE Life Insurance Company.

The outlook for all ICRs has been revised to stable from positive, while the outlook for all FSRs is stable, except for the outlook for ACE Life, which is stable for both ratings.

In addition, Best affirmed the FSR of ‘B-‘ (Fair) and ICR of “bb-” of Century Indemnity Company, the run-off entity of ACE. The outlook for these ratings is stable. Best withdrew the ratings at the company’s request. All companies are domiciled in Philadelphia, PA, unless otherwise specified.

The upgrade of the ICR for ACE and its core operating 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.”

Best indicated 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 that have remained above the level required to support the ratings through soft market conditions, the global financial crisis and the increase in global catastrophe and weather-related events.”

Best also noted that even though underwriting results during the first quarter of 2011 were adversely affected by global weather-related events that impacted the industry across the board, ACE nonetheless “generated favorable overall earnings during that period.” Best added that it “recognizes that ACE’s above average underwriting risk appetite and global scope of operations will result in variability of its earnings.

“Execution risk across the ACE enterprise remains a key rating consideration, in light of ACE’s underwriting risk appetite and global operating reach. Maintaining diligence with regard to pricing, risk selection and exposure levels to generate continued positive underwriting results is necessary for ACE, as it is for the rest of the industry.”

Additional offsetting factors include “the susceptibility of ACE’s balance sheet to capital market volatility; demonstrated by realized and unrealized investment losses recorded in 2008 and early 2009; 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 its significant run-off book and agricultural and captive/cash flow programs.”

Best explained that the upgrade of the ICR for ATLRe is based upon its “position as the immediate parent of ACE Tempest Re, a major global provider of catastrophe reinsurance, and the strategic importance of ACE Tempest Re to the ACE enterprise. The ratings of ATLRe also reflect its favorable capitalization on both a nominal basis and risk-adjusted basis, primarily due to the excess capital at its property/casualty subsidiary as well as its history of favorable operating performance. The ratings also consider ATLRe’s strong risk management and modeling capabilities as it manages sizeable blocks of variable annuity products with minimum guarantees.

“The affirmations of the ratings for ACE Life are 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. ACE Life’s risk-adjusted capital position is sufficient relative to its operating profile, the company maintains a high quality asset portfolio.” Best added that it expects ACE will continue to provide additional capital as required to support its liabilities.

The ICR upgrades of the Combined group of companies recognize its favorable operating results, improved expense structure and strategic role as part of the ACE organization.” Best added that over the next few years, it expects that “Combined’s non-North American business will be transferred to other various ACE entities. However, the Combined brand name remains strong in North America, where it has an established market niche.

“The ratings of Century Indemnity acknowledge its $25 million of capital (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 reinsurance agreement provided by the ACE American Pool.”

In addition Best pointed out that as of December 31, 2010, “approximately $927 million of coverage remains on a paid basis under the National Indemnity Company contract, and $740 million remains on a statutory paid basis under the ACE American Pool agreement.” Best has withdrawn the ratings of Century Indemnity, but will continue to monitor the effect of the run off on ACE and its core property/casualty operating companies.

“ACE maintains substantial capital levels in its Bermuda operations (namely ACE Bermuda and ACE Tempest Re), while capital levels in other operating subsidiaries are sufficient to meet A.M. Best’s rating requirements,” the report continued.

“Operating subsidiary capital levels are protected by internal reinsurance arrangements with ACE affiliates, primarily in Bermuda.” Best said it has “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, 2011 remains modest at 17.8 percent (including trust preferreds). However, the company continues to maintain a sizable 20.2 percent of equity in intangible assets. Adjusting for tangible capital, the debt-to-capital ratio is 21.4 percent (including trust preferreds),” which, Best indicated was well within its “expectations at current rating levels. Interest coverage also remained strong through the first quarter of 2011 at 6.7 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 also has avaiable a complete listing of ACE Limited and its subsidiaries’ FSRs, ICRs and debt ratings.

Source: A.M. Best

Topics Reinsurance AM Best Property Casualty